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As filed with the Securities and Exchange Commission on October 6, 1998
Registration No. 333-12199
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE
AMENDMENT NO. 4
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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>
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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
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<S> <C> <C> <C> <C>
Contract Backed Notes $ 1,000,000 100% $ 1,000,000 $ 303.03 (Paid)
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</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.
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FIRST SIERRA RECEIVABLES II, Inc.
and
FIRST SIERRA RECEIVABLES III, Inc.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Caption in Prospectus
No. Name and Caption in Form S-3 and Prospectus Supplement
--- ---------------------------- -------------------------
<S> <C>
1. Forepart of the Registration Statement and Forepart of the Registration Statement; Front
Outside Front Cover Page of Prospectus Cover Page of Prospectus; Front Cover Page of
Prospectus Supplement; Cross Reference Sheet
2. Inside Front and Outside Back Cover Pages of Inside Front Cover and Outside Back Cover
the Prospectus Pages of Prospectus; Inside Front Cover Page
of Prospectus Supplement; Available
Information; Table of Contents
3. Summary Information; Risk Factors and Ratio Prospectus Summary; Risk Factors; Certain
of Earnings to Fixed Charges Legal Aspects; Prepayment and Yield
Considerations
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price *
6. Dilution *
7. Selling Security Holders *
8. Plan of Distribution Methods of Distribution
9. Description of Securities to be Registered Prospectus Summary; Description of the
Securities; Certain Federal Income Tax
Characteristics
10. Interest of Named Experts and Counsel *
11. Material Changes *
12. Incorporation of Certain Information on Inside Front Cover of Prospectus, Incorporation
Reference of Certain Documents by Reference
13. Disclosure of Commission Position on *
Indemnification for Securities Act Liabilities
</TABLE>
* Not Applicable
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
CONTRACT BACKED SECURITIES ISSUABLE IN SERIES
FIRST SIERRA RECEIVABLES III, INC.
COMPANY
FIRST SIERRA FINANCIAL INC.,
SERVICER
This Prospectus describes certain Contract Backed Notes (the "Notes") and
Contract Backed Certificates (the "Certificates" and, together with the Notes,
the "Securities") that may be sold from time to time in one or more series, in
amounts, at prices and on terms to be determined at the time of sale and to be
set forth in a supplement to this Prospectus (each, a "Prospectus Supplement").
Each series of Securities may include one or more classes of Notes and/or one or
more classes of Certificates. Each Series will be issued by a trust (each a
"Trust") formed by First Sierra Receivables III, Inc. (the "Company") for the
purpose of issuing the Securities. The Trust (which may be an owner trust)
issuing Securities as described in this Prospectus and the related Prospectus
Supplement shall be referred to herein as the "Issuer."
Each class of Securities of any series will evidence beneficial ownership in
a segregated pool of a segregated pool of assets owned by a Trust (each, an
"Asset Pool") (such Securities, "Certificates") or will represent indebtedness
of the Issuer secured by the Asset Pool (such Securities, "Notes"), as described
herein and in the related Prospectus Supplement. Each Asset Pool shall consist
of finance leases and commercial loans, together with all monies received
relating thereto (the "Contracts"). Each Asset Pool may also include security
interests in the underlying equipment and property relating thereto, together
with the proceeds thereof (the "Equipment" together with the Contracts, the
"Receivables"). If and to the extent specified in the related Prospectus
Supplement, credit enhancement with respect to an Asset Pool or any class of
Securities may include any one or more of the following: a financial guaranty
insurance policy (a "Policy") issued by an insurer specified in the related
Prospectus Supplement, a reserve account, letters of credit, credit or liquidity
facilities, third party payments or other support, cash deposits or other
arrangements. In addition to or in lieu of the foregoing, credit enhancement may
be provided by means of subordination, cross-support among the Receivables or
over collateralization. See "Description of the Trust Agreements -- Credit
Enhancements." The Receivables in the Asset Pool for a series will have been
originated by First Sierra Financial, Inc. (the "Seller" or "First Sierra") or
acquired by First Sierra from other entities generally in the business of
originating or acquiring Receivables. Except to the extent provided herein and
in the related Prospectus Supplement, the Company will acquire the Receivables
from the Seller on or prior to the date of issuance of the related Securities,
as described herein and in the related Prospectus Supplement. Each series of
Securities will include one or more classes (each, a "Class"). A series may
include one or more Classes of Securities entitled to principal distributions,
with disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no principal distributions. The
rights of one or more Classes of Securities of any series may be senior or
subordinate to the rights of one or more of the other Classes of Securities. A
series may include two or more Classes of Securities which differ as to the
timing, sequential order, priority of payment, interest rate or amount of
distributions of principal or interest or both. Information regarding each Class
of Securities of a series, together with certain characteristics of the related
Receivables, will be set forth in the related Prospectus Supplement. The rate of
payment in respect of principal of the Securities of any Class will depend on
the priority of payment of such a Class and the rate and timing of payments
(including prepayments, defaults, liquidations or repurchases of Receivables) on
the related Receivables. A rate of payment lower or higher than that anticipated
may affect the weighted average life of each Class of Securities in the manner
described herein and in the related Prospectus Supplement. See "Description of
the Securities."
AN INVESTMENT IN THE SECURITIES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
COMMENCING ON PAGE HEREIN AND THE RELATED PROSPECTUS SUPPLEMENT FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN
INVESTMENT IN THE SECURITIES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE
SECURITIES WILL NOT REPRESENT AN INTEREST IN OR AN OBLIGATION OF THE COMPANY,
FIRST SIERRA, ANY SERVICER, ANY SUBSERVICER, ANY LESSOR, OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE SECURITIES NOR THE UNDERLYING CONTRACTS WILL
BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR BY THE COMPANY, FIRST
SIERRA, ANY SERVICER, ANY SUBSERVICER, ANY LESSOR, OR ANY OF THEIR RESPECTIVE
AFFILIATES EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT.
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters as more fully described under "Method
of Distribution" herein and in the related Prospectus Supplement. Prior to
issuance, there will have been no market for the Securities of any series, and
there can be no assurance that a secondary market for the Securities will
develop, or if it does develop, it will continue.
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT BE
USED TO CONSUMMATE SALES OF SECURITIES UNLESS ACCOMPANIED BY A PROSPECTUS
SUPPLEMENT.
THE DATE OF THIS PROSPECTUS IS , 1998.
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PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a series of Securities to be offered
hereunder, among other things, will set forth with respect to such series of
Securities: (i) a description of the Class or Classes of such Securities, (ii)
the rate of interest, the "Pass-Through Rate" or "Interest Rate" or other
applicable rate (or the manner of determining such rate) and authorized
denominations of such Class of such Securities; (iii) certain information
concerning the Receivables and insurance polices, overcollateralization cash
accounts, letters of credit, financial guaranty insurance policies, third party
guarantees or other forms of credit enhancement, if any, relating to one or more
pools of Receivables or all or part of the related Securities; (iv) the
specified interest, if any, of each Class of Securities in, and manner and
priority of, the distributions from the Asset Pool; (v) information as to the
nature and extent of subordination with respect to such series of Securities, if
any; (vi) the payment date to Securityholders; (vii) information regarding the
Servicer; (viii) the circumstances, if any, under which each Asset Pool may be
subject to early termination; (ix) information regarding tax considerations; and
(x) additional information with respect to the method of distribution of such
Securities.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (together with all amendments and
exhibits thereto, referred to herein as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Securities offered pursuant to this Prospectus. For further information,
reference is made to the Registration Statement which may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; and at the Commission's regional
offices at Northwest Atrium Center, 500 West Madison, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of the Registration Statement may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. 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.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby, nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful.
This Prospectus, together with the Prospectus Supplement for each Series or
Class of Securities will contain a summary of the material terms of the
applicable exhibits to the Registration Statement and the documents referred to
herein and therein. Copies of such exhibits are on file at the offices of the
Commission in Washington, D.C., and may be obtained at rates prescribed by the
Commission upon request and may be inspected, without charge, at the
Commission's offices.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by the Company, either on its own behalf
or on behalf of a Trust, relating to any series of Securities referred to in the
accompanying Prospectus Supplement, with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), after the date of this Prospectus and prior to the
termination of any offering of the Securities issued by the Issuer, shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is
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deemed to be incorporated by reference herein, modifies or replaces such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning any Security and the related Asset
Pool will be provided to the Securityholders. See "Description of the
Securities -- Reports to Securityholders." If the Securities of a series are to
be issued in book-entry form, such reports will be provided to the
Securityholder of record and beneficial owners of such Securities will have to
rely on the procedures described herein under "Description of
Securities -- Book-Entry Registration."
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents referred to above that have been or may be
incorporated by reference in this Prospectus (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Such requests should be directed to: First Sierra Financial Inc.,
Texas Commerce Tower, 600 Travis Street, Houston, Texas 77002, Attention: Roger
Gebhart, Senior Vice President and Treasurer, (713) 221-8822.
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SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to the Securities of any series contained in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of such Securities. Capitalized terms used in the summary and not
defined are defined elsewhere in the Prospectus on the pages indicated in the
"Index of Terms."
Issuers.................... With respect to each series of Securities, a trust
(each trust of a series, the "Trust") to be
formed by the Company. The Trust issuing
Securities pursuant to this Prospectus and the
related Prospectus Supplement shall be referred
to herein as the "Issuer' with respect to the
related Securities. Each class of Securities will
be issued by the Trust and will either evidence a
beneficial ownership in or indebtedness secured
by a segregated pool of assets owned by a Trust
(such pool of assets, a "Asset Pool"). No Series
will be secured by more than one Asset Pool,
except to the extent that more than one Asset
Pool receives the benefit of a common form of
credit enhancement. See "The Issuers."
Company.................... First Sierra Receivables II, Inc., a Delaware
Corporation, and First Sierra Receivables III,
Inc., a Delaware corporation (together, the
"Company" or the "Companies"). The principal
office of each of the Companies is located at 600
Travis Street, Houston, Texas, 77002, and its
telephone number is (713) 221-8822. Each of the
Companies is a wholly-owned subsidiary of the
Servicer. See "The Company."
Servicer................... First Sierra Financial, Inc., a Delaware
corporation (the "Servicer" or "First Sierra").
First Sierra is a specialized finance company
that acquires and originates and sells and
services equipment contracts. The principal
office of First Sierra is 600 Travis Street,
Houston, Texas 77002, and its telephone number is
(713) 221-8822. See "The Servicer."
Seller..................... The Company will acquire the Receivables from First
Sierra or an affiliate (collectively the
"Seller"). The Receivables will be acquired by
the Seller either (a) as the result of the
acquisition of equipment lease portfolios from
small ticket lessors (the "Portfolio Acquisition
Program") or (b) as the result of the ongoing
acquisition of equipment leases which comply with
certain underwriting criteria specified by First
Sierra from certain lessors as such leases are
originated (the "Private Label Program") or (c)
as the result of direct origination by First
Sierra through its own sales force and referral
programs (the "Broker Program" and the "Vendor
Program"). A "small-ticket" lessor, is a lessor
who leases equipment having original equipment
costs which are generally less than $1 million.
For a more complete description of the Portfolio
Acquisition Program and the Private Label Program
please see the descriptions under the caption
"The Receivables" herein and in the related
Prospectus Supplement.
Trustee.................... The Trustee for each series of Securities will be
specified in the related Prospectus Supplement.
The Securities............. Each Class of Securities of any series will
evidence beneficial ownership in an Asset Pool
(such Securities, "Certificates") or will
represent indebtedness of the Issuer secured by
the Asset Pool (such Securities, "Notes"), as
described herein and in the related Prospectus
Supplement. Each Asset Pool shall consist of
finance leases and commercial
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loans, together with all monies received relating
thereto (the "Contracts"). The characteristics of
a particular Asset Pool will be more fully
described in the related Prospectus Supplement.
To the extent any Asset Pool includes
participation interests in previously issued
lease-backed securities, such securities: (a)
either will have (i) been previously registered
under the Securities Act, or (ii) held for at
least the Rule 144(k) holding period; and (b)
will have been acquired in a bona fide secondary
market transaction not from the issuer of such
securities or an affiliate thereof. Each Asset
Pool also may include a security interest in the
underlying equipment and property relating
thereto, together with the proceeds thereof (the
"Equipment" and together with the Contracts, the
"Receivables"). If and to the extent specified in
the related Prospectus Supplement, credit
enhancement with respect to an Asset Pool or any
class of Securities may include any one or more
of the following: a financial guaranty insurance
policy (a "Policy") issued by an insurer
specified in the related Prospectus Supplement, a
reserve account, letters of credit, credit or
liquidity facilities, third party payments or
other support, cash deposits or other
arrangements. In addition to or in lieu of the
foregoing, credit enhancement may be provided by
means of subordination, cross-support among the
Receivables or over-collateralization. The
Company will acquire the Receivables from the
Seller on or prior to the date of issuance of the
related Securities, as described herein and in
the related Prospectus Supplement.
With respect to Securities that represent equity,
each Trust will be established pursuant to an
agreement (each, a "Pooling Agreement") by and
between the Company and the Trustee named
therein. Each Pooling Agreement will describe the
related pool of Receivables held by the Trust.
With respect to Securities that represent debt
issued by the Issuer, the Issuer will enter into
an indenture (each, an "Indenture") by and
between the Issuer and the trustee named on such
Indenture (the "Indenture Trustee"). Each
Indenture will describe the related pool of
Receivables comprising the Asset Pool and
securing the debt issued by the related Issuer.
The Receivables comprising each Asset Pool will be
serviced by the Servicer pursuant to a servicing
agreement (each, a "Servicing Agreement") by and
between the Servicer and the related Issuer. In
addition, the lessors from whom the Receivables
were acquired (each, a "Lessor") may be required
to perform certain monitoring and collection
functions with respect to the Receivables on
behalf of the Seller and its assignee pursuant to
the purchase agreement between the First Sierra
and such Lessor (each, a "Purchase Agreement")
Such Purchase Agreements will be assigned to the
Asset Pool to the extent related to the
Receivables in the Asset Pool.
In the case of any individual Asset Pool, the
contractual arrangements relating to the
establishment of a Trust, if any, the servicing
of the related Receivables and the issuance of
the related Securities may be contained in a
single agreement, or in several agreements which
combine certain aspects of the Pooling Agreement,
the Servicing Agreement and the Indenture
described above (for example, a pooling
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and servicing agreement, or a servicing and
collateral management agreement). For purposes of
this Prospectus, the term "Trust Agreement" as
used with respect to an Asset Pool means,
collectively, and except as otherwise described
in the related Prospectus Supplement, any and all
agreements relating to the establishment of a
Trust, if any, the servicing of the related
Receivables and the issuance of the related
Securities. The term "Trustee" means any and all
persons acting as a trustee pursuant to a Trust
Agreement.
Securities Will Be Non-Recourse to the Seller.
The Securities will not be obligations, either
recourse or non-recourse (except for certain
non-recourse debt described under "Certain Tax
Considerations" in the related Prospectus
Supplement), of the Servicer, the Seller or any
person other than the related Issuer. The Notes
of a given series represent obligations of the
Issuer, and the Certificates of a given series
represent beneficial interests in the related
Trust only and do not represent interests in or
obligations of the Company, the Seller or any of
their respective affiliates other than the
related Trust. In the case of Securities that
represent beneficial ownership interest in the
related Trust, such Securities will represent the
beneficial ownership interests in such Trust and
the sole source of payment will be the assets of
such Trust. In the case of Securities that
represent debt issued by the related Issuer, such
Securities will be secured by assets in the
related Asset Pool. Notwithstanding the
foregoing, and as to be described in the related
Prospectus Supplement, certain types of credit
enhancement, such as a letter of credit,
financial guaranty insurance policy or reserve
fund may constitute a full recourse obligation of
the provider of such credit enhancement.
General Nature of the Securities as Investments.
All of the Securities offered pursuant to this
Prospectus and the related Prospectus Supplement
will be rated in one of the four highest rating
categories by one or more Rating Agencies (as
defined herein).
Additionally, the Securities offered pursuant to
this Prospectus and the related Prospectus
Supplement will be of the fixed-income type
having a principal balance (or certificate
balance) and a specified interest rate ("Interest
Rate"). Securities may either represent
beneficial ownership interests in the related
Receivables held by the related Trust or debt
secured by certain assets of the related Issuer.
Each series or Class of Securities offered pursuant
to this Prospectus may have a different Interest
Rate, which may be a fixed or adjustable Interest
Rate. The related Prospectus Supplement will
specify the Interest Rate for each series or
Class of Securities described therein, or the
initial Interest Rate and the method for
determining subsequent changes to the Interest
Rate.
A series may include one or more Classes of
Securities ("Strip Securities") entitled (i) to
principal distributions, with disproportionate,
nominal or no interest distributions, or (ii) to
interest distributions, with disproportionate,
nominal or no principal distributions. In
addition, a Series of Securities may include two
or more Classes of Securities that differ as to
timing, sequential order, priority of pay-
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ment, Interest Rate or amount of distribution of
principal or interest or both, or as to which
distributions of principal or interest or both on
any Class may be made upon the occurrence of
specified events, in accordance with a schedule
or formula, or on the basis of collections from
designated portions of the related pool of
Receivables. Any such series may include one or
more Classes of Securities ("Accrual
Securities"), as to which certain accrued
interest will not be distributed but rather will
be added to the principal balance (or nominal
balance, in the case of Accrual Securities which
are also Strip Securities) thereof on each
Payment Date, as hereinafter defined, or in the
manner described in the related Prospectus
Supplement.
If so provided in the related Prospectus
Supplement, a series may include one or more
other Classes of Securities (collectively, the
"Senior Securities") that are senior to one or
more other Classes of Securities (collectively,
the "Subordinate Securities") in respect of
certain distributions of principal and interest
and allocations of losses on Receivables.
In addition, certain Classes of Senior (or
Subordinate) Securities may be senior to other
Classes of Senior (or Subordinate) Securities in
respect of such distributions or losses.
General Payment Terms of Securities.
As provided in the related Trust Agreement and as
described in the related Prospectus Supplement,
the holders of the Securities ("Securityholders")
will be entitled to receive payments on their
Securities on specified dates (each, a "Payment
Date"). Payment Dates with respect to Securities
will occur monthly, quarterly or semi-annually,
as described in the related Prospectus
Supplement.
The related Prospectus Supplement will describe a
date (the "Record Date") preceding such Payment
Date, as of which the Trustee or its paying agent
will fix the identity of the Securityholders for
the purpose of receiving payments on the next
succeeding Payment Date. As described in the
related Prospectus Supplement, the Payment Date
will be a specified day of each month, commonly
the tenth, fifteenth or twenty-fifth day of each
month (or, in the case of quarterly-pay
Securities, the tenth, fifteenth or twenty-fifth
day of every third month; and in the case of
semi-annual pay Securities, the tenth, fifteenth
or twenty-fifth day of every sixth month) and the
Record Date will be the close of business as of
the last day of the calendar month that precedes
the calendar month in which such Payment Date
occurs.
As more fully described in the related Prospectus
Supplement, each Trust Agreement will describe a
period (each, a "Remittance Period") preceding
each Payment Date (for example, in the case of
monthly-pay Securities, the calendar month
preceding the month in which a Payment Date
occurs). As more fully described in the related
Prospectus Supplement, collections received on or
with respect to the related Receivables
constituting an Asset Pool during a Remittance
Period will be required to be remitted by the
Servicer to the related Trustee prior to the
related Payment Date and will be used to fund
payments to Securityholders on such Payment Date.
As may be described in the related Prospectus
Supplement, the related Trust
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Agreement may provide that all or a portion of
the payments collected on or with respect to the
related Receivables may be applied by the related
Trustee to the acquisition of additional
Receivables during a specified period (rather
than be used to fund payments of principal to
Securityholders during such period), with the
result that the related Securities will possess
an interest-only period, also commonly referred
to as a revolving period, which will be followed
by an amortization period. Any such interest only
or revolving period may, upon the occurrence of
certain events to be described in the related
Prospectus Supplement, terminate prior to the end
of the specified period and result in the earlier
than expected amortization of the related
Securities.
In addition, and as may be described in the related
Prospectus Supplement, the related Trust
Agreement may provide that all or a portion of
such collected payments may be retained by the
Trustee (and held in certain temporary
investments, including Receivables satisfying the
criteria more fully described in the related
Prospectus Supplement) for a specified period
prior to being used to fund payments of principal
to Securityholders. Such retention and temporary
investment by the Trustee of such collected
payments may be required by the related Trust
Agreement for the purpose of (a) slowing the
amortization rate of the related Securities
relative to the rent payment schedule of the
related Receivables, or (b) attempting to match
the amortization rate of the related Securities
to an amortization schedule established at the
time such Securities are issued. Any such feature
applicable to any Securities may terminate upon
the occurrence of events to be described in the
related Prospectus Supplement, resulting in
distributions to the specified Securityholders
and an acceleration of the amortization of such
Securities.
As more fully specified in the related Prospectus
Supplement, neither the Securities nor the
underlying Receivables will be guaranteed or
insured by any governmental agency or
instrumentality or the Company, First Sierra, the
Servicer, any Lessor, any Trustee, or any of
their affiliates.
No Investment Companies.... The Issuer will not be required to register as an
"investment company" under the Investment Company
Act of 1940, as amended (the "Investment Company
Act"). Dewey Ballantine LLP, counsel to the
Issuer, has rendered its opinion to the effect
that registration of the Issuer as an "investment
company" is not required. However, the Commission
has not determined whether registration would, in
fact, be required, and there can be no assurance
that the Issuer will not be required to register
as an investment company.
The Company's Interest..... With respect to each Trust, the "Company's
Interest" at any time represents the rights to
the related Asset Pool in excess of the
Securityholders' interest of all series then
outstanding that were issued by such Trust. The
Company's Interest in any Asset Pool will
fluctuate as the aggregate Discounted Contract
Balance of such Asset Pool changes from time to
time. A portion of the Company's interest may be
sold separately in one or more public or private
transactions.
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The Asset Pools............ As specified in the related Prospectus Supplement,
each Asset Pool will consist of the related
Contracts, and may include a security interest in
the related Equipment. All of the Lessees (as
defined herein) and all of the Equipment will be
located within the United States. If and to the
extent specified in the related Prospectus
Supplement, credit enhancement with respect to an
Asset Pool or any class of Securities may include
any one or more of the following: a Policy issued
by an insurer specified in the related Prospectus
Supplement, a reserve account, letters of credit,
credit or liquidity facilities, repurchase
obligations, third party payments or other
support, cash deposits or other arrangements. In
addition to or in lieu of the foregoing, credit
enhancement may be provided by means of
subordination, cross-support among the
Receivables or over-collateralization. See
"Description of the Trust Agreements -- Credit
Enhancements." The Contracts are obligations for
the lease or purchase of the Equipment, or
evidence borrowings used to acquire the
Equipment, entitling the obligor thereunder (the
"Lessor") to payments of rent and related
payments and to either the return of the
Equipment at the termination of the related
Contract or, with respect to certain of the
Contracts, the payment of a purchase price for
the Equipment at the election of the obligee
thereunder (the "Lessee").
The Contracts which are leases will all be finance
leases. "Finance Leases" usually have a term
greater than three years. In a Finance Lease, the
Lessor transfers substantially all benefits and
risks of ownership to the Lessee. In accordance
with Statement of Financial Accounting Standards
No. 13 ("FASB 13"), a lease agreement is
classified as a Finance Lease if the
collectibility of payments are reasonably certain
and it meets one of the following criteria: (1)
the lease agreement transfers title and ownership
of the Equipment to the Lessee by the end of the
Contract term; (2) the lease agreement contains a
bargain purchase option; (3) the lease agreement
term at inception is at least 75% of the
estimated life of the Equipment; or (4) the
present value of the minimum lease agreement
payments is at least 90% of the fair market value
of the Equipment at inception of the lease
agreement. The related Prospectus Supplement will
describe the type and characteristics of the
Contracts included in each Asset Pool relating to
the Securities offered pursuant to this
Prospectus and the related Prospectus Supplement.
Neither the related Trust nor the Servicer will
have the right to obtain possession of the
Equipment securing a Contract, or to obtain the
proceeds of the sale of any Equipment, except in
the case of a repossession of such item of
Equipment following a default of the related
Lessee under the Contract. Consequently, except
for proceeds obtained following a repossession,
the Securities will not be secured by, or paid
from, the residual value of the Equipment.
The Receivables comprising an Asset Pool shall be
either (i) originated by the Seller, (ii)
originated by Lessors and acquired by the Seller
or (iii) acquired by the Seller from other
originators or owners of Receivables. See "The
Receivables."
With respect to the Receivables comprising each
Asset Pool, the Company will receive the related
Receivables from the Seller pursuant
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to a Contribution and Sale Agreement as defined
herein. The Company will transfer such
Receivables to a Trust pursuant to a Pooling
Agreement or the Trust may pledge its right,
title and interest in and to such Receivables to
a Trustee on behalf of Securityholders pursuant
to an Indenture. The Contracts transferred to a
Trust or pledged to a Trustee shall have a
Discounted Contract Balance (as defined below)
specified in the related Prospectus Supplement.
The rights and benefits of the Company under such
Contribution and Sale Agreement will be assigned
to the Trustee on behalf of the related
Securityholders. The obligations of the Company
and the Servicer under such Trust Agreements
include those specified below and in the related
Prospectus Supplement.
The "Discounted Contract Balance" of a Contract as
of any Cut-Off Date is the present value of all
of the remaining payments scheduled to be made
with respect to such Contract, discounted at a
rate specified in the related Prospectus
Supplement and the Trust Agreement.
Pre-Funding Account........ If so specified in the related Prospectus
Supplement, a portion of the issuance proceeds of
the Securities of a particular series (such
amount, (the "Pre-Funded Amount") will be
deposited in an account (the "Pre-Funding
Account") to be established with the Trustee,
which will be used to acquire Additional
Receivables from time to time during time period
specified in the related Prospectus Supplement.
Prior to the investment of the Pre-Funded Amount
in Additional Receivables, such Pre-Funded Amount
will be invested in one or more Eligible
Investments. An "Eligible Investment" is any of
the following, in each case as determined at the
time of the investment or contractual commitment
to invest therein (to the extent such investments
would not require registration of the Trust as an
investment company pursuant to the Investment
Company Act): (a) negotiable instruments or
securities represented by instruments in bearer
or registered or book-entry form which evidence:
(i) obligations which have the benefit of the
full faith and credit of the United States of
America, including depository receipts issued by
a bank as custodian with respect to any such
instrument or security held by the custodian for
the benefit of the holder of such depository
receipt, (ii) demand deposits or time deposits
in, or bankers' acceptances issued by, any
depositary institution or trust company
incorporated under the laws of the United States
of America or any state thereof and subject to
supervision and examination by Federal or state
banking or depositary institution authorities;
provided that at the time of the Trustee's
investment or contractual commitment to invest
therein, the certificates of deposit or
short-term deposits (if any) or long-term
unsecured debt obligations (other than such
obligations whose rating is based on collateral
or on the credit of a Person other than such
institution or trust company) of such depositary
institution or trust company has a credit rating
in highest rating category from each Rating
Agency, (iii) certificates of deposit having a
rating in the highest rating category by the
Rating Agencies, or (iv) investments in money
market funds which are (or which are composed of
instruments or other investments which are) rated
in the highest rating category by the Rating
Agencies; (b) demand deposits in the name of the
Trustee in
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any depositary institution or trust company
referred to in clause (a)(ii) above; (c)
commercial paper (having original or remaining
maturities of no more than 270 days) having a
credit rating in the highest rating category by
the Rating Agencies; (d) Eurodollar time deposits
that are obligations of institutions whose time
deposits carry a credit rating in the highest
rating category by the Rating Agencies; (e)
repurchase agreements involving any Eligible
Investment described in any of clauses (a)(i),
(a)(iii) or (d) above, so long as the other party
to the repurchase agreement has its long-term
unsecured debt obligations rated in the highest
rating category by the Rating Agencies; and (f)
any other investment with respect to which the
Rating Agencies rating such Securities indicate
will not result in the reduction or withdrawal of
its then-existing rating of the Securities. Any
Eligible Investment must mature no later than the
Business Day prior to the next Payment Date.
During any Pre-Funding Period, the Company will be
obligated (subject only to the availability
thereof) to acquire from the Seller and to either
transfer to a Trust, additional Receivables (the
"Additional Receivables") from time to time
during such Pre-Funding Period. Such Additional
Receivables will be required to satisfy certain
eligibility criteria more fully set forth in the
related Prospectus Supplement which eligibility
criteria will be consistent with the eligibility
criteria of the Receivables included in each
Asset Pool as of the issuance date subject to
such exceptions as are expressly stated in such
Prospectus Supplement.
Although the specific parameters of the Pre-Funding
Account with respect to any issuance of
Securities will be specified in the related
Prospectus Supplement, it is anticipated that:
(a) the Pre-Funding Period will not exceed 120
days from the related Closing Date, (b) that the
Additional Contracts to be acquired during the
Pre-Funding Period will be subject to the same
representations and warranties as the Contracts
included in the related Asset Pool on the Closing
Date (although additional criteria may also be
required to be satisfied, as described in the
related Prospectus Supplement) and (c) that the
Pre-Funded Amount is anticipated not to exceed
25% of the principal amount of the Securities
issued pursuant to a particular offering.
A periodic report on Form 8-K will be filed with
the Commission with respect to each Trust which
has a Pre-Funding Account, which will be filed
after the end of the related Pre-Funding Period.
Such filing will contain statistical information
on the final collateral pool, and will be
presented on a format substantially similar to
that used in the related Prospectus Supplement
for such statistical information.
Registration of
Securities................. Securities may be represented by global securities
registered in the name of Cede & Co. ("Cede"), as
nominee of The Depository Trust Company ("DTC"),
or another nominee. In such case, Securityholders
will not be entitled to receive definitive
securities representing such Securityholders'
interests, except in certain circumstances
described in the related Prospectus Supplement.
See "Description of the Securities -- Book Entry
Registration" herein.
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<PAGE> 14
Credit Enhancement......... If and to the extent specified in the related
Prospectus Supplement, credit enhancement with
respect to an Asset Pool or any class of
Securities may include any one or more of the
following: a Policy issued by an insurer
specified in the related Prospectus Supplement (a
"Security Insurer"), a reserve account, letters
of credit, credit or liquidity facilities, third
party payments or other support, cash deposits or
other arrangements. In addition to or in lieu of
the foregoing, credit enhancement may be provided
by means of subordination, cross-support among
the Receivables or overcollateralization. Any
form of credit enhancement will have certain
limitations and exclusions from coverage
thereunder, which will be described in the
related Prospectus Supplement. See "Description
of the Trust Agreements -- Credit Enhancements."
To the extent that shortfalls in the proceeds of
the Contracts occur which exceed the amount
covered by the credit enhancement or which are
not covered by the credit enhancement available
to a particular Series or Class,
Certificateholders will bear their allocable
share of any deficiencies. See "Risk
Factors -- Limited Assets" herein, and to the
extent applicable, in the related Prospectus
Supplement.
Any form of credit enhancement will have certain
limitations and exclusions from coverage
thereunder, which will be described in the
related Prospectus Settlement. See "Description
of the Trust Agreements -- Credit Enhancements."
Cross-Collateralization.... As described in the related Trust Agreement and the
related Prospectus Supplement, the source of
payment for Securities of each series will be the
assets of the related Asset Pool only.
However, as may be described in the related
Prospectus Supplement, a series or class of
Securities may include the right to receive
moneys from a common pool of credit enhancement
which may be available for more than one series
of Securities, such as a master reserve account,
master insurance policy or a master collateral
pool consisting of similar Receivables.
Notwithstanding the foregoing, and as described
in the related Prospectus Supplement, no payment
received on any Receivable held by any Trust may
be applied to the payment of Securities issued by
any other Trust (except to the limited extent
that certain collections in excess of the amounts
needed to pay the related Securities may be
deposited in a common master reserve account or
an overcollateralization account that provides
credit enhancement for more than one series of
Securities issued pursuant to the related Trust
Agreement).
Mandatory Repurchase of
Certain Contracts........ As more fully described in the related Prospectus
Supplement, the Company will be obligated to
repurchase a Contract if the Contract is found to
be in breach of a representation or warranty, if
the breach is not cured and the Securityholders'
interests are materially and adversely affected.
Upon discovery by the Trust, the Servicer or in
the case of the Indenture Trustee, upon actual
knowledge of a Responsible Officer of the
Indenture Trustee, of such breach, the party
discovering such breach shall give prompt written
notice to the other parties. In addition, if so
specified in the related Prospectus Supplement,
the Company may from time to time repurchase
certain Receivables or
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<PAGE> 15
substitute other Receivables for such Receivable
held by an Asset Pool, subject to specified
conditions set forth in the related Trust
Agreement and Conveyance Agreement.
Servicer's Compensation.... The Servicer shall be entitled to receive a fee for
servicing the Contracts of each Asset Pool equal
to a specified percentage of the Discounted
Contract Balance of such Contracts, as set forth
in the related Prospectus Supplement. See
"Description of the Trust Agreements -- Servicing
Compensation" herein and in the related
Prospectus Supplement.
Certain Legal Aspects of
the Contracts............ With respect to the transfer of the Contracts to
the related Trust, the Company will warrant, in
each case, that the transfer by it is either a
valid transfer and assignment of the Contracts to
the Trust or the grant of a security interest in
the Contracts. Each Prospectus Supplement will
specify whether the Company will be required to
take such action as is required to perfect either
the Trust's or the Securityholders' security
interest in the Contracts. The Company may also
warrant that, if the transfer or pledge by it to
the Trust or to the Securityholders is deemed to
be a grant to the Trust or to the Securityholders
of a security interest in the Contracts, then the
Trust or the Securityholders 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. Similar security
interest and priority representations and
warranties, as described in the related
Prospectus Supplement, may also be made by the
Company with respect to the Equipment.
Each Prospectus Supplement will specify if the
Seller or the Company has filed or will be
required to file UCC (as herein defined)
financing statements identifying the Equipment as
collateral pledged in favor of the related Trust
or Trustee on behalf of the Securityholders. In
the absence of such filings any security interest
in the Equipment will not be perfected in favor
of the related Trust or Trustee. See "Risk
Factors."
Optional Termination....... The Servicer, the Company, or, if specified in the
related Prospectus Supplement, certain other
entities may, at their respective options, effect
early retirement of a series of Securities under
the circumstances and in the manner set forth
herein under "Description of the Trust
Agreements -- Termination" and in the related
Prospectus Supplement. In the event of such a
redemption, the entire outstanding principal
amount of the Securities subject to early
termination, together with accrued interest
thereon at the related Interest Rate will be
required to be paid to the Securityholders.
Mandatory Termination...... The Trustee, the Servicer or certain other entities
specified in the related Prospectus Supplement
may be required to effect early retirement of all
or any portion of a series of Securities by
soliciting competitive bids for the purchase of
the related Asset Pool or otherwise, under other
circumstances and in the manner specified in
"Description of the Trust
Agreements -- Termination" and in the related
Prospectus Supplement.
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Material Federal Income Tax
Consequences............. Securities of each series offered hereby will, for
federal income tax purposes, constitute either
(i) interests in a Trust treated as a grantor
trust under applicable provisions of the Code
("Grantor Trust Securities") or (ii) debt issued
by a Trust ("Notes"). See "Certain Tax
Considerations."
Holders of Grantor Trust Securities will be treated
as the owner of an interest in the Equipment and
Contracts included in the Grantor Trust Estate.
Holders of Notes will be treated as the owner of
a debt instrument and will be required to report
income received with respect to the Notes in
accordance with their normal method of
accounting.
The Prospectus Supplement for each series of
Securities will summarize, subject to the
limitations stated therein, federal income tax
considerations relevant to the purchase,
ownership and disposition of such Securities.
Investors are recommended to consult their tax
advisors and to review "Certain Federal and State
Income Tax Consequences" herein and in the
related Prospectus Supplement.
ERISA Considerations....... The Prospectus Supplement for each series of
Securities will summarize, subject to the
limitations discussed therein, considerations
under the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), relevant to the
purchase of such Securities by employee benefit
plans and individual retirement accounts. See
"ERISA Considerations" in the related Prospectus
Supplement.
Ratings.................... Each Class of Securities offered pursuant to this
Prospectus and the related Prospectus Supplement
will be rated in one of the four highest rating
categories by one or more "national statistical
rating organizations", as defined in the
Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and commonly referred to as
"Rating Agencies". Such ratings will address, in
the opinion of such Rating Agencies, the
likelihood that the Issuer will be able to make
timely payment of all amounts due on the related
Securities in accordance with the terms thereof.
Such ratings will neither address any prepayment
or yield considerations applicable to any
Securities nor constitute a recommendation to
buy, sell or hold any Securities.
The ratings expected to be received with respect to
any Securities will be set forth in the related
Prospectus Supplement.
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<PAGE> 17
RISK FACTORS
Prospective investors should consider, among other things, the following
factors in connection with the purchase of the Securities:
Limited Liquidity May Result In A Securityholder Being Unable To
Liquidate Its Investments. There can be no assurance that a secondary
market for the Securities of any Series or Class will develop or, if it
does develop, that it will provide Securityholders with liquidity of
investment or that it will continue for the life of such Securities. The
Prospectus Supplement for any series of Securities may indicate that an
underwriter specified therein intends to establish and maintain a secondary
market in such Securities; however, no underwriter will be obligated to do
so. The Securities will not be listed on any securities exchange.
Limited Assets Will Secure The Securities And Securityholders Will
Have No Recourse To The Issuer, The Company, The Servicer, The Seller Or
Any Respective Affiliate. Each Asset Pool will not have, nor is it
permitted or expected to have, any significant assets or sources of funds
other than the related Receivables and, to the extent provided in the
related Prospectus Supplement, the related reserve account(s) and any other
credit enhancement. The Certificates will represent beneficial interests in
the related Trust only and will not represent interests in or obligations
of the Company, the Servicer, the Seller or any of their respective
affiliates other than the related Trust. The sole source of payment with
respect to any Certificate will be the assets of the related Trust. The
Notes will represent obligations of the related Issuer only and will not
represent interests in or obligations of the Company, the Servicer, the
Seller or any of their respective affiliates other than the related Issuer.
The Notes will be secured by the assets of the related Asset Pool, and the
sole source of payment with respect to any Note will be the assets of the
related Asset Pool. No Securities will be insured or guaranteed by the
Seller, the Company, the Servicer or the applicable Trustee(s), except as
set forth in the related Prospectus Supplement. Consequently, holders of
Securities must rely for repayment primarily upon payments on the related
Receivables and, if and to the extent available, amounts on deposit in the
reserve account(s), if any, and any other credit enhancement, all as
specified in the related Prospectus Supplement.
Subordination Of Interest And Principal On Certain Classes And Series
of Securities Will Increase The Likelihood Of Delays And Loss Of Payments
To Such Classes And Series. To the extent specified in the related
Prospectus Supplement, distributions of interest and principal on one Class
or Series of Securities may be subordinated in priority of payment to
interest and principal due on other Classes or Series of Securities. Such
Class or Series of Securities could experience delays and or reductions in
the payment of principal and/or interest to the extent that collections and
other amounts available to make distributions to the senior Class, Classes
or Series of Securities are insufficient to cover the required amount to be
distributed to such senior Class, Classes or Series. The particular terms
of any subordination will be more fully set forth in the related Prospectus
Supplement.
The Seller Or Servicer Rather Than The Trustee May Have Possession Of
The Contracts, Exposing Securityholders To The Risk That They May Lose
Their Security Interest Or Ownership Interest In The Contracts And
Equipment. In connection with the issuance of each Series, the Seller will
transfer Contracts to the Company. The Seller will warrant in a
Contribution and Sale Agreement that the transfer of the Contracts by it to
the Company is a valid assignment, transfer and conveyance of such
Contracts. The Company will warrant in a Trust Agreement (a) if the Company
retains title to the Contracts, that it has granted to the Trustee for the
benefit of Securityholders a valid security interest in such Contracts, or
(b) if the Company transfers such Contracts to a Trust, that the transfer
of the Contracts by it to such Trust is either a valid assignment, transfer
and conveyance of the Contracts to the Trust or it has granted to the
Trustee on behalf of the Securityholders a valid security interest in such
Contracts. Pursuant to each Trust Agreement, the Trustee will be required
to maintain possession of the original copies of all Contracts that
constitute chattel paper; provided that the Servicer or a Lessor acting as
a sub-Servicer may take possession of such original copies as necessary for
the enforcement of any Contract. In certain circumstances, and as specified
in the related Prospectus Supplement, a portion of the Contracts may remain
in the possession of a Lessor or the Seller, subject to specific trigger
events that
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<PAGE> 18
will require delivery to the Trustee. If the Servicer, a Lessor or other
third party, while in possession of the Contracts, sells or pledges and
delivers such Contracts to another party, in violation of the Contribution
and Sale Agreement or the Trust Agreement, there is a risk that such other
party could acquire an interest in such Contracts having a priority over
the Issuer's interest. Furthermore, if the Servicer, a Lessor or a third
party, while in possession of the Contracts, is rendered insolvent, such
event of insolvency may result in competing claims to ownership or security
interests in the Contracts. Such an attempt, even if unsuccessful, could
result in delays in payments on the Securities. If successful such attempt
could result in losses to the Securityholders or an acceleration of the
repayment of the Securities. The Seller and the Company will make certain
representations and warranties with respect to the ownership of the
Contracts as of the date of the transfer to the Company and the Trust, if
any, respectively. The Seller will be obligated to acquire any Contract
from the related Asset Pool if there is a breach of such representations
and warranties that materially adversely affects the interests of the
Company or the Trust in such Contract and such breach has not been cured.
The Seller will also sell and/or contribute all of its right, title
and interest in and to the Equipment to the Company. If a security interest
in title to the Equipment is transferred, the Contribution and Sale
Agreement shall require the Seller to make certain representations and
warranties with respect to the transfer of title and perfection and
priority of such security interest, if any, in the Equipment. The Company
will pledge all of its right, title and interest in and to such Equipment
to the Trust. Pursuant to a Trust Agreement, the Company will warrant (a)
if the Company transfers such Equipment to a Trust, that such transfer is
either a valid assignment, transfer and conveyance of such Equipment to the
Trust or it has granted to the Trust a security interest in such Equipment,
or (b) if the Company retains title, that it has granted to the Trustee for
the benefit of Securityholders a valid security interest in such Equipment.
As specified herein and related Prospectus Supplement, because of the
administrative burden and expense that would be entailed in so doing,
neither the Seller nor the Company will have filed, or necessarily would be
required to file, UCC financing statements identifying the Equipment as
collateral pledged in favor of the related Trust or Trustee on behalf of
the Securityholders. In the absence of such filings any security interest
in the Equipment will not be perfected in favor of the related Trust or
Trustee. As a result the Trust or Trustee could lose priority of its
security interest in such Equipment. Neither the Seller nor the Company
will have any obligation to reacquire Equipment as to which such
aforementioned occurrence results in the loss of lien priority after the
date the Company or the Trust receives an interest in such Equipment unless
otherwise obligated in the related Prospectus Supplement.
Yields, Maturities And Prepayments On The Securities Cannot Be
Predicted And Social, Economic And Other Factors May Affect Securityholders
Return On Their Investments. Because the rate of payment of principal on
the Securities will depend, among other things, on the rate of payment on
the Contracts, the rate of payment of principal on the Securities cannot be
predicted. Payments on the Contracts will include scheduled payments as
well as partial and full prepayments (to the extent not replaced with
substitute Contracts), payments upon the liquidation of Defaulted
Contracts, payments upon acquisitions by the Company of Contracts from the
related Asset Pool on account of a breach of certain representations and
warranties in the related Trust Agreement, payments upon an optional
acquisition by the Company of Contracts from the related Asset Pool (any
such voluntary or involuntary prepayment or other early payment of a
Contract, a "Prepayment"), and residual payments. The rate of early
terminations of Contracts due to Prepayments and defaults may be influenced
by a variety of economic and other factors, including, among others,
obsolescence, then current economic conditions and tax considerations. The
risk of reinvesting distributions of the principal of the Securities will
be borne by the Securityholders. The yield to maturity on Strip Securities
or Securities purchased at premiums or discounts to par will be extremely
sensitive to the rate of Prepayments on the related Receivables. In
addition, the yield to maturity on certain other types of classes of
Securities, including Strip Securities, Accrual Securities or certain other
Classes in a series including more than one Class of Securities, may be
relatively more sensitive to the rate of prepayment of the related
Contracts than other Classes of Securities.
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The Company does not have available to it any statistics as to
prepayment rates historically experienced in the equipment leasing industry
and the Seller does not accumulate information related to Prepayments with
respect to its portfolio. As a matter of practice, the Seller does not
originate Contracts which permit Prepayments. Further, in the ordinary
course of dealings, the Seller does not permit Prepayments at the request
of a Lessee. Additionally, to the extent that one or more Contracts having
large Discounted Contract Balances are prepaid, the prepayment experience
of the Seller's portfolio would not necessarily be indicative of the actual
rate of Prepayments experienced by any particular Asset Pool. The rate of
Prepayments of Contracts cannot be predicted and is influenced by a wide
variety of economic, social, and other factors, including prevailing
interest rates, the availability of alternate financing and local and
regional economic conditions. Therefore, no assurance can be given as to
the level of Prepayments that an Asset Pool will experience.
Securityholders should consider, in the case of Securities purchased
at a discount, the risk that a slower than anticipated rate of Prepayments
on the Receivables could result in an actual yield that is less than the
anticipated yield and, in the case of any Securities purchased at a
premium, the risk that a faster than anticipated rate of Prepayments on the
Receivables could result in an actual yield that is less than the
anticipated yield.
Recoveries On The Contracts May Be Limited, Which May Result In The
Issuer Receiving Substantially Less Than The Face Amount Of The Related
Contract. The Contracts provide that the obligations of the Lessees
thereunder are absolute and unconditional, regardless of any defense,
set-off or abatement which the Lessee may have against the Seller or any
other person or entity whatsoever unless otherwise described in the related
Prospectus Supplement,. The Seller will warrant that no claims or defenses
have been asserted or threatened with respect to the Contracts and that all
requirements of applicable law with respect to the Contracts have been
satisfied.
In the event that the Company or Trustee must rely on repossession and
disposition of Equipment to recover scheduled payments due on Defaulted
Contracts, the Issuer may not realize the full amount due on a Contract (or
may not realize the full amount on a timely basis). Other factors that may
affect the ability of the Issuer to realize the full amount due on a
Contract include whether financing statements to perfect the security
interest in the Equipment had been filed, depreciation, obsolescence,
damage or loss of any item of Equipment, and the application of Federal and
state bankruptcy and insolvency laws. As a result, the Securityholders may
be subject to delays in receiving payments and suffer loss of their
investment in the Securities.
Risks Related To Insolvency Of The Seller And Bankruptcy Matters. The
Company has taken steps in structuring the transactions contemplated hereby
that are intended to ensure that the voluntary or involuntary application
for relief by the Seller under the United States Bankruptcy Code or similar
applicable state laws ("Insolvency Laws") will not result in consolidation
of the assets and liabilities of the Company with those of the Seller.
These steps include the creation of the Company as a separate,
limited-purpose subsidiary pursuant to a certificate of incorporation
containing certain limitations (including restrictions on the nature of the
Company's business and a restriction on the Company's ability to commence a
voluntary case or proceeding under any Insolvency Law without the prior
unanimous affirmative vote of all of its directors). However, there can be
no assurance that the activities of the Company would not result in a
court's concluding that the assets and liabilities of the Company should be
consolidated with those of the Seller in a proceeding under any Insolvency
Law.
In addition, while the Seller is the Servicer, cash collections held
by the Seller may, subject to certain conditions, be commingled and used
for the benefit of the Seller prior to each Payment Date and, in the event
of the bankruptcy of the Seller, the Company, a Trust or Trustee may not
have a perfected interest in such collections.
With respect to each series, the Seller will obtain a legal opinion
from Dewey Ballantine LLP, special counsel to the Seller that the transfer
of the Receivables by Seller to the Company should be treated as a valid
assignment, transfer and conveyance of the Receivables. However, in the
event of an insolvency of the Seller, a court, among other remedies, could
attempt to recharacterize the transfer of
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the Receivables by the Seller to the Company as a borrowing by the Seller
from the Company or the related Securityholders, secured by a pledge of
such Receivables. Such an attempt, even if unsuccessful, could result in
delays in payments on the Securities. If such an attempt were successful, a
court, among other remedies, could elect to accelerate payment of the
Securities and liquidate the Receivables, with the Securityholders entitled
to the then outstanding principal amount thereof and interest thereon at
the applicable Security Interest Rate to the date of payment. Thus, the
Securityholders could lose the right to future payments of interest and
might incur reinvestment losses. As more fully described in the related
Prospectus Supplement, in the event the Company is rendered insolvent, the
Trustee for a Trust, in accordance with the Trust Agreement, will promptly
sell, dispose of or otherwise liquidate the related Receivables in a
commercially reasonable manner on commercially reasonable terms. The
proceeds from any such sale, disposition or liquidation of such Receivables
will be treated as collections on such Receivables. If the proceeds from
the liquidation of the Receivables and any amount available from any credit
enhancement, if any, are not sufficient to pay Securities of the related
series in full, the amount of principal returned to such Securityholders
will be reduced and such Securityholders will incur a loss.
Lessees of the Equipment may be entitled to assert against the Seller,
the Company, or the Trust, if any, claims and defenses which they have
against the Seller with respect to the Receivables. The Seller will warrant
that no such claims or defenses have been asserted or threatened with
respect to the Receivables and that all requirements of applicable law with
respect to the Receivables have been satisfied.
Equipment Obsolescence May Diminish Recovery Values. In the event a
Contract becomes a Defaulted Contract and the Lessee (and any guarantor)
has insufficient assets available to pay the Contract payments on the
scheduled payment dates, the only other source of moneys (other than the
applicable credit enhancements, if any) for such amounts will be the income
and proceeds from the disposition of the related Equipment. Because the
market value of equipment generally declines with age and may be subject to
sudden, significant declines in value because of technological advances, in
the event of a repossession and sale of Equipment subject to a Defaulted
Contract, the Issuer may not recover the entire amount due on such
Contract. As a result, the Securityholders may be subject to delays in
receiving payments and suffer loss of their investment in the Securities.
Future Levels Of Delinquencies On The Contracts Are Uncertain. There
can be no assurance that the levels of delinquencies and losses experienced
in recent years by the Seller on its equipment lease portfolio are
indicative of the performance of the Contracts included in any Asset Pool
or that such levels will continue in the future. Delinquencies and losses
could increase significantly for various reasons, including changes in the
federal income tax laws, changes in the local, regional or national
economies or due to other events.
Book-Entry Registration May Further Reduce Liquidity And May Lead To
Payment Delays. Issuance of the Securities in book-entry form may reduce
the liquidity of such Securities in the secondary trading market since
investors may be unwilling to purchase Securities for which they cannot
obtain definitive physical securities representing such Securityholders'
interests, except in certain circumstances described in the related
Prospectus Supplement.
Since transactions in Securities will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's
book-entry system ("Direct Participants" or "Indirect Participants") or
certain banks, the ability of a Securityholder to pledge a Security to
persons or entities that do not participate in the DTC system, or otherwise
to take actions in respect to such Securities, may be limited due to lack
of a physical security representing the Securities.
Securityholders may experience some delay in their receipt of
distributions of interest on and principal of the Securities since
distributions may be required to be forwarded by the Trustee to DTC and, in
such case, DTC will be required to credit such distributions to the
accounts of its Participants which thereafter will be required to credit
them to the accounts of the applicable class of Securityholders either
directly or indirectly through Indirect Participants. See "Description of
the Securities -- Book Entry Registration."
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Rating Of Securities Subject To Change Based On The Ratings Of The
Credit Enhancers. The rating of Securities credit enhanced by a letter of
credit, financial guaranty insurance policy, reserve fund, credit or
liquidity facilities, cash deposits or other forms of credit enhancement
(collectively "Credit Enhancement") will depend primarily on the
creditworthiness of the issuer of such external Credit Enhancement device
(a "Credit Enhancer"). Any reduction in the rating assigned to the
claims-paying ability of the related Credit Enhancer to honor its
obligations pursuant to any such Credit Enhancement below the rating
initially given to the Securities would likely result in a reduction in the
rating of the Securities.
Software and Service Contracts May Not Be Owned By The Seller And The
Issuer May Not Realize Proceeds Upon A Default Of Such Software And Service
Contracts. Certain Contracts, as described in the related Prospectus
Supplement, will relate to software and services that are not owned by the
Seller and in which no related interest will be transferred to the Issuer.
Instead, the Issuer will receive the right to receive payments under the
Contract. Accordingly, if any such Contract becomes a Defaulted Contract,
the Issuer will not realize any proceeds from the related software and
services from which to satisfy any unpaid payments under such Contracts.
Transfer Of Servicing May Delay Payments To Securityholders. If the
Seller were to cease acting as Servicer, delays in processing payments on
the Receivables and information in respect thereof could occur and result
in delays in payments to the Securityholders.
The Seller's Inability To Repurchase Contracts May Result In Losses
And Delays Of Payments To The Securityholders. In connection with the
transfer of Receivables by the Seller to the Company, the Seller will make
representations and warranties with respect to certain matters relating to
such Receivables. In certain circumstances, the Company and the Seller will
be required to acquire Receivables from the related Asset Pool with respect
to which such representations and warranties have been breached. In the
event that the Seller is incapable of complying with its reacquire
obligations and no other party is obligated to perform or satisfy such
obligations, Securityholders may be subject to delays in receiving payments
and suffer loss of their investment in the Securities.
The Initial Contact Pool May Have Geographic Or Other
Concentrations. As more fully set forth in the related Prospectus
Supplement, the Contracts constituting a particular Asset Pool may be
concentrated such that lessees in a particular geographic region, a
particular type of equipment or a particular lessee constitutes a
significant portion of the Asset Pool. To the extent Adverse economic
conditions were particularly severe in such geographic region or industry
or in the event a lessee under a large amount of Contracts were to
experience financial difficulties the delinquency and default experience of
the Asset Pool could be adversely impacted.
The Seller's Ability To Originate Additional Contracts May Determine
Whether The Pre-Funding Account Will Be Fully Utilized. In the event the
Company is unable to transfer Contracts with an Aggregate Discounted
Contract Balance equal to the Pre-Funded Amount prior to the expiration of
the Pre-Funding Period, Securityholders will experience a prepayment equal
to their allocable share (as more fully described in the related Prospectus
Supplement) of the uninvested Pre-Funded Amount. Such prepayment may reduce
the expected yield to investors. In addition, due to market fluctuations,
investors may be unable to reinvest such prepayment amounts in similarly
yielding investments.
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 be 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.
The Underwriting Criteria Used To Originate Contracts Under The
Portfolio Acquisition Program May Deviate From The Underwriting Criteria Of
First Sierra. The Contracts included in a particular
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Asset Pool may have been purchased by First Sierra from one or more lessors
pursuant to its Portfolio Acquisition Program. To the extent described in
the related Prospectus Supplement, certain Contracts included in a
particular Asset Pool may have been originated using underwriting criteria
different from that of First Sierra's. However, the Contracts included in a
particular Asset Pool will satisfy the criteria set forth in the related
Prospectus Supplement.
Securityholders' Waiver Of Right To Institute Proceeding Against
Company. Each Securityholder by its purchase of Securities is deemed by
its purchase of such Securities to have covenanted that it will not at any
time institute against the Company any bankruptcy, reorganization or other
proceeding under any Insolvency Law.
USE OF PROCEEDS
The proceeds from the sale of the Securities of a given series will be
applied by the related Issuer to the acquisition of the related Receivables or
may be transferred to the Seller in connection with the conveyance of the
Receivables. The Company expects that it will make additional sales of
securities similar to the Securities from time to time, but the timing and
amount of any such additional offering will be dependent upon a number of
factors, including the volume of Contracts acquired by the Company, prevailing
interest rates, availability of funds and general market conditions.
THE ISSUERS
The Securities offered hereby will be issued by a Trust (which may be an
owner trust or a trust) established by the Company pursuant to a Pooling
Agreement or a Trust Agreement. For purposes of this Prospectus and the related
Prospectus Supplement, the Trust issuing the related Securities shall be
referred to as the "Issuer" with respect to such Securities. Each Trust may
issue Certificates and, if it is an owner trust, Notes. The Asset Pool related
to each Trust will be formed and transferred to such Trust pursuant to the
related Pooling Agreement and, in the case of Notes, the related Asset Pool will
be formed and pledged to the related Trustee pursuant to the related Indenture.
To the extent that a Trust in an owner trust (an "Owner Trust"), it will be
organized as a business trust to be formed in accordance with the laws of the
State of Delaware, pursuant to a Trust Agreement, solely for the purpose of
effectuating the transactions described herein and in the related Prospectus
Supplements. Prior to formation, each such Trust will have had no assets or
obligations and no operating history. Upon formation, each such Trust will not
engage in any business activity other than (a) acquiring, managing and holding
the related Contracts, (b) issuing the related Securities, (c) making
distributions and payments thereon and (d) engaging in those activities,
including entering into agreements, that are necessary, suitable or convenient
to accomplish the foregoing or are incidental thereto or connected therewith.
Such Owner Trust may issue Certificates pursuant to a Pooling Agreement or issue
Notes pursuant to an Indenture. The terms of any such issuance are more fully
described herein and may be fully in the related Prospectus Supplement.
THE ASSET POOLS
Each Asset Pool will include, as specified in the related Prospectus
Supplement, (i) a pool of Contracts which will consist solely of finance leases
and commercial loans and the Receivables related thereto, (ii) all moneys
(including accrued interest) due or to become due thereunder on or after the
applicable Cut-off Date, (iii) such amounts as from time to time may be held in
one or more accounts established and maintained by the Servicer pursuant to the
related Trust Agreement, as described below and in the related Prospectus
Supplement, (iv) the security interests, if any, in the Equipment relating to
such pool of Receivables, (v) the right to proceeds from claims on physical
damage policies, if any, covering such Equipment or the related Lessees, as the
case may be, (vi) the rights of the Seller under the related Contribution and
Sale Agreement and (vii) interest earned on short-term investments made by such
Trust. The Asset Pool will also include, if so specified in the related
Prospectus Supplement, monies on deposit in a Pre-Funding Account, which will be
used by the Trustee to acquire or receive a security interest in Additional
Receivables from the Company from
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time to time during the Pre-Funding Period specified in the related Prospectus
Supplement. In addition, to the extent specified in the related Prospectus
Supplement, some combination of Credit Enhancements may be issued to or held by
the Trustee on behalf of the related Securityholders for the benefit of the
holders of one or more classes of Securities.
The Receivables and related items in each Asset Pool will be acquired by
the Company from the Seller pursuant to a contribution and sale agreement
between the Seller and the Company (each, a "Contribution and Sale Agreement").
The Receivables included in each Asset Pool will be selected from those
Receivables held by the Seller based on the criteria specified in the applicable
Trust Agreement and described in the related Prospectus Supplement.
Information with respect to the Receivables in each Asset Pool will be set
forth in the related Prospectus Supplement, including, to the extent
appropriate, the distribution of such Receivables by equipment type, remaining
lease term, original lease term, Discounted Contract Balance and/or Discounted
Contract and Residual Balance, lessee industry and geographic distribution, in
each case, as of the applicable Cut-Off Date.
THE RECEIVABLES
GENERAL
The Contracts are full payout leases with an average original equipment
cost of approximately $17,000, generally range in size from $1,000 to $500,000,
have an average term of nearly 60 months and generally range from 36 to 84
months in term. The Contracts relate to a wide range of equipment, including
computers and peripherals, computer software, medical, dental and diagnostic,
telecommunications, office, automotive servicing, hotel security, food services,
tree service and industrial as well as specialty vehicles.
The Contracts were acquired by the Company from First Sierra or an
affiliate. As more fully described in the related Prospectus Supplement, the
Contracts were either (a) originated by a lessor and acquired by First Sierra
pursuant to First Sierra's Portfolio Acquisition Program, (b) acquired by First
Sierra because such Contracts comply with First Sierra's underwriting criteria
for the Private Label Program or (c) originated by First Sierra under the Broker
Program and Vendor Program.
As more fully described in the related Prospectus Supplement, the Equipment
subject to the Contracts is expected to include furniture, dentist operatories,
diagnostic equipment (including, X-ray machines and blood diagnostic equipment),
copiers, telephone systems, computers and facsimile machines and general office
equipment.
FIRST SIERRA
First Sierra Financial Inc. (the "Seller" or "First Sierra") is a
specialized finance company that acquires and originates, sells and services
equipment contracts.
First Sierra has established strategic alliances with a network of
independent leasing companies, contract brokers and equipment vendors, each of
which acts as a source from which First Sierra obtains access to equipment
contracts. First Sierra customizes contract financing products to meet the
specific equipment financing needs of its customers and in many cases provides
such customers with servicing and technological support via on-line connections
to First Sierra's state-of-the-art computer system.
First Sierra commenced operations in June 1994 and initially developed a
program to purchase contracts from leasing companies which had the ability to
originate significant contract volumes and were willing and able to provide
credit protection to First Sierra (through recourse and purchase price holdback
features) and perform certain servicing functions on an ongoing basis with
respect to such contracts. This program, referred to by First Sierra as its
"Private Label" program (and the companies that participate in the Private Label
Program are "Sources"), was designed to provide First Sierra with access to high
volumes of contracts eligible for the securitization market, while minimizing
the risk of loss to First Sierra. First Sierra has experienced significant
growth in its Private Label program since inception, with the volume of
contracts purchased
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increasing from $4.5 million in 1994, to $65.2 million in 1995, to $161.1
million in 1996, to $210 million in 1997 and to $118 million in the first six
months of 1998. The volume of contracts originated under the Broker Program and
Vendor Program was a combined $168 million in 1997.
PRIVATE LABEL PROGRAM
General
The Private Label Program was designed to provide financing to small ticket
Sources which were typically financed by local commercial banks. Each Private
Label transaction generally contains one or more of the following types of loss
protection: (a) recourse to the Source which requires the Source to repurchase
contracts that are typically 90 days past due up to an aggregate amount that is
up to 10% of the total purchase price of the contracts acquired from such
Source, (b) remarketing of the equipment that is subject to a defaulted contract
and (c) maintenance of a reserve fund funded by holdbacks of a portion of the
purchase price owing to the Source, such reserve funds typically range from 1%
to 10% of the purchase price of the related contracts. However, some Private
Label transactions are non-recourse to the Source (although such Sources are
obligated to repurchase contracts as to which a breach of representation or
warranty occurs) and are not structured with the loss protections contained in
(a), (b) and (c) above. Other than for a breach of a representation or warranty,
First Sierra would absorb the full risk of loss on leases originated under this
structure. Currently, there is no Private Label transaction that falls in this
category.
The Private Label Program utilizes three separate forms of agreements that
utilize the above types of loss protection. Under the first, First Sierra has
recourse to the Source up to 10% of the aggregate purchase price of the
contracts acquired from such Source for defaulted contracts. Under the second
form of agreement, in addition to the aforementioned recourse to the Source,
First Sierra has the benefit of a reserve account which generally ranges from 1%
to 10% of the total purchase price of the contracts acquired from such Source,
with an average of 3.5%. Such amount is funded by the retention of a specified
percentage of the purchase price for each contract as a reserve. Under the third
option, First Sierra has loss protection only from the reserve account for
credit losses.
Underwriting Procedures
In order to qualify for participation in the Private Label Program, a
Source must satisfy certain criteria, which generally require that the majority
of the Source's business be small ticket contracts ($1,000 -- $500,000),
generate a minimum volume of contracts in excess of $5 million a year, have been
in business a minimum of five years, have a history of profitably operating a
leasing company for a period of time in excess of five years, have a personal
credit history which shows that the principal management of the Source has a
clean credit history, and have sufficient staff and financial resources. The
specific requirements vary depending upon such things as transaction size, and
type and location of equipment financed.
First Sierra's underwriting guidelines with respect to Obligors contain
specific requirements which vary according to the nature of the Obligor's
business, the size of the transaction, and the type of program under which the
Source is seeking approval. In underwriting the Obligor, First Sierra considers,
among other things, time in business, bank, credit and trade references, credit
bureau reports on all officers, Dun & Bradstreet reports, confirmation of
ownership, complete financial package, personal guarantees, maximum exposure per
Obligor, verification of a personal medical license, where applicable, and
historical financial statements or tax returns for commercial exposures greater
than $75,000 or as specifically arranged with the originating Source.
The Private Label Source typically closes the contract transaction prior to
sale to First Sierra. The Source will have performed all the necessary credit
inquiries and documentation, and will submit this information to First Sierra
for review. Each contract submitted for funding from any approved Source is
individually underwritten and approved by First Sierra. Individual contract
underwriting procedures generally include review of credit bureau reports and
verification of bank references, trade references, and licenses. For commercial
exposures greater than $50,000, First Sierra reviews personal financial
statements, business financial statements, and tax returns with an emphasis on
cash flow and the ability to service the contract payments and debt. For each
contract application First Sierra receives, the credit department reviews all
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documentation and credit reviews. First Sierra performs periodic verification on
all acquired contracts on a random basis. Ongoing review involves periodic
financial analysis of the Source, portfolio performance assessment for leases
originated from the Source, and periodic on-site visits with management. Private
Label program agreements are structured such that First Sierra retains full
right of approval of all contracts originated from the Source. In the event that
ongoing monitoring and review indicate that the performance of the Source or the
pool does not meet expectations, First Sierra would decline to accept new leases
from that Source. However, the Source remains obligated under the original terms
of the program agreement for all leases previously originated from the Source.
BROKER PROGRAM
First Sierra's Broker Program is designed to fund equipment contracts from
small ticket contract brokers that are unwilling or unable to provide the credit
protection and perform the servicing functions necessary to participate in First
Sierra's Private Label program. In a typical Broker transaction, First Sierra
originates contracts referred to it by the Broker and pays the Broker a referral
fee. Contracts originated under the Broker Program are structured on a
non-recourse basis, with risk of loss in the event of default by the Obligor
residing with First Sierra. First Sierra owns or (in the case of a contract
intended as security) has a security interest in the underlying equipment
covered by a Broker contract and, in certain cases, retains a residual interest
in such underlying equipment. All servicing functions are performed by First
Sierra.
First Sierra also provides a variety of value-added services to
participants in its Broker Program, including consulting on the structuring of
financing transactions with equipment purchasers, timely and efficient credit
approvals and preparation and completion of standardized contract documents.
Although First Sierra enters into a brokerage agreement with each of the
participants in its Broker Program, such agreements are not exclusive and can be
terminated by either party.
First Sierra's yields on contracts originated under its Broker Program,
depending upon the transaction, can typically range from 400 to 600 basis points
higher than those acquired under its Private Label program because of the risk
of loss and servicing responsibilities assumed by First Sierra in the Broker
Program.
VENDOR PROGRAM
First Sierra's Vendor Program focuses on establishing formal and informal
relationships with equipment vendors (of which vendors may deal in software) in
order to establish First Sierra as the provider of financing recommended by such
vendors to their equipment purchasers. By assisting such vendors in providing
timely, convenient and competitive financing for their equipment sales and
offering vendors a variety of value-added services, First Sierra simultaneously
promotes the vendor's equipment sales and the utilization of First Sierra as the
equipment finance provider.
In a typical vendor arrangement, First Sierra originates all contracts
referred to it by the Vendor. Contracts originated under the Vendor Program are
structured on a non-recourse basis, with risk of loss in the event of a default
by the Obligor residing with First Sierra. First Sierra owns or (in the case of
a contract intended as security) has a security interest in the underlying
equipment covered by a vendor contract and, in certain cases, retains a residual
interest in such equipment. All servicing functions are performed by First
Sierra under the Vendor Program.
Criteria for the Vendor Program include the following: minimum time in
business, satisfactory Dun and Bradstreet reports, references, personal
references and satisfactory credit reports on the principals involved, and,
depending upon the size of the vendor relationship and anticipated funding
volume, satisfactory financial results and credit analysis of the vendor.
In some cases, a vendor may desire to establish a captive finance program.
In this instance, First Sierra assists the vendor in establishing a funding
program for the vendor's customers. First Sierra may provide varying levels of
service, generally for a fee, which can include activity related to sales force
training, sales force assistance, origination, funding, and on-going servicing
and collection activities. First Sierra may
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purchase contracts originated through this program or it may assist the vendor
in funding these contracts on a non-recourse basis with other funding sources.
The Vendor Program provides for customized financing arrangements to
respond to the needs of a particular vendor and its equipment purchasers. The
value-added services offered by First Sierra to participants in its Vendor
Program include consulting with vendors on structuring financing transactions
with equipment purchasers, training the vendor's sales and management staffs to
understand and market First Sierra's various financing alternatives, customizing
financial products to encourage product sales, and preparation and completion of
standardized contract documents. In most cases, First Sierra's sales
representatives also work directly with the vendor's equipment purchasers,
providing them with the guidance necessary to complete the equipment financing
transaction. First Sierra also may participate actively in the vendor's sale
sand marketing efforts, including advertising, promotions, trade show activities
and sales meetings.
First Sierra generally obtains yields on contracts funded under the Vendor
Program which are 2 - 3% higher than those in the Broker Program due to
additional services provided by First Sierra under the Vendor Program.
THE SERVICER
GENERAL
First Sierra Financial, Inc., a Delaware corporation (the "Servicer"), was
founded in June 1994. Its principal office is located at 600 Travis Street,
Suite 7050, Houston, Texas 77002. Since its incorporation through March 31,
1998, First Sierra has acquired over $820 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".
COLLECTION POLICIES
On a day-to-day basis, the billing and collection process is handled by
First Sierra's automated billing system. Day-to-day collections are processed
through Chase Bank of Texas' cash management operations, which utilize optical
code reading technology to scan the invoices and earmark payments to the
specific pool where the contract is funded.
For Private Label Programs, the First Sierra relies on the Source to
undertake the initial collection efforts with respect to the Obligors. First
Sierra monitors contract receipts and aging results on a daily basis. First
Sierra provides delinquency status to Sources at least twice monthly. Many
Sources are connected to First Sierra's delinquency reporting systems and can
receive delinquency performance on daily basis. First Sierra monitors the
Source's progress, and is in regular contact with the Source regarding
collection activity, and actions to prevent the delinquency from worsening.
After 60 days, First Sierra contacts the Source directly to notify it that it
has 30 days to ensure the account is brought current. After 90 days, First
Sierra notifies the Source that it has 60 days to repurchase the contract it was
purchased pursuant to a recourse program, or to re-market the equipment. If
collections activities do not rectify the account, First Sierra typically
charges off the account at between 120 and 180 days past due depending on the
specific circumstances related to that account.
With respect to Broker/Vendor Programs, First Sierra's automated billing
cues collectors to initiate contact with Obligors if payment is not received by
the 11th day after due date. If payment has not been received by the 25th, a
general demand letter is sent to the Obligor. If no contact is made within 45
days, a letter is sent which gives the Obligor five days to bring the account
current. If no payment is received, the collector, in conjunction with senior
credit personnel, determines the subsequent actions appropriate for the
circumstances. If collection activities do not rectify the account, First Sierra
typically charges off the account at 120 days.
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PREPAYMENT AND YIELD CONSIDERATIONS
Generally, none of the Seller's originated Contracts are prepayable at any
time. As more fully described in the related Prospectus Supplement, if a
Contract permits a Prepayment such payment or upon a default that results in
such payment, will shorten the weighted average life of the related pool of
Receivables and the weighted average life of the related Securities. The rate of
Prepayments on the Receivables may be influenced by a variety of economic,
financial and other factors. In addition, under certain circumstances, the
Company or the Seller will be obligated to acquire Receivables from the related
Asset Pool pursuant to the applicable Trust Agreement or Contribution and Sale
Agreement as a result of breaches of representations and warranties. Any
reinvestment risks resulting from a faster or slower amortization of the related
Securities which results from Prepayments will be borne entirely by the related
Securityholders.
The related Prospectus Supplement will set forth certain additional
information with respect to the maturity and prepayment considerations
applicable to a particular pool of Receivables and the related series of
Securities.
POOL FACTORS
The "Pool Factor" for each Class of Securities will be a seven-digit
decimal, which the Servicer will compute prior to each distribution with respect
to such Class of Securities, indicating the remaining outstanding principal
balance of such Class of Securities as of the applicable Payment Date, as a
fraction of the initial outstanding principal balance of such Class of
Securities. Each Pool Factor will be initially 1.0000000, and thereafter will
decline to reflect reductions in the outstanding principal balance of the
applicable Class of Securities. A Securityholder's portion of the aggregate
outstanding principal balance of the related Class of Securities is the product
of (i) the original aggregate purchase price of such Securityholder's Securities
and (ii) the applicable Pool Factor.
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THE COMPANY
First Sierra Receivables II, Inc. and First Sierra Receivables III, Inc.
(together, the "Company") is each a limited purpose corporation organized under
the laws of the State of Delaware in , 199 and , 199 ,
respectively. Each of the Company's principal executive offices are located at
600 Travis Street, Houston, Texas 77002.
The Company does not intend to engage in any business or investment
activities other than acquiring, owning, leasing, transferring, receiving or
pledging the assets transferred to the Company. The Company's certificate of
incorporation (the "Certificate of Incorporation") limits the Company's business
and investment activities to the above purposes and to any activities necessary,
suitable or convenient to accomplish the foregoing or incidental thereto.
Pursuant to the Company's Certificate of Incorporation, the limitations so
imposed on the Company's business may only be altered upon unanimous affirmative
vote of all of the Company's directors, including the Independent Director. The
Company's Certificate of Incorporation requires the Company, at all times, to
have at least one Independent Director. An "Independent Director" is not
permitted to be a director, officer or employee of any direct or ultimate parent
or affiliate of the Seller, provided, however, that such Independent Director
may serve in similar capacities for other limited purpose corporations which are
affiliated with the Originator. The Company's Certificate of Incorporation
further prohibits the Company, without the unanimous affirmative vote of the
directors, including the Independent Director, from (1) instituting or
consenting to the institution of bankruptcy or insolvency proceedings, (2)
merging or consolidating with another corporation, (3) incurring, assuming or
guaranteeing any indebtedness other than as otherwise provided in the
Certificate of Incorporation, or (4) engaging in certain other actions that
would have a negative impact upon whether the separate legal identities of the
Company and the Seller will be respected.
The Company has taken steps in structuring the transactions contemplated
hereby that are intended to ensure that the voluntary or involuntary petition
for relief by the Originator under any Insolvency Law will not result in
consolidation of the assets and liabilities of the Company with those of the
Seller. These steps include the creation of the Company as a separate, limited
purpose corporation having a restrictive Certificate of Incorporation as
described above.
The Company will not acquire any assets other than the Receivables and
other assets transferred by the Seller pursuant to the Contribution and Sale
Agreements. Because the Company does not have any operating history and will not
engage in any business activity other than as described above, there has not
been included herein any historical or current financial information with
respect to the Company.
The Seller will warrant to the Company in each Contribution and Sale
Agreement that the transfer of the related Receivables by it to the Company is a
valid transfer of the Receivables to the Company. In addition, the Seller and
the Company will treat the transactions described herein and in the related
Prospectus Supplement as a transfer of the Receivables to the Company, and the
Company will take all actions that are required to perfect the Company's
ownership interest in the Receivables. Notwithstanding the foregoing, if the
Seller 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 Company 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 Company
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 Company is recharacterized as a pledge, then a
tax or government lien on the property of the Seller arising before the transfer
of Receivables to the Company may have priority over the Company's interest in
such Receivables. If the transfer of Receivables to the Company is treated as a
sale, the Receivables would not be part of the Seller's bankruptcy estate and
would not be available to the Seller's creditors.
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THE TRUSTEES
The Trustee for each series of Securities will be specified in the related
Prospectus Supplement. The Trustee's liability in connection with the issuance
and sale of the related Securities is limited solely to the express obligations
of such Trustee set forth in the related Trust Agreement; provided, however,
that such limitation shall in no way be deemed to affect any liability of the
Trustee under the federal securities laws.
With respect to each series of Securities, no resignation or removal of the
Trustee and no appointment of a successor Trustee shall become effective until
the acceptance of appointment by the successor Trustee. The Trustee may resign
for cause at any time by giving written notice thereof to the Company and by
mailing notice of resignation by first-class mail, postage prepaid, to the
Securityholders of such series at their addresses appearing on the Security
Register. The Trustee may be removed at any time by written notice of the
holders of Securities evidencing more than 50% of the voting rights with respect
to such series, delivered to the Trustee and the Company. If the Trustee shall
resign, be removed, or become incapable of acting, or if a vacancy shall occur
in the office of Trustee for any cause, the Company shall promptly appoint a
successor Trustee. If no successor Trustee shall have been so appointed by the
Company or the Securityholders, or if no successor Trustee shall have accepted
appointment within 30 days after any such resignation or removal, existence of
incapability, or occurrence of such vacancy, the Trustee or any Securityholder
may petition any court of competent jurisdiction for the appointment of a
successor Trustee.
DESCRIPTION OF THE SECURITIES
GENERAL
The Securities will be issued in series. Each series of Securities (or, in
certain instances, two or more series of Securities) will be issued pursuant to
a Trust Agreement or an Indenture. The following summaries (together with
additional summaries under the Trust Agreement below) describe all material
terms and provisions relating to the Securities common to each Trust Agreement.
The summaries do not purport to be complete.
All of the Securities offered pursuant to this Prospectus and the related
Prospectus Supplement will be rated in one of the four highest rating categories
by one or more Rating Agencies.
The Securities will generally be styled as debt instruments, having a
principal balance and a specified Interest Rate. The Securities may either
represent beneficial ownership interests in the related Asset Pool held by the
related Trust or debt secured by certain assets of the related Issuer. To the
extent that the Securities represent debt secured by certain assets of the
related Asset Pool, such Securities will not represent beneficial ownership
interests in the related Receivables.
Each series or Class of Securities offered pursuant to this Prospectus may
have a different Interest Rate, which may be a fixed or adjustable interest
rate. The related Prospectus Supplement will specify the Interest Rate for each
series or Class of Securities described therein, or the initial interest rate
and the method for determining subsequent changes to the Interest Rate.
A series may include one or more Classes of Strip Securities entitled (i)
to principal distributions, with disproportionate, nominal or no interest
distributions, or (ii) to interest distributions, with disproportionate, nominal
or no principal distributions. In addition, a series of Securities may include
two or more Classes of Securities that differ as to timing, sequential order,
priority of payment, Interest Rate or amount of distribution of principal or
interest or both, or as to which distributions of principal or interest or both
on any Class may be made upon the occurrence of specified events, in accordance
with a schedule or formula, or on the basis of collections from designated
portions of the related pool of Receivables. Any such series may include one or
more Classes of Accrual Securities, as to which certain accrued interest will
not be distributed but rather will be added to the principal balance (or nominal
balance, in the case of Accrual Securities which are also Strip Securities)
thereof on each Payment Date, as hereinafter defined, or in the manner described
in the related Prospectus Supplement.
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If so provided in the related Prospectus Supplement, a series may include
one or more other Classes of Senior Securities that are senior to one or more
other Classes of Subordinate Securities in respect of certain distributions of
principal and interest and allocations of losses on Receivables.
In addition, certain Classes of Senior (or Subordinate) Securities may be
senior to other Classes of Senior (or Subordinate) Securities in respect of such
distributions or losses.
GENERAL PAYMENT TERMS OF SECURITIES
As provided in the related Trust Agreement and as described in the related
Prospectus Supplement, Securityholders will be entitled to receive payments on
their Securities on the specified Payment Dates. Payment Dates with respect to
the Securities will occur monthly, quarterly or semi-annually, as described in
the related Prospectus Supplement.
The related Prospectus Supplement will describe the Record Date preceding
such Payment Date, as of which the Trustee or its paying agent will fix the
identity of the Securityholders for the purpose of receiving payments on the
next succeeding Payment Date. As more fully described in the related Prospectus
Supplement, the Payment Date may be the tenth, fifteenth or twenty-fifth day of
each month (or, in the case of quarterly-pay Securities, the tenth, fifteenth or
twenty-fifth day of every third month; and in the case of semi-annual pay
Securities, the tenth, fifteenth or twenty-fifth day of every sixth month) and
the Record Date will be the close of business as of the last day of the calendar
month that precedes the calendar month in which such Payment Date occurs.
As more fully provided in the related Prospectus Supplement, each Trust
Agreement will describe a Remittance Period preceding each Payment Date (for
example, in the case of monthly-pay Securities, the calendar month preceding the
month in which a Payment Date occurs). As more fully provided in the related
Prospectus Supplement, collections received on or with respect to the related
Receivables held by a Trust during a Remittance Period will be required to be
remitted by the Servicer to the related Trustee prior to the related Payment
Date and will be used to fund payments to Securityholders on such Payment Date.
As may be described in the related Prospectus Supplement, the related Trust
Agreement may provide that all or a portion of the payments collected on or with
respect to the related Receivables may be applied by the related Trustee to the
acquisition of additional Receivables during a specified period (rather than be
used to fund payments of principal to Securityholders during such period) with
the result that the related Securities will possess an interest-only period,
also commonly referred to as a revolving period, which will be followed by an
amortization period. Any such interest only or revolving period may, upon the
occurrence of certain events to be described in the related Prospectus
Supplement, terminate prior to the end of the specified period and result in the
earlier than expected amortization of the related Securities. The revolving
period is one of structural features related to the conclusion that under
certain structures the Securities are considered debt of the particular issuer
for federal income tax considerations. The duration of the revolving period and
the requirements to be satisfied by additional Receivables will be specified in
the related Prospectus Supplement. Any direct or indirect costs to investors
associated with a revolving period will be discussed in the related Prospectus
Supplement.
In addition, and as may be described in the related Prospectus Supplement,
the related Trust Agreement may provide that all or a portion of such collected
payments may be retained by the Trustee (and held in certain temporary
investments, including Receivables) for a specified period prior to being used
to fund payments of principal to Securityholders.
Such retention and temporary investment by the Trustee of such collected
payments may be required by the related Trust Agreement for the purposes of (a)
slowing the amortization rate of the related Securities relative to the rent
payment schedule of the related Receivables, or (b) attempting to match the
amortization rate of the related Securities to an amortization schedule
established at the time such Securities are issued. Any such feature applicable
to any Securities may terminate upon the occurrence of events to be described in
the related Prospectus Supplement, resulting in distributions to the specified
Securityholders and an acceleration of the amortization of such Securities.
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Neither the Securities nor the underlying Receivables will be guaranteed or
insured by any governmental agency or instrumentality or the Company, First
Sierra, the Servicer, any Seller, any Trustee or any of their affiliates unless
specifically set forth in the related Prospectus Supplement.
As may be described in the related Prospectus Supplement, Securities of
each series covered by a particular Trust Agreement will either evidence
specified beneficial ownership interest in a separate Asset Pool created
pursuant to such Trust Agreement or represent debt secured by the related Asset
Pool. To the extent that any Asset Pool includes certificates of interest or
participations in Receivables, the related Prospectus Supplement will describe
the material terms and conditions of such certificates or participations.
BOOK-ENTRY REGISTRATION
As may be described in the related Prospectus Supplement, Securityholders
of a given series may hold their Securities through DTC (in the United States)
or CEDEL or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations that are participants in such systems.
Cede, as nominee for DTC, will hold the global Securities in respect of a
given series. CEDEL and Euroclear will hold omnibus positions on behalf of the
CEDEL Participants (as defined below) and the Euroclear Participants (as defined
below) (collectively, the "Participants"), respectively, through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries (collectively, the "Depositaries") which in turn will
hold such positions in customers' securities accounts in the Depositaries' names
on the books of DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of notes or certificates.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations. Indirect access to the DTC system also is available to
others such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
the ordinary way in accordance with their applicable rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant CEDEL
Participant or Euroclear Participant on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
CEDEL or Euroclear cash account only as of the business day following settlement
in DTC.
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The Securityholders of a given series that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, Securities of such series may do so only through
Participants and Indirect Participants. In addition, Securityholders of a given
series will receive all distributions of principal and interest through the
Participants who in turn will receive them from DTC. Under a book-entry format,
Securityholders of a given series may experience some delay in their receipt of
payments, since such payments will be forwarded by the applicable Trustee to
Cede, as nominee for DTC. DTC will forward such payments to its Participants,
which thereafter will forward them to Indirect Participants or such
Securityholders. It is anticipated that the only "Securityholder" in respect of
any series will be Cede, as nominee of DTC. Securityholder of a given series
will not be recognized as Securityholders of such series, and such
Securityholders will be permitted to exercise the rights of Securityholders of
such series only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Securities of a given series among Participants on whose behalf it acts with
respect to such Securities and to receive and transmit distributions of
principal of, and interest on, such Securities. Participants and Indirect
Participants with which the Securityholders of a given series have accounts with
respect to such Securities similarly are required to make book-entry transfers
and receive and transmit such payments on behalf of their respective
Securityholders of such series. Accordingly, although such Securityholders will
not possess Securities, the Rules provide a mechanism by which Participants will
receive payments and will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder of a given series to pledge Securities of such series to persons
or entities that do not participate in the DTC system, or to otherwise act with
respect to such Securities, may be limited due to the lack of a physical
certificate for such Securities.
DTC will advise the Trustee in respect of each Series that it will take any
action permitted to be taken by a Securityholder of the related series only at
the direction of one or more Participants to whose accounts with DTC the
Securities of such series are credited. DTC may take conflicting actions with
respect to other undivided interests to the extent that such actions are taken
on behalf of Participants whose holdings include such undivided interests.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of the
Euroclear System ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 28 currencies, including United
States dollars. The Euroclear System includes various other services, including
securities lending and borrowing and interfaces with domestic markets in several
countries generally similar to the arrangements for cross-market transfers with
DTC described above. Euroclear is operated by Morgan Guaranty Trust Company of
New York, Brussels, Belgium office, under contract with Euroclear Clearance
System, S.C., a Belgian cooperative corporation (the "Cooperative"). All
operations are
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conducted by the "Euroclear Operator" (as defined below), and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Cooperative. The Cooperative establishes policy for
the Euroclear System on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries and may include the Underwriters.
Indirect access to the Euroclear System is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
The "Euroclear Operator" is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of relationship with persons holding through Euroclear Participants.
Except as required by law, the Trustee in respect of a series will not have
any liability for any aspect of the records relating to or payments made or
account of beneficial ownership interests of the related Securities held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
DEFINITIVE NOTES
As may be described in the related Prospectus Supplement, the Securities
will be issued in fully registered, certificated form ("Definitive Securities")
to the Securityholders of a given series or their nominees, rather than to DTC
or its nominee, only if (i) the Trustee in respect of the related series advises
in writing that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to such Securities and such Trustee
is unable to locate a qualified successor, (ii) such Trustee, at its option,
elects to terminate the book-entry-system through DTC or (iii) after the
occurrence of an "Event of Default" under the related Indenture or a default by
the Servicer under the related Trust Agreements, Securityholders representing at
least a majority of the outstanding principal amount of such Securities advise
the applicable Trustee through DTC in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in such
Securityholders' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the applicable Trustee will be required to notify all such
Securityholders through Participants of the availability of Definitive
Securities. Upon surrender by DTC of the definitive certificates representing
such Securities and receipt of instructions for re-registration, the applicable
Trustee will reissue such Securities as Definitive Securities to such
Securityholders.
Distributions of principal of, and interest on, such Securities will
thereafter be made by the applicable Trustee in accordance with the procedures
set forth in the related Indenture or Trust Agreement directly to holders of
Definitive Securities in whose names the Definitive Securities were registered
at the close of business on the applicable Record Date specified for such
Securities in the related Prospectus Supplement. Such distributions will be made
by check mailed to the address of such holder as it appears on the register
maintained by the applicable Trustee. The final payment on any such Security,
however, will be made only upon presentation and surrender of such Security at
the office or agency specified in the notice of final distribution to the
applicable Securityholders.
Definitive Securities in respect of a given series of Securities will be
transferable and exchangeable at the offices of the applicable Trustee or of a
certificate registrar named in a notice delivered to holders of such
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Definitive Securities. No service charge will be imposed for any registration of
transfer or exchange, but the applicable Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
REPORTS TO SECURITYHOLDERS
With respect to each series of Securities, on or prior to each Payment Date
for such series, the Servicer, Company or Trustee will forward or cause to be
forwarded to each holder of record of such class of Securities a statement or
statements with respect to the related Asset Pool setting forth the information
specifically described in the related Trust Agreement which generally will
include the following information:
(i) the amount of the distribution with respect to each class of
Securities;
(ii) the amount of such distribution allocable to principal;
(iii) the amount of such distribution allocable to interest;
(iv) the Pool Balance, if applicable, as of the close of business on
the last day of the related Remittance Period;
(v) the aggregate outstanding principal balance and the Pool Factor
for each Class of Securities after giving effect to all payments reported
under (ii) above on such Payment Date;
(vi) the amount paid to the Servicer, if any, with respect to the
related Remittance Period;
(vii) the amount of the aggregate purchase amounts for Receivables
that have been reacquired, if any, for such Remittance Period; and
(viii) the amount of coverage under any letter of credit, financial
guaranty insurance policy, reserve account or other form of credit
enhancement covering default risk as of the close of business on the
applicable Payment Date and a description of any Credit Enhancement
substituted therefor.
Each amount set forth pursuant to subclauses (i), (ii), (iii) and (v) with
respect to the Securities of any series will be expressed as a dollar amount per
$1,000 of the initial principal balance of such Securities, as applicable.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year, the applicable Trustee will provide to the
Securityholders a statement containing the amounts described in (ii) and (iii)
above for that calendar year and any other information required by applicable
tax laws, for the purpose of the Securityholders' preparation of federal income
tax returns.
DESCRIPTION OF THE TRUST AGREEMENTS
The following summary describes the material terms of each Trust Agreement
pursuant to which an Asset Pool will be created and the related Securities in
respect of such Asset Pool will be issued. For purposes of this Prospectus, the
term "Trust Agreement" as used with respect to a Trust means, collectively, and
except as otherwise specified, any and all agreements relating to the
establishment of the related Trust, the servicing of the related Receivables and
the issuance of the related Securities, including without limitation the
Indenture, (i.e. pursuant to which any Notes shall be issued). Forms of the
Trust Agreement have been filed as exhibits to the Registration Statement of
which the Prospectus forms a part. The summary does not purport to be complete.
ASSIGNMENT OF THE RECEIVABLES
On the Closing Date specified with respect to any given series of
Securities (the "Closing Date"), the Company will receive the related
Receivables from the Seller pursuant to a Contribution and Sale Agreement. The
Company will either transfer such Receivables to a Trust pursuant to a Pooling
Agreement, or, in the case of Notes, the related Trust Agreement. The rights and
benefits of the Company under such Contribution and Sale Agreement will be
assigned to the Trustee on behalf of Securityholders as collateral for the
Securities of
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the related series issued by a Trust or pursuant to an Indenture. The
obligations of the Company and the Servicer under such Trust Agreements include
those specified below and in the related Prospectus Supplement.
In each Contribution and Sale Agreement, the Seller will agree, and in each
Trust Agreement, the Servicer will agree, to indicate in its computer records
that the Receivables included in the related Asset Pool have been sold to the
Company, and, as appropriate, transferred to the related Trust and/or pledged
under the related Indenture. As specified in the related Trust Agreement, a
custodian, as may be specified therein (the "Custodian") or the Trustee will
have possession of any original lease documentation constituting "chattel paper"
under the UCC.
With respect to each Asset Pool, First Sierra, as Seller, will file UCC
financing statements with respect to the sale, contribution, transfer and
assignment of the related Receivables to the Company. If the Issuer is a Trust,
the Company will file UCC financing statements with respect to the sale,
transfer and assignment of such Receivables to such Trust. In addition, if
applicable, the Issuer will file UCC financing statements with respect to the
security interest in its assets granted to the Indenture Trustee under the
related Indenture. Since the Contract Files will remain in First Sierra's
possession, as Servicer, and will not be stamped or otherwise marked to reflect
the sale, contribution, transfer and assignment of the related Receivables to
the Company, the Trust and/or the Trustee, as applicable, if a subsequent
purchaser were able to take possession of the related Contract for new value in
the ordinary course of its business without actual knowledge of the assignments,
the Company's, the Trust's and/or the Trustees, as applicable, interests in such
Receivables could be defeated. See "Certain Legal Aspects of the Receivables."
Any Receivables to be included in an Asset Pool in substitution for other
Receivables will also be acquired by the Company from the Seller under the
related Contribution and Sale Agreement. Any substitute lease would be required
to satisfy criteria set forth in the relevant transaction documents and
described in the related prospectus supplement. Any additional costs, direct or
indirect associated with the substitution of Contracts will be discussed in the
related Prospectus Supplement.
REPRESENTATIONS AND WARRANTIES
With respect to each Asset Pool, the Seller will make certain
representation and warranties pursuant to the Contribution and Sale Agreement
with respect to the related Receivables. In the related Pooling Agreement or
Indenture, the Company will assign such representations and warranties to the
related Trust (or the related Trustee) and will represent and warrant that the
Company has taken no action to which would cause such representations and
warranties of the Seller to be false in any material respect. Under the related
Trust Agreement, in the event the Servicer or the related Trustee discovers or
by written notice is informed that any such representation or warranty of the
Seller or Company is untrue, the Servicer and such Trustee will be obligated to
use reasonable efforts to enforce the obligation of the Seller or Company set
forth in the related Contribution and Sale Agreement or the related Pooling
Agreement to purchase any Receivable included in the related Asset Pool
materially and adversely affected by such untruth. The Seller or Company will be
obligated to purchase each such Receivable on or prior to the thirtieth day
after such discovery or notice (or such later date as the Seller or Company and
such Trustee shall agree); provided, that the Seller or Company will not be
required to purchase any such Receivable if such untruth has been cured in all
material aspects or if such Receivable is replaced with a substitute Receivable
(if and to the extent substitution is permitted in the related Trust Agreement).
Any such repurchase shall be the sole remedy for any such breach. The purchase
price for any Receivable so purchased (the "Warranty Purchase Price") will be
based on the then Discounted Contract Balance or Discounted Contract and
Residual Balance of such Receivable as further described in the related
Prospectus Supplement. All such payments will be deposited in the related
Collection Account.
In each Contribution and Sale Agreement, the Seller will also make
representations and warranties to the Company to the effect that, among other
things, as of the closing date for the issuance of any related Securities: (a)
the Seller is duly formed as a corporation and in good standing under the laws
of the State of Delaware, it has the requisite power and authority to consummate
the transactions contemplated thereby and
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such Contribution and Sale Agreement constitutes a legal, valid and binding
obligation of the Seller and (b) the contribution and sale of the related
Receivables thereunder constitute a valid contribution, sale, transfer and
assignment to the Company of all right, title and interest of the Seller therein
(subject, in the case of Leased Vehicles, to applicable titling statutes), and
such Receivables will be held by the Company free and clear of any lien of any
person claiming through or under the Seller, except for liens created by or
permitted under the related Trust Agreement.
In each Trust Agreement, the Company will make representations and
warranties to the effect that, among other things, as of the closing date for
the issuance of any related Securities: (a) the Company is duly incorporated and
in good standing under the laws of the State of Delaware, it has the corporate
power and authority to consummate the transactions contemplated thereby and such
Trust Agreement constitutes a legal, valid and binding agreement of the Company;
and (b) if the Issuer is a Trust, the transfer of the Receivables pursuant to
such Trust Agreement constitutes a valid sale, transfer and assignment to such
Trust of all right, title and interest of the Company in such Receivables, and
such Receivables will be held by such Trust free and clear of any lien of any
person claiming through the Company, except for liens created or permitted by
the such Trust Agreement. In the related Indenture, if any, the Issuer will
represent and warrant to the related Indenture Trustee that (a) no interest in
any Receivable conveyed by such Issuer to such Indenture Trustee thereunder has
been sold, transferred or pledged by such Issuer to any other person, (b) upon
execution and delivery of such Indenture by such Issuer, such Indenture Trustee
shall have all of the right, title and interest of the Issuer in such
Receivables, free of any lien, and (c) all UCC filings have been made to give
such Indenture Trustee, a first priority perfected security interest in the
Issuer's interest in such Contract and the related Equipment (if such Equipment
is located in a state in which a UCC filing was made), subject to liens
permitted by the related Trust Agreement and liens which have priority by
operation of law.
In each Contribution and Sale Agreement, the Seller will agree to do
nothing to impair the rights of the Company in the Receivables included in the
related Asset Pool, except as it is expressly permitted to do in its capacity as
the Servicer under the related Trust Agreement. In each Trust Agreement, the
Company will covenant that, except for the sale and conveyances pursuant
thereto, and the interests created under, such Trust Agreement or as otherwise
permitted therein, the Company will not sell, pledge, assign or transfer any
interest in any Receivables included in the related Asset Pool.
ACCOUNTS
With respect to each series of Securities issued by a Trust, the Servicer
will establish and maintain with the applicable Trustee one or more accounts, in
the name of such Trustee on behalf of the related Securityholders, into which
all payments made on or with respect to the related Receivables will be
deposited (the "Collection Account"). The Servicer will also establish and
maintain with such Trustee separate accounts, in the name of such Trustee on
behalf of such Securityholders, in which amounts released from the Collection
Account and the reserve account or other Credit Enhancement, if any, and to the
extent provided, for distribution to such Securityholders will be deposited and
from which distributions to such Securityholders will be made (the "Distribution
Account").
Any other accounts to be established with respect to a Trust, including any
reserve account, will be described in the related Prospectus Supplement.
For any series of Securities, funds in the Collection Account, the
Distribution Account, any reserve account and other accounts identified as such
in the related Prospectus Supplement (collectively, the "Trust Accounts") shall
be invested as provided in the related Trust Agreement in Eligible Investments.
Subject to certain conditions, Eligible Investments may include securities
issued by the Company or its affiliates or other trusts created by the Company
or its affiliates. Except as described below or in the related Prospectus
Supplement, Eligible Investments are limited to obligations or securities that
mature not later than the business day immediately preceding the next
distribution. However, subject to certain conditions, funds in the reserve
account may be invested in securities that will not mature prior to the date of
the next distribution and will not be sold to meet any shortfalls. Thus, the
amount of cash in any reserve account at any time may be less than the balance
of such reserve account. If the amount required to be withdrawn from any reserve
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account to cover shortfalls in collections on the related Receivables exceeds
the amount of cash in such reserve account a temporary shortfall in the amounts
distributed to the related Securityholders could result, which could, in turn,
increase the average life of the Securities of such series. Except as otherwise
specified in the related Prospectus Supplement, investment earnings on funds
deposited in the applicable Trust Accounts, net of losses and investment
expenses (collectively, "Investment Earnings"), shall be deposited in the
applicable Collection Account on each Payment Date and shall be treated as
collections of interest on the related Receivables.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution has a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
"Eligible Institution" means, with respect to a Trust, (a) the corporate trust
department of the related Indenture Trustee or the related Trustee, as
applicable, or (b) a depository institution organized under the laws of the
United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank), which (i) (A) has either
(w) a long-term unsecured debt rating acceptable to the Rating Agencies or (x) a
short-term unsecured debt rating or certificate of deposit rating acceptable to
the Rating Agencies or (B) the parent corporation of which has either (y) a
long-term unsecured debt rating acceptable to the Rating Agencies or (z) a
short-term unsecured debt rating or certificate of deposit rating acceptable to
the Rating Agencies and (ii) whose deposits are insured by the FDIC.
To the extent that the Seller's unsecured debt ratings are acceptable to
the Rating Agencies, amounts deposited to any Trust Account may be commingled
with the Seller's general account moneys. Any rights to so commingle moneys will
be described in the related Prospectus Supplement.
PRE-FUNDING ACCOUNT
In accordance with the provisions that may be set forth in the related
Prospectus Supplement, a portion of the issuance proceeds of the Securities of a
particular series (such amount, the "Pre-Funded Amount") will be deposited in an
account (the "Pre-Funding Account") to be established with the Trustee, which
will be used to acquire Additional Receivables from time to time during time
period specified in the related Prospectus Supplement. Prior to the investment
of the Pre-Funded Amount in Additional Receivables, such Pre-Funded Amount will
be invested in certain temporary investments satisfying certain eligibility
criteria more fully described in the related Prospectus Supplement. Although the
specific criteria with respect to such temporary investments will be specified
in the related Prospectus Supplement, such temporary investments will be highly
rated, short-term securities.
During any Pre-Funding Period, the Company will be obligated (subject only
to the availability thereof) to acquire from the Seller and to either transfer
to a Trust or pledge to a Trustee on behalf of Securityholders, Additional
Receivables from time to time during such Pre-Funding Period. Such Additional
Receivables will be required to satisfy certain eligibility criteria more fully
set forth in the related Prospectus Supplement.
Although the specific parameters of the Pre-Funding Account with respect to
any issuance of Securities will be specified in the related Prospectus
Supplement, it is anticipated that: (a) the Pre-Funding Period will not exceed
120 days from the related Closing Date, (b) that the Additional Contracts to be
acquired during the Pre-Funding Period will be subject to the same
representations and warranties as the Contracts included in the related Asset
Pool on the Closing Date (although additional criteria may also be required to
be satisfied, as described in the related Prospectus Supplement) and (c) that
the Pre-Funded Amount will not exceed 25% of the principal amount of the
Securities issued pursuant to a particular offering.
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SUBSTITUTION
Subject to the limitations set forth in the related Prospectus Supplement,
pursuant to the related Trust Agreement, the Company may have the ability to
substitute a comparable Contract, together with an interest in the related
Equipment, for and replace any Contract that defaults, terminates prior to its
scheduled termination date or becomes subject to purchase by the Seller, the
Company or the Servicer as a result of the breach of the representations,
warranties or covenants by the Seller, the Company or the Servicer, as
applicable, with respect to such Contract. The related Prospectus Supplement
will describe the limitations, if any, on the ability of the Company to
substitute Receivables with respect to any Asset Pool and the criteria to be
satisfied with respect to any Receivable to be added to an Asset Pool in
substitution of another Receivable. The Company will acquire all such
Receivables under the related Contribution and Sale Agreement.
The Company will also have the right to substitute Equipment under any
Contract for comparable Equipment so long as there is no change in the amount,
number or timing of the scheduled payments with respect to such Contract, and,
to the extent provided in the related Prospectus Supplement, the Company may
also have the right to permit add-ons and upgrades with respect to any Contract.
Upon the replacement of a Contract and/or Equipment with a substitute
Contract and/or Equipment as described above, the interest of the related
Trustee in such replaced Contract and/or Equipment shall be terminated and, if
it has been transferred to the related Trust, such replaced Contract and/or
Equipment shall be transferred to the Company.
SERVICING PROCEDURES
In accordance with the Servicer's procedures set forth under "Underwriting
Procedures" herein, with respect to each series of Securities, the Servicer will
make reasonable efforts to collect all payments due with respect to the
Receivables held in the related Asset Pool and, in a manner consistent with the
related Trust Agreement, will continue such collection procedures as the
Servicer follows with respect to the particular type of Receivable in the
particular pool it services for itself and others. Consistent with its normal
procedures, the Servicer may, in its discretion and on a case-by-case basis,
arrange with the Lessee on a Receivable to extend or modify the payment
schedule. Some of such arrangements (including, without limitation any extension
of the payment schedule beyond the final scheduled Payment Date for the related
Securities may result in the Servicer acquiring such Receivable if such Contract
becomes a Defaulted Contract. The Servicer may sell the Equipment securing the
respective Defaulted Contract, if any, at a public or private sale, or take any
other action permitted by applicable law. See "Certain Legal Aspects of the
Receivables".
PAYMENTS ON RECEIVABLES
With respect to each series of Securities, the Servicer will deposit all
payments on the related Receivables (from whatever source) and all proceeds of
such Receivables collected within two (2) business days of receipt thereof in
the related collection facility (a "Lockbox"). As specified in the related
Prospectus Supplement, the Servicer will be required to deposit payments on the
related Receivables (from whatever source) collected during each collection
period (each, a "Collection Period") into the related Collection Account on a
specified day each month. Pending deposit into the related Collection Account,
collections in the Lockbox may be invested by the Servicer at its own risk and
for its own benefit, and will not be segregated from funds of the Servicer.
SERVICING COMPENSATION
As may be described in the related Prospectus Supplement with respect to
any series of securities issued by a Trust, the Servicer will be entitled to
receive a servicing fee for each Collection Period (the "Servicing Fee") in an
amount equal to a specified percentage per annum (as set forth in the related
Prospectus Supplement, the "Servicing Fee Rate") of the Pool Balance as of the
first day of such Collection Period. Each Prospectus Supplement and Servicing
Agreement will specify the priority of distributions with respect to the
Servicing Fee (together with any portion of the Servicing Fee that remains
unpaid from prior Payment Dates), such Servicing Fee may be paid prior to any
distribution to the related Securityholders.
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The Servicer will also collect and retain any late fees, the penalty
portion of interest paid on past due amounts and other administrative fees or
similar charges allowed by applicable law with respect to the Receivables, and
will be entitled to reimbursement from each Trust for certain expenses to the
extent provided in the related Servicing Agreement or Pooling Agreement, as the
case may be. Payments by or on behalf of Lessees will be allocated to scheduled
payments and late fees and other charges in accordance with the Servicer's
normal practices and procedures.
The Servicing Fee will compensate the Servicer for performing the functions
of a third party servicer of similar types of receivables as an agent for their
beneficial owner, including collecting and posting all payments, responding to
inquiries of Lessees on the Receivables, investigating delinquencies, sending
payment coupons to Lessees, paying costs of collection and disposition of
defaults, and policing the collateral. The Servicing Fee also will compensate
the Servicer for administering the Receivables, accounting for collections and
furnishing statements to the applicable Trustee and the applicable Indenture
Trustee, if any, with respect to distributions. The Servicing Fee also will
reimburse the Servicer for certain taxes, accounting fees, outside auditor fees,
data processing costs and other costs incurred in connection with administering
the Receivables.
DISTRIBUTIONS
With respect to each series of Securities, beginning on the Payment Date
specified in the related Prospectus Supplement, distributions of principal and
interest (or, where applicable, of principal or interest only) on each Class of
such Securities entitled thereto will be made by the applicable Indenture
Trustee to the Noteholders and by the applicable Trustee to the
Certificateholders of such series. The timing, calculation, allocation, order,
source, priorities of and requirements for each class of Noteholders and all
distributions to each class of Certificateholders of such series will be set
forth in the related Prospectus Supplement.
With respect to each series of Securities, on each Payment Date collections
on the related Receivables will be transferred from the Collection Account to
the Distribution Account for distribution to Securityholders, respectively, to
the extent provided in the related Prospectus Supplement. Credit Enhancement,
such as a reserve account, may be available to cover any shortfalls in the
amount available for distribution on such date, to the extent specified in the
related Prospectus Supplement. As more fully described in the related Prospectus
Supplement, and unless otherwise specified therein, distributions in respect of
principal of a Class of Securities of a given series will be subordinate to
distributions in respect of interest on such Class, and distributions in respect
of the Certificates of such series may be subordinate to payments in respect of
the Notes of such series.
CREDIT ENHANCEMENTS
The amounts and types of Credit Enhancement arrangements, if any, and the
provider thereof, if applicable, with respect to each class of Securities of a
given series will be set forth in the related Prospectus Supplement. If and to
the extent provided in the related Prospectus Supplement, credit enhancement may
be in the form of a Policy, subordination of one or more Classes of Securities,
cross-support among the Receivables, reserve accounts, overcollateralization,
letters of credit, credit or liquidity facilities, third party payments or other
support, surety bonds, guaranteed cash deposits or any combination of two or
more of the foregoing. If specified in the applicable Prospectus Supplement,
Credit Enhancement for a Class of Securities may cover one or more other Classes
of Securities of the same series, and Credit Enhancement for a series of
Securities may cover one or more other series of Securities.
The presence of Credit Enhancement for the benefit of any Class or series
of Securities is intended to enhance the likelihood of receipt by the
Securityholders or such Class or series of the full amount of principal and
interest due thereon and to decrease the likelihood that such Securityholders
will experience losses. As more specifically provided in the related Prospectus
Supplement, the credit enhancement for a Class or series of Securities will not
provide protection against all risks of loss and will not guarantee repayment of
the entire principal balance and interest thereon. If losses occur which exceed
the amount covered by any Credit Enhancement or which are not covered by any
Credit Enhancement, Securityholders of any Class or series will bear their
allocable share of deficiencies, as described in the related Prospectus
Supplement. In addition,
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if a form of Credit Enhancement covers more than one series of Securities,
Securityholders of any such series will be subject to the risk that such Credit
Enhancement will be exhausted by the claims of Securityholders of other series.
STATEMENTS TO INDENTURE TRUSTEES AND TRUSTEES
Prior to each Payment Date with respect to each series of Securities, the
Servicer will provide to the applicable Indenture Trustee and/or the applicable
Trustee and Credit Enhancer as of the close of business on the last day of the
preceding related Collection Period a statement setting forth substantially the
same information as is required to be provided in the periodic reports provided
to Securityholders of such series described under "Description of the
Securities -- Reports to Securityholders".
EVIDENCE AS TO COMPLIANCE
Each Trust Agreement will provide that a firm of independent public
accountants will furnish to the related Trust and/or the applicable Indenture
Trustee and Credit Enhancer, annually, a statement as to compliance by the
Servicer during the preceding twelve months (or, in the case of the first such
certificate, the period from the applicable Closing Date) with certain standards
relating to the servicing of the Receivables.
Each Trust Agreement will also provide for delivery to the related Trust
and/or the applicable Indenture Trustee of a certificate signed by an officer of
the Servicer stating that the Servicer either has fulfilled its obligations
under such Trust Agreement in all material respects throughout the preceding 12
months (or, in the case of the first such certificate, the period from the
applicable Closing Date) or, if there has been a default in the fulfillment of
any such obligation in any material respect, describing each such default. The
Servicer also will agree to give each Indenture Trustee and each Trustee notice
of certain "Servicer Defaults" (as defined below) under the related Trust
Agreement.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the applicable Indenture
Trustee or the applicable Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
With respect to each series of Securities issued by a Trust, each Trust
Agreement will provide that First Sierra may not resign from its obligations and
duties as Servicer thereunder, except upon determination that First Sierra's
performance of such duties is no longer permissible under applicable law. No
such resignation will become effective until the related Trustee or a successor
servicer has assumed First Sierra's servicing obligations and duties under the
Trust Agreement.
Except as otherwise provided in the related Prospectus Supplement, each
Trust Agreement will further provide that neither the Servicer nor any of its
respective directors, officers, employees, or agents shall be under any
liability to the related Issuer or the related Securityholders for taking any
action or for refraining from taking any action pursuant to such Trust
Agreement, or for errors in judgment; provided, however, that neither the
Servicer nor any such person will be protected against any liability that would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of reckless disregard of
obligations and duties thereunder and provided, further, however, that neither
the Servicer nor any such person will be protected against any liability that
would be imposed under the federal securities laws. In addition, such Trust
Agreement will provide that the Servicer is under no obligation to appear in,
prosecute, or defend any legal action that is not incidental to its servicing
responsibilities under such Trust Agreement and that, in its opinion, may cause
it to incur any expense or liability.
Under the circumstances specified in any such Trust Agreement, any entity
into which the Servicer may be merged or consolidated, or any entity resulting
from any merger or consolidation to which the Servicer is a party, or any entity
succeeding to the business of the Servicer or, with respect to its obligations
as Servicer, which corporation or other entity in each of the foregoing cases
assumes the obligations of the Servicer, will be the successor of the Servicer
under such Trust Agreement.
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SERVICER DEFAULT
Except as otherwise provided in the related Prospectus Supplement,
"Servicer Default" under a Trust Agreement will include (i) any failure by the
Servicer to deliver to the applicable Trustee for deposit in any of the related
Trust Accounts any required payment or to direct such Trustee to make any
required distributions therefrom, which failure continues unremedied for greater
than three (3) Business Days after written notice from such Trustee is received
by the Servicer or after discovery by the Servicer; (ii) any failure by the
Servicer or the Company, as the case may be, duly to observe or perform in any
material respect any other covenant or agreement in such Trust Agreement, which
failure materially and adversely affects the rights of the related
Securityholders and which continues unremedied for greater than ninety (90) days
after the giving of written notice of such failure (1) to the Servicer or the
Company, as the case may be, by the applicable Trustee or (2) to the Servicer or
the Company, as the case may be, and to the applicable Trustee by holders of the
related Securities, as applicable, evidencing not less than 25% of the voting
rights of such outstanding Securities; and (iii) any Insolvency Event. An
"Insolvency Event" shall mean financial insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings with respect to
the Servicer or the Company and certain actions by the Servicer or the Company
indicating its insolvency, reorganization pursuant to bankruptcy proceedings, or
inability to pay its obligations.
RIGHTS UPON SERVICER DEFAULT
As more fully described in the related Prospectus Supplement, as long as a
Servicer Default under a Trust Agreement remains unremedied, the applicable
Trustee, Credit Enhancer or holders of Securities of the related series
evidencing not less than 25% of the voting rights of such then outstanding
Securities may terminate all the rights and obligations of the Servicer, if any,
under such Trust Agreement, whereupon a successor servicer appointed by such
Trustee or such Trustee will succeed to all the responsibilities, duties and
liabilities of the Servicer under such Trust Agreement and will be entitled to
similar compensation arrangements. If, however, a bankruptcy trustee or similar
official has been appointed for the Servicer, and no Servicer Default other than
such appointment has occurred, such bankruptcy trustee or official may have the
power to prevent the applicable Trustee or such Securityholders from effecting a
transfer of servicing. In the event that the Trustee is unwilling or unable to
so act, it may appoint, or petition a court of competent jurisdiction for the
appointment of, a successor with a net worth of at least $25,000,000 and whose
regular business includes the servicing of a similar type of receivables. Such
Trustee may make such arrangements for compensation to be paid, which in no
event may be greater than the servicing compensation payable to the Servicer
under the related Trust Agreement.
WAIVER OF PAST DEFAULTS
With respect to each Asset Pool, unless otherwise provided in the related
Prospectus Supplement and subject to the approval of any Credit Enhancer, the
holders of Notes evidencing at least a majority of the voting rights of such
then outstanding Securities may, on behalf of all Securityholders of the related
Securities, waive any default by the Servicer, or by the Company, in the
performance of its obligations under the related Trust Agreement and its
consequences, except a default in making any required deposits to or payments
from any of the Trust Accounts in accordance with such Trust Agreement. No such
waiver shall impair the Securityholders' rights with respect to subsequent
defaults.
AMENDMENT
As more fully described in the related Prospectus Supplement, each of the
Trust Agreements may be amended by the parties thereto, without the consent of
the related Securityholders, for the purpose of (a) adding any provisions to or
changing in any manner or eliminating any of the provisions of such Trust
Agreements or (b) modifying in any manner the rights of such Securityholders;
provided that such action will not, in the opinion of counsel satisfactory to
the applicable Trustee, materially and adversely affect the interests of any
such Securityholder and, to the extent provided in the related Prospectus
Supplement, to which the related Credit Enhancer may consent. As may be
described in the related Prospectus Supplement, the Trust Agreements may also be
amended by the Company, the Servicer, and the applicable Trustee with
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the consent of the holders of Securities evidencing at least a majority of the
voting rights of such then outstanding Securities for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Trust Agreements or of modifying in any manner the rights of such
Securityholders; provided, however, that no such amendment may (i) increase or
reduce in any manner the amount of, or accelerate or delay the timing of,
collections of payments on the related Receivables or distributions that are
required to be made for the benefit of such Securityholders or (ii) reduce the
aforesaid percentage of the Securities of such series which are required to
consent to any such amendment, without the consent of the Securityholders of
such series.
INSOLVENCY EVENT
As described in the related Prospectus Supplement, if an Insolvency Event
occurs with respect to the Company, the Receivables held in each Asset Pool will
be liquidated and each Trust will be terminated 90 days after the date of such
Insolvency Event, unless, before the end of such 90-day period, the Trustee of
such Trust shall have received written instructions from each of the related
Securityholders (other than the Company) and/or Credit Enhancer to the effect
that such party disapproves of the liquidation of such Receivables and
termination of such Trust. Promptly after the occurrence of any Insolvency Event
with respect to the Company, notice thereof is required to be given to such
Securityholders and/or Credit Enhancer; provided, however, that any failure to
give such required notice will not prevent or delay termination of any Trust.
Upon termination of any Trust, the applicable Trustee shall direct that the
assets of such Trust be promptly sold (other than the related Trust Accounts) in
a commercially reasonable manner and on commercially reasonable terms. The
proceeds from any such sale, disposition or liquidation of such Receivables will
be treated as collections on such Receivables and deposited in the related
Collection Account. If the proceeds from the liquidation of such Receivables and
any amounts on deposit in the Reserve Account, if any, and the related
Distribution Account are not sufficient to pay the Securities of the related
series in full, and no additional Credit Enhancement is available, the amount of
principal returned to Securityholders will be reduced and some or all of such
Securityholders will incur a loss.
Each Trust Agreement will provide that the applicable Trustee does not have
the power to commence a voluntary proceeding in bankruptcy with respect to any
related Trust without the unanimous prior approval of all Certificateholders
(including the Company, if applicable) of such Trust and the delivery to such
Trustee by each such Certificateholder of a certificate certifying that such
Certificateholder reasonably believes that such Trust is insolvent.
TERMINATION
With respect to each Trust formed by the Company to issue Securities, the
obligations of the Servicer, the Company and the applicable Trustee pursuant to
the related Trust Agreements will terminate upon the earlier to occur of (i) the
maturity or other liquidation of the last related Receivable and the disposition
of any amounts received upon liquidation of any such remaining Receivables and
(ii) the payment to Securityholders of the related series of all amounts
required to be paid to them pursuant to such Trust Agreement. As more fully
described in the related Prospectus Supplement, in order to avoid excessive
administrative expense, the Servicer will be permitted in respect of the
applicable Asset Pool, unless otherwise specified in the related Prospectus
Supplement, at its option to purchase from such Asset Pool, as of the end of any
Collection Period immediately preceding a Payment Date, if the Discounted
Contract Balance of the related Contracts is less than a specified percentage
(set forth in the related Prospectus Supplement) of the initial Pool Balance in
respect of such Asset Pool, all such remaining Receivables at a price equal to
the Aggregate Discounted Contract Balance of the related Securities will be
redeemed following such purchase. Unless otherwise provided in the related
Prospectus Supplement, the Trustee shall not be required to solicit bids from
third parties.
If and to the extent provided in the related Prospectus Supplement with
respect to an Asset Pool, the applicable Trustee will, within ten days following
a Payment Date as of which the Pool Balance is equal to or less than the
percentage of the initial Pool Balance specified in the related Prospectus
Supplement, solicit bids for the purchase of the Receivables remaining in such
Trust, in the manner and subject to the terms and
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conditions set forth in such Prospectus Supplement. If such Trustee receives
satisfactory bids as described in such Prospectus Supplement (which must, in any
case, generate sufficient proceeds to pay in full all outstanding Securities),
then the Receivables remaining in such Asset Pool will be sold to the highest
bidder. Affiliates of the Company will be permitted to submit bids.
As more fully described in the related Prospectus Supplement, any
outstanding Notes of the related series will be redeemed concurrently with
either of the events specified above and the subsequent distribution to the
related Certificateholders of all amounts required to be distributed to them
pursuant to the applicable Trust Agreement may effect the prepayment of the
Certificates of such series.
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CERTAIN LEGAL MATTERS AFFECTING THE RECEIVABLES
GENERAL
To the extent provided in the related Prospectus Supplement, the Contracts
that comprise the Receivables are "chattel paper" as defined in the Uniform
Commercial Code in effect in the State of Texas, the State of California and the
State of Florida; the governing laws chosen in the First Sierra forms of lease
contract. The governing law of the lease contracts acquired by the Seller
pursuant to its Portfolio Acquisition Program may vary as specified in the
related Prospectus Supplement. Pursuant to the UCC for most purposes, a sale of
chattel paper is treated in a manner similar to a transaction creating a
security interest in chattel paper. To the extent provided in the related
Prospectus Supplement, First Sierra and the Company will cause the filing of
appropriate UCC-1 financing statements to be made with the appropriate
governmental authorities. Under the Trust Agreement, the Servicer will be
obligated from time to time to take such actions as are necessary to protect and
perfect the Trust's or the Trustee's interests in the Contracts and their
proceeds.
THE SECURITY INTEREST IN THE EQUIPMENT
The Seller will convey the Seller's interest in the Equipment to the
Company. The Company will pledge a security interest in the Equipment to the
related Issuer. UCC financing statements will not be filed to perfect any
security interest in the Equipment unless otherwise specified in the related
Prospectus Supplement. Moreover, in the event of the repossession and resale of
Equipment, it may be subject to a superior lien. In such case, the senior
lienholder may be entitled to be paid the full amount of the indebtedness owed
to it out of the sale proceeds before such proceeds could be applied to the
payment of claims of the Servicer on behalf of the Trust.
In the event of a default by the Lessee, the Servicer on behalf of the
related Trustee may take action to enforce such Defaulted Contract by
repossession and resale of the leased Equipment. Under the UCC in most states, a
creditor can, without prior notice to the debtor, repossess assets securing a
defaulted contract by the Lessee's voluntary surrender of such assets or by
"self-help" repossession that does not involve a breach of the peace and by
judicial process.
In the event of a default by the Lessee, some jurisdictions require that
the Lessee be notified of the default and be given a time period within which it
may cure the default prior to repossession. Generally, this right of
reinstatement may be exercised on a limited number of occasions in any one-year
period.
The UCC and other state laws place restrictions on repossession sales,
including requirements that the secured party provide the Lessee with reasonable
notice of the date, time and place of any public sale and/or the date after
which any private sale of the collateral may be held and that any such sale be
conducted in a commercially reasonable manner. Each Trust Agreement may require
the Servicer to sell promptly any repossessed item of Equipment, reacquire such
Equipment from the Asset Pool, re-lease such Equipment for the benefit of the
Securityholders or take such other action as specified in the related Prospectus
Supplement.
Under most state laws, a Lessee has the right to redeem collateral for its
obligations prior to actual sale by paying the secured party the unpaid balance
of the obligation plus reasonable expenses for repossession, holding and
preparing the collateral for disposition and arranging for its sale, plus, to
the extent provided for in the written agreement of the parties, reasonable
attorneys' fees.
In addition, because the market value of the equipment of the type financed
pursuant to the Receivables generally declines with age and because of
obsolescence, the net disposition proceeds of leased Equipment at any time
during the term of the lease may be less than the outstanding balance on the
Contract principal balance which it secures. Because of this, and because other
creditors may have rights in the related leased Equipment superior to those of
the related Trustee, the Servicer may not be able to recover the entire amount
due on a Defaulted Contract in the event that the Servicer elects to repossess
and sell such leased Equipment at any time.
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Under the UCC and laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a Lessee for any deficiency on repossession
and resale of the asset securing the unpaid balance of such Lessee's contract.
However, some states impose prohibitions or limitations on deficiency judgments.
In most jurisdictions the courts, in interpreting the UCC, would impose upon a
creditor an obligation to repossess the equipment in a commercially reasonable
manner and to "mitigate damages" in the event of a Lessee's failure to cure a
default. The creditor would be required to exercise reasonable judgment and
follow acceptable commercial practice in seizing and disposing of the equipment
and to offset the net proceeds of such disposition against its claim. In
addition, a Lessee may successfully invoke an election of remedies defense to a
deficiency claim in the event that the Servicer's repossession and sale of the
leased Equipment is found to be a retention discharging the Lessee from all
further obligations under UCC Section 9-505(2). If a deficiency judgment were
granted, the judgment would be a personal judgment against the Lessee for the
shortfall, but a defaulting Lessee may have very little capital or sources of
income available following repossession. Therefore, in many cases, it may not be
useful to seek a deficiency judgment or, if one is obtained, it may be settled
at a significant discount.
Certain statutory provisions, including federal and state bankruptcy and
insolvency laws, may also limit the ability of the Servicer to repossess and
resell collateral or obtain a deficiency judgment. In the event of the
bankruptcy or reorganization of a Lessee, various provisions of the Bankruptcy
Code of 1978 (the "Bankruptcy Code") and related laws may interfere with or
eliminate the ability of the Servicer or the Trustee to enforce its rights under
the Receivables. If bankruptcy proceedings were instituted in respect of a
Lessee, the Trustee could be prevented from continuing to collect payments due
from or on behalf of such Lessee or exercising any remedies assigned to such
Trustee without the approval of the bankruptcy court, and the bankruptcy court
could permit the Lessee to use or dispose of the leased Equipment and provide
the Trustee with a lien on substitute collateral, so long as such substitute
collateral constituted "adequate protection" as defined under the Bankruptcy
Code.
In addition, certain of the Receivables may be leased by the Seller to
governmental entities. Payment by governmental authorities of amounts due under
such Contracts may be contingent upon legislative approval. Accordingly, payment
delays and collection difficulties as described in the related Prospectus
Supplement may limit collections with respect to certain governmental Contracts.
These UCC and bankruptcy provisions, in addition to the possible decrease
in value of a repossessed item of Equipment (equipment leased pursuant to a
Finance Lease), may limit the amount realized on the sale of the collateral to
less than the amount due on the related Receivable.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The Prospectus Supplement for each series of Securities will summarize,
subject to the limitations stated therein, federal income tax considerations
relevant to the purchase, ownership and disposition of such Securities.
The following describes the material anticipated Federal income tax
consequences to the holders of Securities. The tax aspects of each Series will
be reflected in the related Prospectus Supplement, and the Company will file an
additional tax opinion with respect thereto by Form 8-K.
GENERAL
The following is the opinion of Dewey Ballantine LLP, special tax counsel
to the Sellers ("Special Counsel") as to certain of the material federal income
tax consequences to investors of the purchase, ownership and disposition of the
Securities offered hereby. The discussion is based upon laws, regulations,
rulings and decisions now in effect, all of which are subject to change. The
discussion below does not purport to deal with all federal tax consequences
applicable to all categories of investors. 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. It is recommended that Investors consult their own tax
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advisors in determining the federal, state, local and any other tax consequences
to them of the purchase, ownership and disposition of the Securities.
The following discussion addresses Securities of two general types: (i)
certificates ("Grantor Trust Certificates") representing interests in a trust
estate (a "Grantor Trust Estate"); and (ii) Notes ("Notes") that are intended to
be treated for federal income tax purposes as indebtedness secured by the
Equipment and Contracts. For purposes of this discussion, references to a
"Holder" are to the beneficial owner of a Security.
GRANTOR TRUST CERTIFICATES
With respect to each Series of Grantor Trust Certificates, Special Counsel
will additionally deliver its opinion to the Seller that (unless otherwise
limited in the applicable Prospectus Supplement) the related Grantor Trust
Estate will be classified as a grantor trust and not as a partnership or an
association taxable as a corporation. Accordingly, each Holder of a Grantor
Trust Certificate will be treated as the owner of an interest in the Equipment
and Contracts included in the Grantor Trust Estate.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the Equipment and
Contracts constituting the related Grantor Trust Estate, together with interest
thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate."
In certain cases in which the Contracts in the Grantor Trust Estate consist
entirely of Finance Leases, a Grantor Trust Certificate may be issued
representing ownership of all or a portion of the difference between the
interest component of the payments on the Finance Leases constituting the
related Grantor Trust Estate and interest paid to the Holders of Grantor Trust
Fractional Interest Certificates issued with respect to such Grantor Trust
Estate. Such an Certificate will be referred to as a "Grantor Trust Strip
Certificate."
Taxation of Holders of Grantor Trust Certificates. Holders of Grantor
Trust Fractional Interest Certificates will be required to report on their
federal income tax returns their respective shares of the income from the
Contracts (including amounts used to pay reasonable servicing fees and other
expenses but excluding amounts payable to Holders of any corresponding Grantor
Trust Strip Certificates) and, subject to the limitations described below, will
be entitled to deduct their shares of any such reasonable servicing fees and
other expenses. If all of the Contracts in the Grantor Trust Estate consist of
Finance Leases, the income from the Contracts will be limited to the interest
component of the payment thereon. Payments of principal generally will be
treated as nontaxable recoveries of the Holder's investment. In such a case, if
a Holder acquires a Grantor Trust Fractional Interest Certificate for an amount
that differs from its outstanding principal amount or from the aggregate
outstanding principal amount of the underlying Finance Leases, the amount
includible in income on a Grantor Trust Fractional Interest Certificate may
differ from the amount of interest distributable thereon. See "Discount and
Premium," below.
Individuals holding a Grantor Trust Fractional Interest Certificate
directly or through certain pass-through entities will be allowed a deduction
for such reasonable servicing fees and expenses only to the extent that the
aggregate of such Holder's miscellaneous itemized deductions exceeds two percent
of such Holder's adjusted gross income. Further, Holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining alternative minimum taxable
income.
Holders of Grantor Trust Strip Certificates will be required to treat such
Certificates as "stripped coupons" under section 1286 of the Internal Revenue
Code of 1986 (the "Code"). Accordingly, such a Holder will be required to treat
the excess of the total amount of payments on such an Certificate over the
amount paid for such Certificate as original issue discount and to include such
discount in income as it accrues over the life of such Certificate. See
"Discount and Premium," below.
Grantor Trust Fractional Interest Certificates may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Certificates is issued
as part of the same series of Certificates. The consequences of the application
of the coupon stripping rules would appear to be that any discount arising upon
the purchase of such a Certificate (and perhaps all stated interest thereon)
would be classified as original issue discount and includible in the Holder's
income as it accrues (regardless of the Holder's method of accounting), as
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described below under "Discount and Premium." The coupon stripping rules will
not apply, however, if (i) the pass-through rate is no more than 100 basis
points lower than the gross rate of interest on the Contracts and (ii) the
difference between the outstanding principal balance on the Certificate and the
amount paid for such Certificate is less than 0.25 percent of such principal
balance times the weighted average remaining maturity of the Certificate.
Sales of Grantor Trust Certificates. Any gain or loss recognized on the
sale of a Grantor Trust Certificate (equal to the difference between the amount
realized on the sale and the adjusted basis of such Grantor Trust Certificate)
will be capital gain or loss, except to the extent of accrued and unrecognized
market discount, which will be treated as ordinary income, and in the case of
banks and other financial institutions except as provided under section 582(c)
of the Code. The adjusted basis of a Grantor Trust Certificate will equal its
cost, increased by any income reported by the seller (including original issue
discount and market discount income) and reduced (but not below zero) by any
previously reported losses, any amortized premium and by any distributions on
the Certificates.
Grantor Trust Reporting. The Trustee will furnish to each Holder of a
Grantor Trust Fractional Interest Certificate with each distribution a statement
setting forth the amount of such distribution allocable to principal on the
Contracts and to interest thereon at the related Certificate Rate. In addition,
within a reasonable time after the end of each calendar year, based on
information provided by the Servicer, the Trustee will furnish to each Holder
during such year such customary factual information as the Servicer deems
necessary or desirable to enable Holders of Grantor Trust Certificates to
prepare their tax returns and will furnish comparable information to the IRS as
and when required to do so by law.
NOTES
With respect to each Series of Notes, Special Counsel will additionally
deliver its opinion to the Seller (unless otherwise limited in the applicable
Prospectus Supplement) that the Notes will be classified as debt of the Seller
secured by the Equipment and Contracts. Consequently, the Notes will not be
treated as ownership interests in the Equipment and Contracts or the Trust.
Holders will be required to report income received with respect to the Notes in
accordance with their normal method of accounting. For additional tax
consequences relating to Notes purchased at a discount or with premium, see
"Discount and Premium," below.
Sale or Exchange of Notes. If a Holder of Notes sells or exchanges such
Notes, the Holder will recognize gain or loss equal to the difference, if any,
between the amount received and the Holder's adjusted basis in the Note. The
adjusted basis in the Notes generally will equal its initial cost, increased by
any original issue discount or market discount previously included in the
seller's gross income with respect to the Notes and reduced by the payments
previously received on the Notes, other than payments of qualified stated
interest, and by any amortized premium.
In general (except as described in "Discount and Premium Market Discount,"
below, and except for certain financial institutions subject to section 582(c)
of the Code), any gain or loss on the sale or exchange of Notes recognized by an
investor who holds the Notes as a capital asset (within the meaning of section
1221 of the Code), will be capital gain or loss and will be long-term or
short-term depending on the length of time the Holder has held the Notes.
POSSIBLE CLASSIFICATION OF THE CERTIFICATES AS INTERESTS IN A PARTNERSHIP OR AN
ASSOCIATION
Although, as described above, it is the opinion of Special Counsel that the
Securities will properly be characterized either as ownership interests in a
grantor trust or as debt for Federal income tax purposes, such opinion is not
binding on the IRS and thus no assurance can be given that such a
characterization will prevail. If the IRS were to contend successfully that the
Securities were not interests in a grantor trust or debt obligations for Federal
income tax purposes, the arrangement between the Seller and the Holders might be
classified as a partnership for Federal income tax purposes, as an association
taxable as a corporation or as a "publicly traded partnership" taxable as a
corporation.
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If the Securities were treated as interests in a partnership, each item of
income, gain, loss, deduction and credit generated through the ownership of the
Equipment and the Contracts by the partnership would be passed through to the
partners in such a partnership (including the Holders) according to their
respective interests therein. Under current law, the income reportable by the
Holders as partners in such a partnership could differ from the income
reportable by the Holders as holders of debt or of interests in a grantor trust.
Except as discussed below, it is not expected that such differences would be
materially adverse to Holders unless the proposed legislation, discussed in the
following paragraph, is enacted. If the Holders were treated as partners, a cash
basis Holder might be required to report income when it accrues to the
partnership rather than when it is received by the Holder. Moreover, if Notes
were treated as interests in a partnership, an individual Holder's share of
expenses of the partnership (such as Servicing Fees) would be miscellaneous
itemized deductions that in the aggregate are allowed only to the extent they
exceed two percent of the holder's adjusted gross income, meaning that the
holder might be taxed on a greater amount of income than the stated interest on
his Notes. Finally, if the trust is treated as a partnership of a Security
treated as a partnership interest, any taxable income allocated to a Holder that
is a pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account), could constitute "unrelated
business taxable income".
If, alternatively, the Securities were treated as interests in an
association taxable as a corporation or a "publicly traded partnership" taxable
as a corporation, the resulting entity would be subject to Federal income tax at
corporate tax rates on its taxable income generated by ownership of the
Contracts. Moreover, distributions by the entity on the Securities probably
would not be deductible in computing the entity's taxable income and all or part
of distributions to Holders would probably be treated as dividend income to such
Holders. Such an entity-level tax could result in a reduced amount of cash
available for distributions to Securityholders.
Since the Seller will treat the Grantor Trust Certificates as ownership
interests in a grantor trust and Notes as indebtedness for Federal income tax
purposes, the Trustee (and Participants and Indirect Participants) will not
attempt to satisfy the tax reporting requirements that would apply under these
alternative characterizations of the Securities. Further, If the IRS were to
contend successfully that the Securities are interests in a partnership or an
association taxable as a corporation, additional tax consequences would apply to
Foreign Holders. It is recommended that Investors consult their own tax advisors
with regard to the potential application of such provisions.
DISCOUNT AND PREMIUM
A Note purchased at original issue for an amount other than its outstanding
principal amount will be subject to the rules governing original issue discount
or premium. A Grantor Trust Certificate purchased for an amount other than the
aggregate outstanding principal amount of the Contracts in the Grantor Trust
Estate generally will be subject to the rules governing market discount or
premium. In addition, all Grantor Trust Strip Certificates and certain Grantor
Trust Fractional Interest Certificates will be treated as having original issue
discount by virtue of the coupon stripping rules in section 1286 of the Code. In
general terms, (i) original issue discount is treated as a form of interest and
must be included in a Holder's income as it accrues (regardless of the Holder's
regular method of accounting) using a constant yield method; (ii) market
discount is treated as ordinary income and must be included in a Holder's income
as principal payments are made on the Security (or upon a sale of a Security);
and (iii) if a Holder so elects, premium may be amortized over the life of the
Security and offset against inclusions of interest income. These tax
consequences are discussed in greater detail below.
Original Issue Discount. In general, a Security will be considered to be
issued with original issue discount equal to the excess, if any, of its "stated
redemption price at maturity" over its "issue price." The issue price of a
Security is the initial offering price to the public (excluding bond houses and
brokers) at which a substantial amount of the Securities is sold. The issue
price also includes any accrued interest attributable to the period prior to the
Series Issuance Date. The stated redemption price at maturity of a Security is
equal to the sum of all distributions to be made under such Security other than
amounts of "qualified stated interest." Qualified stated interest is stated
interest that is unconditionally payable at least annually at a single fixed
rate
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or, unless otherwise stated in an applicable Prospectus Supplement, at one or
more variable rates. The stated redemption price at maturity of any Security
will include an amount equal to the excess (if any) of the interest payable on
the first Distribution Date over the interest that accrues for the period from
the Series Issuance Date to the first Distribution Date.
Notwithstanding the general definition, original issue discount will be
treated as zero if such discount is less than 0.25 percent of the stated
redemption price at maturity multiplied by its weighted average life. The
weighted average life of a Security is apparently computed for this purpose as
the sum, for all distributions included in the stated redemption price at
maturity, of the amounts determined by multiplying (i) the number of complete
years (rounding down for partial years) from the Series Issuance Date until the
date on which each such distribution is expected to be made under the assumption
that the Contracts prepay at a specified rate (the "Prepayment Assumption") by
(ii) a fraction, the numerator of which is the amount of such distribution and
the denominator of which is the Security's stated redemption price at maturity.
If original issue discount is treated as zero under this rule, the actual amount
of original issue discount must be allocated to the principal distributions on
the Security and, when each such distribution is received, gain equal to the
discount allocated to such distribution will be recognized.
Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this Code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The Seller anticipates that the Prepayment Assumption
for each Series of Securities will be consistent with this standard. The Seller
makes no representation, however, that the Contracts for a given Series will
prepay at the rate reflected in the Prepayment Assumption for that Series or at
any other rate. Each investor must make its own decision as to the appropriate
prepayment assumption to be used in deciding whether or not to purchase any of
the Securities.
Each Holder must include in gross income the sum of the "daily portions" of
original issue discount on its Security for each day during its taxable year on
which it held such Security. For this purpose, in the case of an original
Holder, the daily portions of original issue discount will be determined as
follows. A calculation will first be made of the portion of the original issue
discount that accrued during each "accrual period." The Trustee will supply, at
the time and in the manner required by the IRS, to Holders, brokers and
middlemen information with respect to the original issue discount accruing on
the Securities. Unless otherwise disclosed in the applicable Prospectus
Supplement, the Trustee will report original issue discount based on accrual
periods of one month, each beginning on a payment date (or, in the case of the
first such period, the Series Issuance Date) and ending on the day before the
next payment date.
Under section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (i) the sum of (A) the present values of all the distributions remaining
to be made on the Security, if any, as of the end of the accrual period and (B)
the distribution made on such Security during the accrual period of amounts
included in the stated redemption price at maturity, over (ii) the adjusted
issue price of such Security at the beginning of the accrual period. The present
value of the remaining distributions referred to in the preceding sentence will
be calculated based on (i) the yield to maturity of the Security, calculated as
of the Series Issuance Date, giving effect to the Prepayment Assumption, (ii)
events (including actual prepayments) that have occurred prior to the end of the
accrual period, (iii) the Prepayment Assumption, and (iv) in the case of a
Security calling for a variable rate of interest, an assumption that the value
of the index upon which such variable rate is based remains the same as its
value on the Series Issuance Date over the entire life of such Security. The
adjusted issue price of a Security at any time will equal the issue price of
such Security, increased by the aggregate amount of previously accrued original
issue discount with respect to such Security, and reduced by the amount of any
distributions made on such Security as of that time of amounts included in the
stated redemption price at maturity. The original issue discount accruing during
any accrual period will then be allocated ratably to each day during the period
to determine the daily portion of original issue discount.
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In the case of Grantor Trust Strip Certificates, the calculation described
in the preceding paragraph may produce a negative amount of original issue
discount for one or more accrual periods. No definitive guidance has been issued
regarding the treatment of such negative amounts. The legislative history to
section 1272(a)(6) indicates that such negative amounts may be used to offset
subsequent positive accruals but may not offset prior accruals and may not be
allowed as a deduction item in a taxable year in which negative accruals exceed
positive accruals. Holders of such Certificates should consult their own tax
advisors concerning the treatment of such negative accruals.
A subsequent purchaser of a Security that purchases such Security at a cost
less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Security for all days on or after the day of purchase).
Market Discount. A Holder that purchases a Security at a market discount,
that is, at a purchase price less than the remaining stated redemption price at
maturity of such Security (or, in the case of a Security with original issue
discount, its adjusted issue price), will be required to allocate each principal
distribution first to accrued market discount on the Security, and recognize
ordinary income to the extent such distribution does not exceed the aggregate
amount of accrued market discount on such Security not previously included in
income. With respect to Securities that have unaccrued original issue discount,
such market discount must be included in income in addition to any original
issue discount. A Holder that incurs or continues indebtedness to acquire a
Security at a market discount may also be required to defer the deduction of all
or a portion of the interest on such indebtedness until the corresponding amount
of market discount is included in income. In general terms, market discount on a
Security may be treated as accruing either (i) under a constant yield method or
(ii) in proportion to remaining accruals of original issue discount, if any, or
if none, in proportion to remaining distributions of interest on the Security,
in any case taking into account the Prepayment Assumption. The Trustee will make
available, as required by the IRS, to Holders of Securities information
necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a Security will be
considered to be zero if such discount is less than 0.25 percent of the
remaining stated redemption price at maturity of such Security multiplied by its
weighted average remaining life. Weighted average remaining life presumably
would be calculated in a manner similar to weighted average life, taking into
account payments (including prepayments) prior to the date of acquisition of the
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Certificates Purchased at a Premium. A purchaser of a Security that
purchases such Security at a cost greater than its remaining stated redemption
price at maturity will be considered to have purchased such Security (a "Premium
Security") at a premium. Such a purchaser need not include in income any
remaining original issue discount and may elect, under section 171(c)(2) of the
Code, to treat such premium as "amortizable bond premium." If a Holder makes
such an election, the amount of any interest payment that must be included in
such Holder's income for each period ending on a Distribution Date will be
reduced by the portion of the premium allocable to such period based on the
Premium Certificate's yield to maturity. Such premium amortization should be
made under principles analogous to those governing the accrual of market
discount (as discussed above under "Market Discount"). If such election is made
by the Holder, the election will also apply to all bonds the interest on which
is not excludible from gross income ("fully taxable bonds") held by the Holder
at the beginning of the first taxable year to which the election applies and to
all such fully taxable bonds thereafter acquired by it, and is irrevocable
without the consent of the IRS. If such an election is not made, (i) such a
Holder must include the full amount of each interest payment in income as it
accrues, and (ii) the premium must be allocated to the principal distributions
on the Premium Security and, when each such distribution is received, a loss
equal to the premium allocated to such distribution will be
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recognized. Any tax benefit from the premium not previously recognized will be
taken into account in computing gain or loss upon the sale or disposition of the
Premium Security.
Because the interest rate on a Grantor Trust Certificate generally will be
lower than the implicit interest rate on the Finance Leases that comprise the
Grantor Trust Estate, the principal amount of such Certificates may be higher
than the aggregate outstanding principal amount of the Finance Leases. The IRS
may take the position that the existence of market discount or premium on
Grantor Trust Certificates should be measured with reference to the aggregate
outstanding principal balance of the Contracts, rather than the Certificates.
Accordingly, it is recommended that Holders of Grantor Trust Certificates
consult with their own advisors regarding the advisability of making a
protective election to treat any premium on such Certificates as amortizable
bond premium.
Special Election. A Holder may elect to include in gross income all
"interest" that accrues on the Security by using a constant yield method. For
purposes of the election, the term "interest" includes stated interest,
acquisition discount, original issue discount, de minimis original issue
discount, market discount, de minimis market discount and unstated interest as
adjusted by any amortizable bond premium or acquisition premium. Holders are
encouraged to consult their own tax advisors regarding the time and manner of
making and the scope of the election and the implementation of the constant
yield method.
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the "backup withholding
tax" under section 3406 of the Code at a rate of 31 percent if recipients of
such distributions fail to furnish to the payor certain information, including
their taxpayer identification numbers, or otherwise fail to establish an
exemption from such tax. Any amounts deducted and withheld from a distribution
to a recipient would be allowed as a credit against such recipient's federal
income tax. Furthermore, certain penalties may be imposed by the IRS on a
recipient of distributions that is required to supply information but that does
not do so in the proper manner.
FOREIGN INVESTORS
Distributions made on a Grantor Trust Certificate or a Note to, or on
behalf of, a Holder that is not a U.S. Person generally will be exempt from U.S.
federal income and withholding taxes. The term "U.S. Person' means a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, an estate that is subject to U.S. federal income tax
regardless of the source of its income or a trust other than a "foreign trust"
as defined in Section 7701(a)(31) of the Internal Revenue Code of 1986 as
amended. The term "Non-U.S. Person" means any person who is not a U.S. Person.
This Prospectus does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of the Securities or with
the application of recently issued Treasury Regulations relating to tax
documentation requirements that are generally effective with respect to payments
made after December 31, 1999. This exemption is applicable provided (a) the
Holder is not subject to U.S. tax as a result of a connection to the United
States other than ownership of the Security, (b) the Holder signs a statement
under penalties of perjury that certifies that such Holder is not a U.S. Person,
and provides the name and address of such Holder, and (c) the last U.S. Person
in the chain of payment to the Holder receives such statement from such Holder
or a financial institution holding on its behalf and does not have actual
knowledge that such statement is false. Holders should be aware that the IRS
might take the position that this exemption does not apply to a Holder that also
owns 10 percent or more of the total combined voting power of all classes of
stock of the Seller entitled to vote, or to a Holder that is a "controlled
foreign corporation" described in section 881(c)(3)(C) of the Code.
STATE AND LOCAL TAX CONSEQUENCES
State tax consequences to each Securityholder will depend upon the
provisions of the state tax laws to which the Holder 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% of
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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 tax law varies, it is impossible to predict the tax consequences to the
Securityholders in all the state taxing jurisdictions in which they are already
subject to tax. Securityholders are encouraged to consult their own tax advisors
with respect to state taxes.
ERISA CONSIDERATIONS
The Prospectus Supplement for each series of Securities will summarize,
subject to the limitations discussed therein, considerations under ERISA
relevant to the purchase of such Securities by employee benefit plans and
individual retirement accounts.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplement will
be offered in series through one or more of the methods described below. The
Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the public offering or
purchase price of such series and the net proceeds to the Company from such
sale.
The Company intends that Securities will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular series of
Securities may be made through a combination of two or more of these methods.
Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. By placements by the Company with institutional investors through
dealers;
3. By direct placements by the Company with institutional investors;
and
4. By competitive bid.
In addition, if specified in the related Prospectus Supplement, a series of
Securities may be offered in whole or in part in exchange for the Receivables
(and other assets, if applicable) that would comprise the Asset Pool in respect
of such Securities.
If underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. The Securities will be set forth
on the cover of the Prospectus Supplement relating to such series and the
members of the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the sale of the Securities, underwriters may receive
compensation from the Company or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Company and any profit on the resale of Securities by them may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Prospectus Supplement will describe any such compensation paid by the
Company.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of Securities will provide that the obligations of the underwriters
will be subject to certain conditions precedent, that the underwriters will be
obligated to purchase all such Securities if any are purchased (other than in
connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the Company will indemnify the several underwriters and the
underwriters will indemnify the Company against certain civil liabilities,
47
<PAGE> 53
including liabilities under the Securities Act or will contribute to payments
required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Company and purchasers of
Securities of such series.
Purchasers of Securities, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act in connection with reoffers and sales by them of
Securities. Holders of Securities should consult with their legal advisors in
this regard prior to any such reoffer or sale.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the issuance of the Securities of any
series, including certain federal and state income tax consequences with respect
thereto, will be passed upon by Dewey Ballantine LLP, New York, New York.
FINANCIAL INFORMATION
A new Asset Pool will be formed with respect to each Series of Securities
and no Asset Pool will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Securities. The
Company's activities will be limited solely to the activities of Asset Pools to
be formed with respect to each Series of Securities. Accordingly, no financial
statements with respect to any Asset Pool will be included in this Prospectus or
in the related Prospectus Supplement.
A Prospectus Supplement may contain the financial statements of the related
Credit Enhancer, if any.
ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each series of
Securities, contains a summary of the material terms of the applicable exhibits
to the Registration Statement and the documents referred to herein and therein.
Copies of such exhibits are on file at the offices of the Securities and
Exchange Commission in Washington, D.C., and may be obtained at rates prescribed
by the Commission upon request to the Commission and may be inspected, without
charge, at the Commission's offices.
48
<PAGE> 54
INDEX OF TERMS
Set forth below is a list of the defined terms used in this Prospectus and
the pages on which the definitions of such terms may be found herein.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Accrual Securities.......................................... 4
Additional Receivables...................................... 8
Asset Pool.................................................. 1
Bankruptcy Code............................................. 39
Broker Program.............................................. 1
Cede........................................................ 8
CEDEL Participants.......................................... 26
Certificate of Incorporation................................ 26
Certificates................................................ 1,2
Class....................................................... 1
Closing Date................................................ 28
Code........................................................ 47
Collection Account.......................................... 30
Collection Period........................................... 32
Commission.................................................. 2
Company..................................................... 1,22
Contracts................................................... 1,2
Contribution and Sale Agreement............................. 17
Cooperative................................................. 26
Credit Enhancement.......................................... 16
Credit Enhancer............................................. 16
Custodian................................................... 29
Debt Certificates........................................... 40
Debt Securities............................................. 10
Definitive Securities....................................... 27
Depositaries................................................ 25
Direct Participants......................................... 15
Discounted Contract Balance................................. 6
Distribution Account........................................ 30
DTC......................................................... 8
Eligible Deposit Account.................................... 31
Eligible Institution........................................ 31
Eligible Investment......................................... 7
Equipment................................................... 1,2
ERISA....................................................... 10
Euroclear Operator.......................................... 27
Euroclear Participants...................................... 26
Exchange Act................................................ 11
</TABLE>
49
<PAGE> 55
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FASB 13..................................................... 6
Finance Leases.............................................. 6
First Sierra................................................ 1,18
FSFH........................................................ 20
Grantor Trust Certificates.................................. 10,40
Fully Taxable Bonds......................................... 45
Grantor Trust Estate........................................ 40
Grantor Trust Securities.................................... 10
Indenture................................................... 2
Indenture Trustee........................................... 2
Independent Director........................................ 22
Indirect Participants....................................... 15
Insolvency Event............................................ 35
Insolvency Laws............................................. 14
Interest Rate............................................... 3
Investment Company Act...................................... 5
Investment Earnings......................................... 31
Issuer...................................................... 1
Lessee...................................................... 6
Lessor...................................................... 2
Lockbox..................................................... 32
Market Discount............................................. 45
Notes....................................................... 1,2
Owner Trust................................................. 17
Participants................................................ 25
Partnership Interest........................................ 10
Pass-Through Rate........................................... 2
Payment Date................................................ 4
Policy...................................................... 1,2
Pool Factor................................................. 21
Pooling Agreement........................................... 2
Portfolio Acquisition Program............................... 1
Pre-Funded Amount........................................... 7,31
Pre-Funding Account......................................... 7,31
Premium Certificate......................................... 45
Prepayment.................................................. 13
Prepayment Assumption....................................... 43
Private Label............................................... 18
Private Label Program....................................... 1
Prospectus Supplement....................................... 1
Purchase Agreement.......................................... 2
</TABLE>
50
<PAGE> 56
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Receivables................................................. 1,2
Record Date................................................. 4
Registration Statement...................................... 2
Remittance Period........................................... 4
Rules....................................................... 26
Securities.................................................. 1
Securities Act.............................................. 2
Security Insurer............................................ 8
Securityholders............................................. 4
Seller...................................................... 1,18
Senior Securities........................................... 4
Servicer.................................................... 1,20
Servicer Defaults........................................... 34
Servicing Agreement......................................... 2
Servicing Fee............................................... 32
Servicing Fee Rate.......................................... 32
Sources..................................................... 18
Special Counsel............................................. 46
Strip Securities............................................ 3
Subordinate Securities...................................... 4
Terms and Conditions........................................ 27
Trust....................................................... 1
Trust Accounts.............................................. 30
Trust Agreement............................................. 3
Trustee..................................................... 3
U.S. Person................................................. 45
Vendor Program.............................................. 1
Warranty Purchase Price..................................... 29
</TABLE>
51
<PAGE> 57
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITER(S). THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN
OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement.................... i
Available Information.................... i
Incorporation of Certain Documents by
Reference.............................. i
Reports to Securityholders............... ii
Summary.................................. 1
Risk Factors............................. 12
Use of Proceeds.......................... 17
The Issuers.............................. 17
The Asset Pools.......................... 17
The Receivables.......................... 18
First Sierra............................. 18
The Servicer............................. 21
Prepayment and Yield Considerations...... 22
Pool Factors............................. 22
The Company.............................. 23
The Trustees............................. 24
Description of the Securities............ 24
Description of the Trust Agreements...... 29
Certain Legal Matters Affecting the
Receivables............................ 39
Material Federal Income Tax
Consequences........................... 40
ERISA Considerations..................... 47
Method of Distribution................... 47
Certain Legal Matters.................... 48
Financial Information.................... 48
Additional Information................... 48
Index of Terms........................... 49
</TABLE>
---------------------
UNTIL , 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS
SUPPLEMENT), ALL DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS SUPPLEMENT AND A PROSPECTUS WHEN ACTING AS UNDERWRITER(S)
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
CONTRACT BACKED
FIRST SIERRA
RECEIVABLES III, INC.
--------------------
PROSPECTUS
--------------------
[UNDERWRITER]
[DATE]
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 58
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be
incurred in connection with the offering of the securities being offered
hereunder other than underwriting discounts and commissions.
Registration Fee..............................................$ 303.03*
Printing and Engraving Expenses..................................... **
Trustee's Fees...................................................... **
Legal Fees and Expenses............................................. **
Blue Sky Fees and Expenses.......................................... **
Accountants' Fees and Expenses...................................... **
Rating Agency Fees.................................................. **
Miscellaneous Fees.................................................. **
Total............................................................... **
* Paid.
** To be filed by amendment.
Item 15. INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND AGENTS
The General Corporation Law of Delaware (Section 145) gives Delaware
corporations broad powers to indemnify their present and former directors and
officers and those affiliated corporations against expenses incurred in the
defense of any lawsuit to which they are made parties by reason of being or
having been such directors or officers, subject to specified conditions and
exclusions; gives a director or officer who successfully defends an action the
right to be so indemnified; and authorizes said corporation to buy director's
and officers' liability insurance. Such indemnification is not exclusive of any
other right to which those indemnified may be entitled under any bylaw,
agreement, vote of stockholders or otherwise.
Pursuant to agreements which the Registrants may enter into with
underwriters or agents (forms of which will be included as exhibits to this
Registration Statement), officers and directors of the Registrants, and
affiliates thereof, may be entitled to indemnification by such underwriters or
agents against certain liabilities, including liabilities under the Securities
Act of 1933, arising from information which has been or will be furnished to the
Registrants by such underwriters or agents that appear in the Registration
Statement or any Prospectus.
II-1
<PAGE> 59
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 Indenture between the Trust and the Indenture Trustee, including
forms of Notes and certain other related agreements as Exhibits thereto.
4.2* --Form of Indenture between the Company and the Indenture 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 Trust Agreement between the Company and the Trustee.
5.1 --Opinion of Dewey Ballantine with respect to legality.
8.1 --Opinion of Dewey Ballantine as to tax matters.
10.1* --Form of Bond Insurance Policy.
23.1 --Consent of Dewey Ballantine (included in Exhibits 5.1 and 8.1).
23.2* --Consent of Independent Auditor of Bond Insurer.
24.1* --Power of Attorney.
25.1* --Statement of Eligibility and Qualification of Trustee (Form T-1).
99.1 --Form of Prospectus Summary -- Notes.
</TABLE>
* Incorporated by reference to Registration Statement No. 33-98822.
** To be filed by Amendment
(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> 60
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in
the registration statement.
provided that paragraph (a)(i) and (a)(ii) do not apply if such information is
contained in periodic reports filed or furnished to the Commission by the
Registrants pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934.
(b) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(d) That insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrants pursuant to the provisions described
under item 15 above, or otherwise, the Registrants have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrants of expenses incurred or paid by a director,
officer or controlling person of the Registrants in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrants will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(e) That, for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(f) The undersigned registrants hereby undertake that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrants' annual reports pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(g) (i) That, for purposes of determining any liability under
the Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrants pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
(ii) That for the purpose of determining any liability
under the Securities Act of 1933, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new
II-3
<PAGE> 61
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(h) The undersigned registrants hereby undertake to file an
application for the purpose of determining the eligibility of the trustee to act
under subsection (a) of section 310 of the Trust Indenture Act (the "TIA") in
accordance with the rules and regulations prescribed by the Commission under
section 305(b)(2) of the TIA.
II-4
<PAGE> 62
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 October 6, 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> 63
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 6th day of October,
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 5.1
October 6, 1998
First Sierra Receivables II Inc.
600 Travis Street, Suite 6950
Houston, Texas 77002
First Sierra Receivables III Inc.
600 Travis Street, Suite 6050
Houston, Texas 77002
Ladies and Gentlemen:
We have acted as counsel to First Sierra Receivables II Inc., a
Delaware corporation, and First Sierra Receivables III Inc., a Delaware
corporation (each, the "Company"), in connection with the preparation of the
registration statement on Form S-3 (the "Registration Statement") relating to
the proposed offering from time to time in one or more series (each, a "Series")
of up to $1,000,000.00 aggregate principal amount of asset backed notes (the
"Notes"). The Registration Statement will be filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"). As set forth in the Registration Statement, each Series of
Notes is to be issued under and pursuant to the terms of a separate pooling and
servicing agreement, sale and servicing agreement, pooling agreement, trust
agreement or indenture (each, an "Agreement") among the Company, an independent
trustee (the "Trustee") and where appropriate, a servicer (the "Servicer"), each
to be identified in the prospectus supplement for such Series of Securities.
As such counsel, we have examined copies of the Articles of
Incorporation and Bylaws of each of the Companies, the Registration Statement,
the Prospectus and each form of Prospectus Supplement included therein, the form
of each Agreement, and originals or copies of such other corporate minutes,
records, agreements and other instruments of the Company, certificates of public
officials and other documents and have made such examinations of law, as we have
deemed necessary to form the basis for the opinion hereinafter expressed. In our
examination of such materials, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity to original documents of all copies submitted to us.
We do not express any opinion herein concerning any law other than the
federal laws of the United States of America and the laws of the State of New
York.
<PAGE> 2
First Sierra Receivables II Inc.
First Sierra Receivables III Inc.
October 6, 1998
Page 2
Based upon and subject to the foregoing, we are of the opinion that:
1. When the Notes have been duly executed and delivered, authenticated
by the Trustee and sold as described in the Registration Statement, the Notes
will constitute valid and binding obligations of the issuer thereof in
accordance with their terms and the terms of such Agreement or Agreements, and
will be legally issued, fully paid and non-assessable. This opinion is subject
to the effect of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto and we express no opinion with respect to the
application of equitable principles or remedies in any proceeding, whether at
law or in equity.
2. When the Certificates have been duly executed and delivered,
authenticated by the Trustee and sold as described in the Registration
Statement, the Certificates will be legally issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this firm under the caption
"Legal Matters" in the Prospectus which forms a part of the Registration
Statement. In giving such consent, we do not admit hereby that we come within
the category of persons whose consent is required under Section 7 of the Act or
the Rules and Regulations of the Commission thereunder.
Very truly yours,
/s/ Dewey Ballantine LLP
<PAGE> 1
EXHIBIT 8.1
October 6, 1998
First Sierra Receivables II Inc.
600 Travis Street, Suite 6950
Houston, Texas 77002
First Sierra Receivables III Inc.
600 Travis Street, Suite 6950
Houston, Texas 77002
Re: Registration Statement 333-12199
--------------------------------
Ladies and Gentlemen:
We have acted as special tax counsel to First Sierra Receivables II
Inc., a Delaware corporation, and First Sierra Receivables III Inc., a Delaware
corporation (each, the "Registrant") in connection with the Prospectus filed by
the Registrant.
The term "Prospectus" means the prospectus included in the Registration
Statement. The term "Registration Statement" means (i) the Registration
Statement on Form S-3 (No. 333-12199), including the exhibits thereto and (ii)
any post-effective amendment filed and declared effective prior to the date of
issuance of the Securities.
We have examined the question of whether the Securities will have the
tax treatment described in the Prospectus. Our analysis is based on the
provisions of the Internal Revenue Code of 1986, as amended, and the Treasury
Regulations promulgated thereunder as in effect on the date hereof and on
existing judicial and administrative interpretations thereof. These authorities
are subject to change and to differing interpretations, which could apply
retroactively. The opinion of special tax counsel is not binding on the courts
or the Internal Revenue Service (the "IRS").
In general, whether a transaction constitutes the issuance of
indebtedness or the sale of assets for federal income tax purposes is a question
of fact, the resolution of which is based primarily upon the economic substance
of the instruments and the transaction pursuant to which they are issued rather
than the form of the transaction or the manner in which the instruments are
labeled. The IRS and the courts have set forth various factors to be taken into
account in determining whether or not a transaction constitutes the issuance of
indebtedness or the sale of assets for federal income tax
<PAGE> 2
First Sierra Receivables II Inc.
First Sierra Receivables III Inc.
October 6, 1998
Page 2
purposes, which we have reviewed as they apply to the transactions described on
the Prospectus.
Based on the foregoing, and such legal and factual investigations as we
have deemed appropriate, we are of the opinion that for federal income tax
purposes:
(1) The Securities, assuming they are issued in accordance with the
Prospectus, will have the federal income tax treatment described in the
Prospectus.
(2) We hereby adopt and confirm the information appearing under the
caption "Material Federal Income Tax Consequences" in the Prospectus and confirm
that it represents our opinion with respect to the matters discussed therein.
This opinion is furnished by us as counsel to the Registrant. We hereby
consent to the filing of this opinion as an Exhibit to the Registration
Statement and to the reference to Dewey Ballantine LLP in the Registration
Statement and the related prospectus under the heading "Legal Matters."
Very truly yours,
/s/ Dewey Ballantine LLP
<PAGE> 1
EXHIBIT 99.1
The Information in this Prospectus Supplement is not complete and may be
changed. We may not sell these notes until the registration statement filed with
the Securities and Exchange Commission is effective. This Prospectus Supplement
is not an offer to sell these notes and it is not soliciting an offer to buy
these notes in any state where the offer or sale is not permitted.
Subject to completion, dated _____, 1998.
Prospectus Supplement to Prospectus dated _______, 1998
- -------------------
FIRST SIERRA EQUIPMENT CONTRACT TRUST 1998-1
Issuer $______________
FIRST SIERRA FINANCIAL, INC. Equipment Contract Backed Notes,
Originator and Servicer Series 1998-1
FIRST SIERRA RECEIVABLES III, INC.
Depositor
- -------------------
The First Sierra Equipment Contract Trust 1998-1 will issue six classes of Notes
backed solely by a pledge of 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 __ OF THIS
PROSPECTUS SUPPLEMENT AND PAGE __ OF THE PROSPECTUS AND CONSIDER THESE FACTORS
BEFORE MAKING A DECISION TO INVEST IN THE NOTES.
The Notes represent interests in the Trust only and are not interests in or
obligations of any other person.
Neither the Notes nor the underlying leases and loans will be insured or
guaranteed by any governmental agency or instrumentality or by any other person.
- --------------------------------------------------------------------------------
THE NOTES--
- - Of the six classes of Notes issued by the Trust, only the three classes of
Notes set forth in the table below are offered by this Prospectus Supplement.
- - Interest and principal on the Notes is scheduled to be paid monthly, on the
10th day of the month, or the business day immediately following such 10th
day. The first scheduled payment date is ________.
CREDIT ENHANCEMENT--
- - The Notes are issued in descending alphabetical order. Each class of Notes
with a lower alphabetical designation is subordinate to all classes of Notes
having a higher alphabetical designation. Subordination of a class of Notes
provides credit enhancement for each class of Notes having a higher
alphabetical designation.
- - 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 Notes. Subordination of the Trust
Certificate provides credit enhancement for all of the Notes.
<TABLE>
<CAPTION>
Initial Aggregate Underwriting Proceeds to the
Class Note Balance Note Rate Price to Public(1) Discount Depositor(2)
<S> <C> <C> <C> <C> <C>
A-1 $ % % % $
A-2 $ % % % $
B $ % % % $
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 _____, 1998
<PAGE> 2
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS
We provide information to you about the Notes in two separate documents
that progressively provide more detail: (1) the accompanying Prospectus, which
provides general information, some of which may not apply to your series of
Notes, and (2) this Prospectus Supplement, which describes the specific terms of
your series of Notes.
This Prospectus Supplement does not contain complete information about
the offering of the Offered Notes. 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 Notes to you unless you have
received both this Prospectus Supplement and the Prospectus.
IF THE TERMS OF YOUR SERIES OF NOTES VARY BETWEEN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION
IN THIS PROSPECTUS SUPPLEMENT.
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.
In connection with this offering, the underwriters may over-allot or
effect transactions which stabilize or maintain the market prices of the Offered
Notes at levels above those which might otherwise prevail in the open market.
Such stabilizing, if commenced, may be discontinued at any time.
AVAILABLE INFORMATION
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 Notes offered pursuant to this Prospectus
Supplement. This Prospectus Supplement and the Prospectus, which form a part of
the Registration Statement, omit certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
You may inspect and copy the Registration Statement at the Public Reference Room
at the Commission at 450 Fifth Street, N.W., Washington, D.C. and the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York, 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. You can obtain copies of such materials at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission
maintains a site on the World Wide Web containing reports, proxy materials,
information statements and other items. The address is http://www.sec.gov.
REPORTS TO NOTEHOLDERS
Unless and until definitive Notes are issued, periodic and annual
unaudited reports containing information concerning the leases and loans will be
prepared by the Servicer and sent on behalf of the
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Trust only to Cede & Co., as nominee of The Depository Trust Company and
registered holders of the Notes. 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.
INCORPORATION BY REFERENCE
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TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT THE INFORMATION
PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS................................................2
AVAILABLE INFORMATION..........................................................2
REPORTS TO NOTEHOLDERS.........................................................2
INCORPORATION BY REFERENCE.....................................................3
TABLE OF CONTENTS..............................................................4
SUMMARY........................................................................5
Parties....................................................................5
The Trust..............................................................5
The Depositor..........................................................5
The Originator and the Servicer........................................5
The Sellers............................................................5
The Indenture Trustee..................................................5
The Owner Trustee......................................................5
Description of the Securities..............................................6
The Offered Notes......................................................6
The Non-Offered Notes..................................................7
The Trust Certificate..................................................7
Payments on the Notes......................................................7
Interest...............................................................7
Principal..............................................................7
Flow of Funds..............................................................8
Credit Enhancement........................................................10
The Trust Assets..........................................................10
General...............................................................10
Origination and Acquisition...........................................10
Notice Concerning the Statistical Information
in this Prospectus Supplement.......................................11
Characteristics of the Contracts......................................13
Servicing.................................................................13
Substitutions and Modifications...........................................14
Advances..................................................................14
Repurchases for Breaches of Representations and Warranties................15
Certain Legal Aspects of the Contracts....................................15
Optional Redemption.......................................................16
Tax Status................................................................16
ERISA Considerations......................................................16
Rating of the Offered Notes...............................................16
RISK FACTORS..................................................................17
THE RECEIVABLES...............................................................18
The Equipment.............................................................18
The Contracts.............................................................18
Substitutions and Modifications...........................................20
THE SELLERS...................................................................28
FIRST SIERRA..................................................................28
Private Label Program.....................................................29
General...............................................................29
Underwriting Procedures...............................................29
Broker Program............................................................30
Vendor Program............................................................31
THE SERVICER..................................................................31
Delinquency and Loss Experience...........................................32
Collection Policies.......................................................33
FORMATION OF THE TRUST........................................................34
General...................................................................34
LEGAL PROCEEDINGS.............................................................34
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION....................34
The Owner Trustee.........................................................34
The Indenture Trustee.....................................................34
The Trust Assets..........................................................35
DESCRIPTION OF THE NOTES......................................................35
General...................................................................35
Conveyance of Receivables.................................................36
Representations and Warranties of First Sierra............................37
Indemnification...........................................................39
The Accounts..............................................................39
Servicer Advances.........................................................39
Flow of Funds.............................................................40
Withholding...............................................................53
Reports to Noteholders....................................................53
Optional Redemption.......................................................55
Remittance and Other Servicing Procedures.................................55
Servicing Compensation and Payment of
Expenses..................................................................56
Evidence as to Compliance.................................................56
Certain Matters Relating to the Servicer..................................57
Events of Servicing Termination...........................................57
Rights Upon an Event of Servicing Termination.............................58
Events of Default.........................................................58
Termination of the Trust..................................................59
Amendment.................................................................59
THE INDENTURE TRUSTEE.........................................................60
General...................................................................60
Duties and Immunities of the Indenture Trustee............................60
THE OWNER TRUSTEE.............................................................61
PREPAYMENT AND YIELD
CONSIDERATIONS................................................................61
Weighted Average Lives of the Offered Notes...............................62
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.......................................66
Tax Characterization of the Trust.........................................66
Tax Consequences to Holders of the Notes..................................66
STATE AND LOCAL TAX CONSIDERATIONS............................................69
ERISA CONSIDERATIONS..........................................................70
LEGAL INVESTMENT..............................................................71
RATINGS.......................................................................71
METHOD OF DISTRIBUTION........................................................71
LEGAL MATTERS.................................................................72
REPORT OF PUBLIC INDEPENDENT ACCOUNTANTS......................................73
INDEX OF PRINCIPAL DEFINED TERMS..............................................76
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SUMMARY
- - This summary highlights selected information from this Prospectus Supplement
and does not contain all of the information that you need to consider in
making your investment decision. To understand all of the terms of the
offering of the Notes, read carefully this entire Prospectus Supplement and
the accompanying Prospectus.
- - This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
Prospectus Supplement and the accompanying Prospectus.
- - You can find a listing of the pages where capitalized terms used in this
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 (the "Trust"), a Delaware business
trust. The Trust will be formed pursuant to a Trust Agreement (the "Trust
Agreement") between the Depositor and the Owner Trustee. The principal executive
offices of the Trust are in Wilmington, Delaware, in care of the Owner Trustee,
at the address of the Owner Trustee specified below.
THE DEPOSITOR
First Sierra Receivables III, Inc. (the "Depositor"), a Delaware corporation.
The Depositor is a wholly-owned special-purpose subsidiary of the Servicer. The
principal office of the Depositor is located at 600 Travis Street, Suite 7050,
Houston, Texas 77002, and its telephone number is (___) ________.
THE ORIGINATOR AND THE SERVICER
First Sierra Financial, Inc. ("First Sierra" or the "Originator" and, in its
separate capacity as servicer, the "Servicer"), 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 (___) _____.
THE SELLERS
The Originator, together with certain affiliates and certain trusts sponsored by
the Originator or its affiliates, including investors related thereto (the
"Sellers").
THE INDENTURE TRUSTEE
Bankers Trust Company (the "Indenture Trustee" or "Bankers Trust Company"), a
New York banking corporation. The corporate trust offices of the Indenture
Trustee are located at Four Albany Street, New York, New York 10006, and its
telephone number is (212) 250-4237.
THE OWNER TRUSTEE
First Union Trust Company, National Association (the "Owner Trustee"), a
national banking association. The corporate trust offices of the Owner Trustee
are located at One Rodney Square, 920 King Street, Suite 102, Wilmington,
Delaware 19801, and its telephone number is (___) ________.
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DESCRIPTION OF THE SECURITIES
The Trust will issue six classes (each, a "Class") of its Equipment Contract
Backed Notes (the "Notes") pursuant to an Indenture, dated as of September 1,
1998 (the "Indenture"), among the Trust, the Servicer and the Indenture Trustee.
The Notes are designated as the "Class A-1 Notes", the "Class A-2 Notes", the
"Class B Notes", the "Class C Notes", the "Class D Notes" and the "Class E
Notes". The Class A-1 Notes and the Class A-2 are collectively referred to as
the "Class A Notes".
The Class A-1, Class A-2 and Class B Notes (collectively, the "Offered Notes")
are offered pursuant to this Prospectus Supplement. The Class C, Class D and
Class E Notes (collectively, the "Non-Offered Notes") are not offered pursuant
to this Prospectus Supplement. We will sell the Non-Offered Notes to qualified
institutional investors in private transactions. Holders of the Notes are
referred to herein as "Noteholders".
The Notes will be backed solely by a pledge of the assets of the Trust (the
"Trust Assets"), which consist primarily of a segregated pool of finance leases
and commercial loans (the "Contracts") and a security interest in the related
underlying equipment or other property (collectively with the Contracts, the
"Receivables").
Pursuant to the Trust Agreement, the Trust will issue a certificate (the "Trust
Certificate") representing the entire beneficial ownership interest in the
Trust. The Trust Certificate is subordinate to the Notes.
THE OFFERED NOTES
Each Class of Offered Notes will have the initial principal amount (each, an
"Initial Note Principal Balance") and interest rate (each, a "Note Rate") set
forth in the following table. The dates on which the final payment of principal
and interest on each Class of Offered Notes is expected to be made (each, an
"Expected Final Payment Date") and must ultimately be made (each, a "Legal Final
Maturity Date") are also set forth in the following table.
<TABLE>
<CAPTION>
Initial Note Expected Final Legal Final CUSIP
Class Principal Balance Note Rate Payment Date Maturity Date Number
- ----- ----------------- --------- ------------ ------------- ------
<S> <C> <C>
A-1 $ %
A-2 $ %
B $ %
</TABLE>
The aggregate Initial Note Principal Balance of the Offered Notes (the "Initial
Offered Note Principal Balance") is equal to $___________. The sum of the Class
A-1 Initial Note Principal Balance and the Class A-2 Initial Note Principal
Balance (the "Class A Initial Note Principal Balance") is equal to
$__________.
The Offered Notes will initially be issued in book-entry form only, through the
facilities of The Depository Trust Company. The Offered Notes will be issued in
minimum denominations of $1,000 and multiples of $1,000 in excess thereof.
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THE NON-OFFERED NOTES
The following table sets forth the Initial Note Principal Balance and the Note
Rate with respect to each Class of Non-Offered Notes.
<TABLE>
<CAPTION>
Initial Note
Class Principal Balance Note Rate
- ----- ----------------- ---------
<S> <C> <C>
C $ %
D $ %
E $ %
</TABLE>
THE TRUST CERTIFICATE
The Trust Certificate represents the ownership of the Trust. Payments in respect
of the Trust Certificate are subordinate to payments in respect of the Notes.
The principal balance of the Trust Certificate (the "Trust Certificate Principal
Balance") will equal the excess of the aggregate discounted value of the
scheduled payments remaining on the Contracts (the "Aggregate Discounted
Contract Principal Balance") over the sum of the Note Principal Balances of each
Class of Notes (the "Aggregate Note Principal Balance").
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 NOTES
Principal and interest is scheduled to be paid to the Noteholders on the 10th
day of each month, or, if such day is not a Business Day, on the next succeeding
Business Day (each, a "Payment Date"), commencing on ________. The Indenture
Trustee will make payments to the Noteholders of record as of the close of
business on the first day of such month (each, a "Record Date"). Payments made
on each Payment Date will relate to the collections received in respect of the
Receivables 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 (each, a "Collection Period").
INTEREST
The Noteholders of each Class of Notes will be entitled to receive distributions
of interest (the "Note Current Interest") on each Payment Date. Interest will
accrue during the related interest accrual period on each Class at the related
Note Rate on the outstanding Note Principal Balance. The interest accrual period
for each Class of Notes is the period beginning on and including the prior
Payment Date (or, in the case of the initial Payment Date, ________ (the
"Closing Date")) and ending on but excluding the current Payment Date.
For the Class A-1 Notes, the Note Current Interest for a Payment Date is based
on the actual number of days elapsed in the related Interest Accrual Period in a
360-day year. For the Notes other than the Class A-1 Notes, the Note Current
Interest for a Payment Date is based on a 360-day year consisting of twelve
30-day months.
Interest on a Class of Notes which is not paid as scheduled ("Overdue Interest")
is due on the following Payment Date and will accrue interest at a rate equal to
the Note Rate for such Class plus 1%.
PRINCIPAL
On each Payment Date, the Noteholders are scheduled to receive an amount of
principal (the "Base Principal Amount") 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 Noteholders of each Class of Notes are scheduled to receive a
percentage of this Base
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Principal Amount. Each Class's percentage (each, a "Principal Payment
Percentage") will equal such Class's Initial Note 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
("Overdue Principal") 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 Receivables (the "Available Funds") are to be paid, until such
Available Funds are exhausted, in the following order of priority:
first to the payment of certain fees and expenses of the Servicer and the
Indenture Trustee;
second to the payment of interest due, including Overdue Interest, on the
outstanding Notes on such Payment Date, in descending alphabetical
order starting with the Class A Notes. Classes with a higher
alphabetical designation are paid in full before Classes with a lower
alphabetical designation are paid any amount. Amounts distributed to
the Class A Noteholders are shared by the Class A-1 and Class A-2
Noteholders in proportion to the outstanding Note Principal Balance of
each Class;
- - However, no payment of interest will be made on the Class B, Class C,
Class D or Class E Notes if such payment would result in a situation
where there are not enough funds to pay the principal due on the Class
A Notes on such Payment Date (such event, an "Available Funds
Shortfall"). In such an event, the amount necessary to pay the
principal due on the Class A Notes would be withheld from the interest
distribution and distributed to the Class A Noteholders as principal.
third to the payment of principal due, including Overdue Principal, on the
outstanding Notes on such Payment Date, in descending alphabetical
order starting with the Class A Notes. Classes with a higher
alphabetical designation are paid in full before Classes with a lower
alphabetical designation are paid any amount. Amounts distributed to
the Class A Noteholders are paid first to the Class A-1 Noteholders
until the Class A-1 Note Principal Balance is reduced to zero, and then
are paid to the Class A-2 Noteholders; and
- - However, during the continuance of a Restricting Event, principal will
not be paid as set forth above, but will instead be paid to the most
senior Class of Notes 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 Discounted Contract Principal
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Balance of all of the Contracts for which payments have not been made for more
than 30 days ("Delinquent Contracts") exceeds 7.5% of the Aggregate Discounted
Contract Principal Balance of all Contracts.
fourth 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 Noteholders as an additional distribution of
principal. Such distribution will be made to each Class of Notes 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 Notes 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 Notes--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 during an Available
Funds Shortfall. Starting with the most junior Class of Notes, funds are
diverted to the extent necessary to pay the Class A Base Principal Distribution
Amount.
- ------The dashed line indicates the flow of funds during a Restricting Event.
During a Restricting Event, only the most senior Class of Notes outstanding
receives principal. Principal payable to more subordinate Classes of Notes or
the amounts
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payable to the Residual Holder are diverted to the most senior Class of Notes
outstanding. The chart assumes the Class A Notes are outstanding.
CREDIT ENHANCEMENT
The credit enhancement available for the benefit of any Class of Notes is
provided by each Class of Notes having a lower alphabetical designation than
such Class of Notes, as well as by the Trust Certificate. Losses caused by
defaults on the underlying contracts will be absorbed first, by the Residual
Holder, second, to the Class E Noteholders, third, by the Class D Class
Noteholders, fourth, by the Class C Class Noteholders and fifth, by the Class B
Noteholders. Thus, before any losses are allocated to a Class of Notes, the Note
Principal Balance of each Class of Notes 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 Noteholders and the Residual Holder will be suspended
and shall be disbursed to the most senior Class of Notes then outstanding, as a
further reduction of the outstanding Note Principal Balance of such Class.
THE TRUST ASSETS
GENERAL
The assets of the Trust (the "Trust Assets") will consist of:
- - a segregated pool of direct finance leases and commercial loans
(collectively, the "Contracts"), together with all monies received
relating thereto on or after September 1, 1998 (the "Cut-Off Date");
- - the security interest of the Originator or its affiliate, in the
equipment or other property securing such Contracts (the "Equipment"
and, together with the Contracts, the "Receivables");
- - all funds on deposit in certain accounts relating to the Receivables;
and
- - certain of the Originator's rights under insurance policies relating to
the Receivables.
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.
First Sierra acquired each Private Label Contract pursuant to an agreement
between First Sierra and the related Source (each such agreement, a "Source
Agreement"). Under each Source Agreement, First Sierra has acquired all right,
title and interest of such Source in and to the related Contract, together with
a security interest in such Source's right, title and interest in and to the
related Equipment.
The Sellers will transfer the Receivables to the Trust pursuant to a Receivables
Transfer Agreement (the "Receivables Transfer Agreement") among the Sellers and
the Trust. The Trust will pledge the Receivables to the Indenture Trustee, for
the benefit of the Noteholders, pursuant to the Indenture. The Servicer will
service the Receivables pursuant to
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the Servicing Agreement,(the "Servicing Agreement") among the Servicer, the
Trust and the Indenture Trustee. The Trust Agreement, the Indenture, the
Receivables Transfer Agreement and the Servicing Agreement are referred to
collectively herein as the "Transaction Documents".
The Originator, in its capacity as such, will make certain representations and
warranties with respect to, among other things, the Equipment and the Contracts,
which representations and warranties will be assigned to the Indenture Trustee
under the Indenture.
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 (the "Obligor")
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.
NOTICE CONCERNING THE STATISTICAL INFORMATION IN THIS PROSPECTUS SUPPLEMENT
The statistical information in this Prospectus Supplement concerning the
Receivables is based on the pool of Receivables that existed on September 1,
1998 (the "Statistic Calculation Date"). 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 for the final Receivables pool as of the Closing Date will vary
somewhat from the statistical distribution of such characteristics as of the
Statistic Calculation Date as presented in this Prospectus Supplement, such
variance will not be material.
As of the Statistic Calculation Date, the Contracts will have 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 actual discount rate
is _____% (the "Discount Rate") and was calculated using the weighted average of
the Note Rates of each Class of Notes, weighted by the Initial Note Principal
Balance of the related Class, plus the Servicing Fee Rate and the Trustee Fee
Rate. The Discount Rate will be used to calculate the actual Initial Offered
Note Principal Balance and the actual Initial Aggregate Discounted Contract
Principal Balance of the Contracts. The Initial Aggregate Discounted Contract
Principal Balance as of the Cut-Off Date calculated using the Discount Rate
equals $______________.
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 Discount Rate in the manner
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described below. 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 Servicing Agreement shall be equal to zero.
In connection with all calculations of Discounted Contract Principal Balances,
the Discounted Contract Principal Balance for each Contract shall be calculated
using the following assumptions:
- - Scheduled Payments are due on the last day of each Collection Period;
- - Scheduled Payments are discounted on a monthly basis using a 30-day
month and a 360-day year; and
- - Scheduled Payments are discounted to the last day of the Collection
Period prior to the date of determination.
The "Aggregate Discounted Contract Principal Balance" as determined from time to
time is the sum of the Discounted Contract Principal Balances of all Contracts.
CHARACTERISTICS OF THE CONTRACTS
As of the Statistic Calculation Date, all of the Contracts had the following
characteristics:
- - an original term to maturity of __ months to ___ months, with a weighted
average original term to maturity of approximately ___ months; and 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.
On the Closing Date, the statistical characteristics of the Receivables pool
will meet the following guidelines (percentages are measured as of the Cut-Off
Date, and are measured by 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 ___%, except for one Source which
shall not exceed ___%;
- - 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.
SERVICING
The Servicer is responsible for servicing, managing and administering the
Receivables 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.
As compensation for acting as Servicer, the Servicer will receive a monthly fee
(the "Servicer Fee") equal to the product of (i) one-twelfth of 0.50% (the
"Servicing Fee Rate") and (ii) the Aggregate Discounted Contract Principal
Balance of all Contracts as of the beginning of
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<PAGE> 14
the previous Collection Period. The Servicer will also be entitled to retain
late payment fees and certain other fees paid by the Obligors ("Servicing
Charges").
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 can not exceed 10% of the Aggregate
Discounted Contract Principal Balance of all Contracts as of the
Cut-Off Date;
- - 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 Noteholders.
However, the Servicer will covenant in the 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.
- - If the Prepayment is in full, such Prepayment must equal at least the
related Prepayment Amount.
- - If the Prepayment is partial, 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 recalculate the Discounted Contract
Principal Balance, and the allocation of Scheduled Payments to
principal and interest.
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
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<PAGE> 15
Collection Period, the Servicer will 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 Indenture 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 Noteholders have been paid as set forth below in "Flow
of Funds."
REPURCHASES FOR BREACHES OF REPRESENTATIONS AND WARRANTIES
First Sierra, as Originator or as Servicer, as the case may be, will be
obligated to accept the reconveyance of a Receivable from the Indenture Trustee
and to deposit the Repurchase Amount in the Collection Account if the interest
of the Trust in any of the related 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.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The Sellers will warrant that:
- - the transfer by the Sellers to the Trust of the Receivables is a valid
transfer and assignment of the Receivables; 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 Receivables, 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 Receivables except as discussed below with respect to
the Equipment. If the Sellers, the Servicer or the Indenture Trustee, while in
possession of an item of Receivables, sells or pledges and delivers such
Receivables to another party, in violation of the Indenture and the Servicing
Agreement, there is a risk that the purchaser could acquire an interest in such
Receivables 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 pledge of the Trust Assets to the Indenture Trustee 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;
- - a UCC-1 financing statement with respect to the pledge of all Contracts
by the Trust to the Indenture Trustee; and
- - a UCC-3 financing statement assigning First Sierra's lien on the
related Equipment to the Indenture Trustee on behalf of the Trust.
Subject to certain limitations, First Sierra has filed UCC-1 financing
statements with respect to Contracts as to which the related Equipment had an
original cost of $75,000 or more.
Except as described in the immediately preceding paragraph, because of the
S-14
<PAGE> 16
administrative burden and expense that would be entailed in so doing, none of
the Sellers nor the Servicer has filed or will be required to file UCC financing
statements in favor of the Indenture Trustee identifying the Equipment as
collateral pledged to the Indenture 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 Indenture Trustee and the Indenture Trustee shall
have no liability with respect to such lack of perfection.
OPTIONAL REDEMPTION
The Residual Holder will have the option to cause the early retirement of the
Notes as of any Payment Date following the date on which the Aggregate Note
Principal Balance of each Class of Notes is less than 10% of the initial
Aggregate Note Principal Balance of each Class of Notes. In the event of such a
redemption, the entire outstanding Note Principal Balance of each Class of
Notes, together with accrued interest thereon at the related Note Rate, will be
required to be paid to the Noteholders of such Class, on such Payment Date.
TAX STATUS
Dewey Ballantine LLP ("Tax Counsel") will give an opinion that, under existing
law, the Offered Notes will be characterized as indebtedness for federal income
tax purposes. Under the Transaction Documents, the Depositor, the Servicer and
other parties will agree to treat the Offered Notes as debt for all income tax
purposes. By accepting an Offered Note, each Noteholder will be deemed to agree
to treat their Notes as debt for all income tax purposes. See "Certain Federal
Income Tax Consequences" herein for additional information concerning the
application of federal income tax laws.
ERISA CONSIDERATIONS
Subject to the considerations described herein, the Offered Notes may be
purchased by Benefit Plans that are subject to the Employee Retirement Income
Security Act of 1974 ("ERISA") or entities using assets of such Benefit Plans.
If you are a Benefit Plan fiduciary, you should consult your tax and/or legal
advisors with respect to the potential applicability of ERISA and the Code to an
investment in the Offered Notes.
RATING OF THE OFFERED NOTES
The Offered Notes must receive at least the following ratings from Standard &
Poor's, a division of the McGraw-Hill Companies, Inc. ("S&P"), Duff & Phelps
Credit Rating Co. ("DCR") and Fitch IBCA, Inc. ("Fitch IBCA" and, together with
S&P and DCR, the "Rating Agencies") in order to be issued:
Class Rating
- ----- -----------------------------------------------
S&P DCR Fitch IBCA
---- ---- ----------
A-1 A-1+ D-1+ F-1+
A-2 AAA AAA AAA
B A A A
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<PAGE> 17
RISK FACTORS
In addition to the Material Risks discussed in the Prospectus,
prospective Offered Noteholders should consider, among other things, the
following additional factors in connection with the purchase of the Offered
Notes:
RISK OF DOWNGRADE OF INITIAL RATINGS ASSIGNED TO NOTES. It is a
condition to the issuance of the Offered Notes that they receive the ratings
from the Rating Agencies set forth in the Summary under the heading "Rating of
the Offered Notes." A rating is not a recommendation to purchase, hold or sell
the Offered Notes, inasmuch as such rating does not comment as to market price
or suitability for a particular investor. The ratings of the Offered Notes
address the likelihood of the timely payment of interest on and the ultimate
repayment of principal of the Offered Notes pursuant to their respective terms.
There is no assurance that a rating will remain for any given period of time or
that a rating will not be lowered or withdrawn entirely by a Rating Agency if in
its judgment circumstances in the future so warrant. The ratings of the Offered
Notes are based primarily on the Rating Agencies' analysis of the Contracts and
the Equipment, overcollateralization and, with respect to the Class A Notes, the
subordination provided by the Class B Notes, the Non-Offered Notes and the Trust
Certificate and with respect to the Class B Notes, the subordination provided by
the Non-Offered Notes and the Trust Certificate.
LIMITED SOURCES OF CREDIT ENHANCEMENT. The assets of the Trust are the
sole source of funds for distributions on the Offered Notes. The Offered Notes
will not have the benefit of a financial guaranty insurance policy. The
subordination of the Class B Notes and the Subordinate Securities to the Class A
Notes and the further subordination among the Class B Notes and the Subordinate
Securities are the sole sources of protection against losses. If losses exceed
the protection afforded by such mechanism, such losses will be allocated first,
to the Residual Holder, second, to the Class E Noteholders, third, to the Class
D Noteholders, fourth, to the Class C Noteholders, fifth, to the Class B
Noteholders, and sixth, to the Class A Noteholders. The Offered Notes represent
interests only in the Trust and do not represent interests in, or obligations of
the Depositor, the Originator, the Servicer, the Indenture Trustee, the Owner
Trustee, or any of their respective affiliates.
TRANSFER OF SERVICING MAY DELAY PAYMENTS. If First Sierra were to cease
acting as Servicer, delays in processing payments on the Receivables and
information in respect thereof could occur and result in delays in payments to
the Noteholders.
RISKS ASSOCIATED WITH INABILITY OF FIRST SIERRA TO REACQUIRE
RECEIVABLES. 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 Receivables. In certain circumstances, First Sierra will be
required to reacquire from the Trust Receivables 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
Receivables and no other party is obligated to perform or satisfy such
obligations, the Noteholders may be subject to delays in receiving payments and
suffer loss of their investment in the Notes.
GEOGRAPHIC CONCENTRATIONS OF RECEIVABLES. As of the Statistic
Calculation Date, Obligors with respect to approximately ____%, ____% and ____%
of the Receivables (based on the
S-16
<PAGE> 18
Aggregate 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 Receivables.
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) equipment
utilized in the offices and clinics of dentists, medical doctors, chiropractors
and other professional service providers, (ii) equipment utilized in the offices
and clinics of veterinarians, (iii) restaurant equipment, (iv) point of sale
equipment, (v) computer equipment, (vi) copier and facsimile equipment, (vii)
telecommunications equipment, (viii) automobile servicing equipment and (ix)
other similar general use equipment in the service sector.
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 "Discount Rate") has
been calculated using the actual levels of fees payable by the Trust, the actual
Note Rate with respect to each class of the Class A Notes, the Class B Notes,
the Class C Notes, the Class D Notes and the Class E Notes and shall be used to
calculate the actual Initial Class A Note Principal Balance, the Initial Class B
Note 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
S-17
<PAGE> 19
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 variance will not be material.
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 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 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 Servicing
Agreement and described herein, and the Contracts eligible to be designated as
Substitute Contracts will conform to the characteristics specified in the
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> 20
Principal Balance is attributable to any one Obligor, and the average Discounted
Contract Principal Balance is approximately $_____.
Under the Servicing Agreement, 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
Pursuant to the Servicing Agreement, First Sierra may 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 Servicing Agreement.
Each Substitute Contract shall be a Contract which satisfies certain
representations and warranties set forth in the 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 Noteholders. However, the Servicer will covenant in
the 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
S-19
<PAGE> 21
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 Servicing Agreement, the Servicer will manage,
administer, service and make collections on the Contracts, in accordance with
the terms of the 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 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
release, 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.
S-20
<PAGE> 22
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
</TABLE>
S-21
<PAGE> 23
<TABLE>
<CAPTION>
Percentage of
Statistical Statistical Discounted
Discounted Contract Number of Discounted Contract Contract
Principal Balance Contracts Principal Balance Principal Balance
------------------- --------- ------------------- ----------------------
<S> <C> <C> <C>
=============================================================================================================================
Total............................................ $ 100.00%
=============================================================================================================================
</TABLE>
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<PAGE> 24
DISTRIBUTION OF THE CONTRACTS BY DEFINED OBLIGOR INDUSTRY (TOP 25)
<TABLE>
<CAPTION>
Statistical Percentage of
Numbers 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>
S-23
<PAGE> 25
<TABLE>
<CAPTION>
DISTRIBUTION OF THE CONTRACTS BY OBLIGOR BILLING ADDRESS
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>
S-24
<PAGE> 26
S-25
<PAGE> 27
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> 28
THE SELLERS
First Sierra Financial, Inc. (the "Originator"), a financial services
and asset management company, together with 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 September 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
First Sierra Financial Inc. ("First Sierra") is a specialized finance
company that acquires and originates, and sells and services equipment
contracts. The underlying contracts financed by First Sierra relate to a wide
range of equipment, including computers and peripherals, computer software,
medical, dental and diagnostic, telecommunications, office, automotive
servicing, hotel security, food services, tree service and industrial, as well
as specialty vehicles. The equipment generally has a purchase price of less than
$500,000 (with an average of approximately $17,000), and thus First Sierra's
contracts are commonly referred to as "small ticket contracts."
First Sierra has established strategic alliances with a network of
independent leasing companies, contract brokers and equipment vendors, each of
which acts as a source from which First Sierra obtains access to equipment
contracts. First Sierra customizes contract financing products to meet the
specific equipment financing needs of its customers and in many cases provides
such customers with servicing and technological support via on-line connections
to First Sierra's state-of-the-art computer system.
First Sierra commenced operations in June 1994 and initially developed
a program to purchase contracts from leasing companies which had the ability to
originate significant contract volumes and were willing and able to provide
credit protection to First Sierra (through recourse and purchase price
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holdback features) and perform certain servicing functions on an ongoing basis
with respect to such contracts. This program, referred to by First Sierra as its
"Private Label" program (and the companies that participate in the Private Label
Program are referred to as "Sources"), was designed to provide First Sierra with
access to high volumes of contracts eligible for the securitization market,
while minimizing the risk of loss to First Sierra. First Sierra has experienced
significant growth in its Private Label program since inception, with the volume
of contracts purchased increasing from $4.5 million in 1994, to $65.2 million in
1995, to $161.1 million in 1996, to $210.1 million in 1997 and to $118 million
in the first six months of 1998. The volume of contracts originated under the
Broker Program and the Vendor Program was a combined $168 million in 1997.
PRIVATE LABEL PROGRAM
GENERAL
The Private Label Program was designed to provide financing to small
ticket Sources which were typically financed by local commercial banks. Each
Private Label transaction generally contains one or more of the following types
of loss protection: (a) recourse to the Source which requires the Source to
repurchase contracts that are typically 90 days past due up to an aggregate
amount that is 10% of the total purchase price of the contracts acquired from
such Source, (b) remarketing of the equipment that is subject to a defaulted
contract and (c) maintenance of a reserve fund funded by holdbacks of a portion
of the purchase price owing to the Source, such reserve funds typically ranging
from 1% to 10% of the purchase price of the related contracts. However, some
Private Label transactions are non-recourse to the Source (although such Sources
are obligated to repurchase contracts as to which a breach of representation or
warranty occurs) and are not structured with the loss protections contained in
(a), (b) and (c) above. Other than for a breach of a representation or warranty,
First Sierra would absorb the full risk of loss on leases originated under this
structure.
The Private Label Program utilizes three separate forms of agreements
that utilize the above types of loss protection. Under the first, First Sierra
has recourse to the Source in an amount up to 10% of the aggregate purchase
price of the contracts acquired from such Source for defaulted contracts. Under
the second form of agreement, in addition to the aforementioned recourse to the
Source, First Sierra has the benefit of a funded cash reserve account which
generally ranges from 1% to 10% of the total purchase price of the contracts
acquired from such Source, with an average reserve account of 3.5%. Such amount
is funded by the retention of a specified percentage of the purchase price for
each contract as a reserve. Under the third option, First Sierra has recourse
only to the cash reserve account for credit losses, which reserve account also
ranges from 1% to 10% of the total purchase price of the contracts acquired from
such Source, with an average reserve account of 3.5%.
UNDERWRITING PROCEDURES
In order to qualify for participation in the Private Label Program, a
Source must satisfy certain criteria, which generally require that the majority
of the Source's business be small ticket contracts ($1,000 - $500,000), generate
a minimum volume of contracts, have been in business a minimum of five years,
have a history of profitably operating a leasing company for a period of time in
excess of five years, the principal management of the Source has a clean credit
history, and have sufficient staff and
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<PAGE> 30
financial resources. The specific requirements vary depending upon such things
as transaction size, and type and location of equipment financed.
First Sierra's underwriting guidelines with respect to Obligors contain
specific requirements which vary according to the nature of the Obligor's
business, the size of the transaction, and the type of program under which the
Source is seeking approval. In underwriting the Obligor, First Sierra considers,
among other things, time in business, bank, credit and trade references, credit
bureau reports on all officers, Dun & Bradstreet reports, confirmation of
ownership, complete financial package, personal guarantees, maximum exposure per
Obligor, verification of a personal medical license, where applicable, and
historical financial statements or tax returns for commercial exposures greater
than $75,000 or as specifically arranged with the originating Source.
The Private Label Source typically closes the contract transaction
prior to sale to First Sierra. The Source will have performed all the necessary
credit inquiries and documentation, and will submit this information to First
Sierra for review. Each contract submitted for funding from any approved Source
is individually underwritten and approved by First Sierra. Individual contract
underwriting procedures generally include review of credit bureau reports and
verification of bank references, trade references, and licenses. For commercial
exposures greater than $50,000, First Sierra reviews personal financial
statements, business financial statements, and tax returns with an emphasis on
cash flow and the ability to service the contract payments and debt. For each
contract application First Sierra receives, the credit department reviews all
documentation and credit reviews. First Sierra performs periodic verification on
all acquired contracts on a random basis. Through June 30, 1998, First Sierra
had incurred net charge-offs of $________ from contracts funded pursuant to the
Private Label program. There can be no assurance that First Sierra's Private
Label Sources will continue to meet their repurchase obligations or that the
amounts withheld under the purchase price holdback feature of the Private Label
program, together with any amounts realized upon disposal of the underlying
equipment, will be sufficient to fully offset any losses which might be incurred
upon default of Obligors in the future.
BROKER PROGRAM
First Sierra's Broker program is designed to fund equipment contracts
from small ticket contract brokers that are unwilling or unable to provide the
credit protection and perform the servicing functions necessary to participate
in First Sierra's Private Label program. In a typical Broker transaction, First
Sierra originates contracts referred to it by the Broker and pays the Source a
referral fee. Contracts originated under the Broker program are structured on a
non-recourse basis, with risk of loss in the event of default by the Obligor
residing with First Sierra. First Sierra owns or (in the case of a contract
intended as security) has a security interest in the underlying equipment
covered by a Broker contract and, in certain cases, retains a residual interest
in such underlying equipment. All servicing functions are performed by First
Sierra.
First Sierra also provides a variety of value-added services to
participants in its Broker program, including consulting on the structuring of
financing transactions with equipment purchasers, timely and efficient credit
approvals and preparation and completion of standardized contract documents.
Although First Sierra enters into a brokerage agreement with each of the
participants in its Broker program, such agreements are not exclusive and can be
terminated by either party.
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<PAGE> 31
First Sierra's yields on contracts originated under its Broker program
are higher than those acquired under its Private Label program because of the
risk of loss and servicing responsibilities assumed by First Sierra in the
Broker program.
VENDOR PROGRAM
First Sierra's Vendor program focuses on establishing formal and
informal relationships with equipment vendors in order to establish First Sierra
as the provider of financing recommended by such vendors to their equipment
purchasers. By assisting such vendors in providing timely, convenient and
competitive financing for their equipment sales and offering vendors a variety
of value-added services, First Sierra simultaneously promotes the vendor's
equipment sales and the utilization of First Sierra as the equipment finance
provider.
In a typical vendor arrangement, First Sierra originates all contracts
referred to it by the Vendor. Contracts originated under the Vendor program are
structured on a non-recourse basis, with risk of loss in the event of a default
by the Obligor residing with First Sierra. First Sierra owns or (in the case of
a contract intended as security) has a security interest in the underlying
equipment covered by a vendor contract and, in certain cases, retains a residual
interest in such equipment. All servicing functions are performed by First
Sierra under the Vendor program.
In some cases, a vendor may desire to establish a captive finance
program. In this instance, First Sierra assists the vendor in establishing a
funding program for the vendor's customers. First Sierra may provide varying
levels of service, generally for a fee, which can include activity related to
sales force training, sales force assistance, origination, funding, and on-going
servicing and collection activities. First Sierra may purchase contracts
originated through this program or it may assist the vendor in funding these
contracts on a non-recourse basis with other funding sources.
The Vendor program provides for customized financing arrangements to
respond to the needs of a particular vendor and its equipment purchasers. The
value-added services offered by First Sierra to participants in its Vendor
program include consulting with vendors on structuring financing transactions
with equipment purchasers, training the vendor's sales and management staffs to
understand and market First Sierra's various financing alternatives, customizing
financial products to encourage product sales, and preparation and completion of
standardized contract documents. In most cases, First Sierra's sales
representatives also work directly with the vendor's equipment purchasers,
providing them with the guidance necessary to complete the equipment financing
transaction. First Sierra also may participate actively in the vendor's sale
sand marketing efforts, including advertising, promotions, trade show activities
and sales meetings.
First Sierra generally obtains higher yields on contracts funded under
the Vendor program than those in the Broker program due to additional services
provided by First Sierra under the Vendor program.
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,
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Houston, Texas 77002. Since its incorporation through March 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>
AS OF
DECEMBER 31, AS OF
1996 DECEMBER 31, 1997 AS OF MARCH 31, 1998
BROKER/
TOTAL TOTAL PRIVATE LABEL VENDOR TOTAL
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross Remaining
Contract Receivable $257,234 $611,3584 $453,234 $265,435 $718,669
31 - 60 days past due 2.40% 1.87% 1.91% 1.22% 1.66%
61 - 90 days past due 0.78% 0.57% 0.70% 0.44% 0.61%
Over 90 days past due 0.33% 0.37% 0.76% 0.76% 0.61%
-----------------------------------------------------------------------------------------------------------
Total 3.51% 2.81% 2.42% 2.42% 2.88%
</TABLE>
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FOR THE QUARTER
1996 1997 ENDED MARCH 31, 1998
------------ ------------ --------------------
PRIVATE BROKER/
TOTAL (1) TOTAL LABEL VENDOR TOTAL
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average servicing portfolio $124,592 $321,965 $371,885 $179,973 $551,858
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Net losses $25 $584 $100 $310 $410
Percentage of average
servicing portfolio 0.02% 0.18% 0.03% 0.17% 0.07%
</TABLE>
- ------------------------
(1) Because First Sierra did not establish its Broker/Vendor Programs until
July, 1996, the figures provided for the year ended December 31, 1996
only relates to the Private Label Program.
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
statistical data in the table is based on all of the contracts in the Servicer's
servicing portfolio. 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
On a day-to-day basis, the billing and collection process is handled by
the Servicer's automated billing system. Day-to-day collections are processed
through Chase Bank of Texas, N.A.'s cash management operations, which utilize
optical code reading technology to scan the invoices and earmark payments to the
specific pool where the contract is funded.
For Private Label Programs, the Servicer relies on the Source to
undertake the initial collection efforts with respect to the Obligors. The
Servicer monitors contract receipts and aging results on a daily basis. The
Servicer provides delinquency status to Sources at least twice monthly. Many
Sources are connected to the Servicer's delinquency reporting systems and can
receive delinquency performance on a daily basis. The Servicer monitors the
Source's progress, and is in regular contact with the Source regarding
collection activity, and actions to prevent the delinquency from worsening.
After 60 days, the Servicer contacts the Source directly to notify it that it
has 30 days to ensure the account is brought current. After 90 days, the
Servicer notifies the Source that it has 60 days to repurchase the contract it
was purchased pursuant to a recourse program, or to re-market the equipment.
After 150 days, the Servicer charges off the account.
With respect to Broker/Vendor programs, the Servicer's automated
billing cues collectors to initiate contact with Obligors if payment is not
received by the 11th day after the due date. If payment has not been received by
the 25th, a general demand letter is sent to the Obligor. If no contact is made
within 45 days, a letter is sent which gives the Obligor five days to bring the
account current. If no payment is received, the collector, in conjunction with
senior credit personnel, determines the appropriate course of subsequent actions
appropriate for the circumstances. If collection activities do not rectify the
account, the Servicer typically charges off the account when it has determined
that the account is not collectable, but no later than 180 days after the due
date.
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FORMATION OF THE TRUST
GENERAL
The Trust, First Sierra Equipment Contract Trust 1998-1, is a business
trust formed in accordance with the laws of the State of Delaware, pursuant to
the Trust 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 pledging the
Receivables, (ii) issuing the Notes and the Trust Certificate and (iii)
distributing payments thereon. As described under "Description of the Notes -
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 Indenture Trustee as fees. All other expenses
of the Trust will be paid as provided in the Trust Agreement.
LEGAL PROCEEDINGS
As of the date of this Prospectus, 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, is not involved in any legal
proceedings.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
As of the date of this Prospectus, the Trust has not had an operating
history. The net proceeds of the sale of the Offered Notes will be employed to
purchase the Contracts. The Trust was formed for the limited purposes of (i) the
purchaser of equipment contracts from First Sierra and its affiliates, (ii) the
issuance of notes collateralized by its assets and (iii) engaging in acts
incidental, necessary or convenient to the foregoing.
THE OWNER TRUSTEE
First Union Trust Company, National Association, the Owner Trustee
under the Trust Agreement, is a national banking association, the principal
offices of which are located at One Rodney Square, 920 King Street, Suite 102,
Wilmington, Delaware 19801. The Owner Trustee will perform limited
administrative functions under the Trust Agreement. The Owner Trustee's duties
in connection with the issuance and sale of the Trust Certificate and the Notes
is limited solely to the express obligations of the Owner Trustee set forth in
the Trust Agreement.
THE INDENTURE TRUSTEE
Bankers Trust Company is the Indenture Trustee under the Indenture.
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
Indenture Trustee's duties in connection with the Notes is limited solely to its
express obligations under the Indenture and the Servicing Agreement.
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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 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 Notes 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.
DESCRIPTION OF THE NOTES
The Notes will be issued pursuant to the Indenture to be entered into
by the Servicer, the Trust and the Indenture Trustee. The Servicer will provide
a copy of the Indenture to subsequent Noteholders without charge on written
request addressed to it at 600 Travis Street, Suite 7050, Houston, Texas 77002.
The following summary describes certain terms of the Receivables
Transfer Agreement and the Indenture, does not purport to be complete and is
subject to and qualified in its entirety by reference to the Receivables
Transfer Agreement and the Indenture. Wherever provisions of the Receivables
Transfer Agreement and the Indenture are referred to, such provisions are hereby
incorporated herein by reference.
GENERAL
The obligations evidenced by the Notes are recourse to the assets of
the Trust only and are not recourse to the Depositor, First Sierra, the
Servicer, the Indenture Trustee or any other Person.
The Trust will agree in the Indenture and in the respective Offered
Notes to pay (a) to the Class A-1 Noteholders (i) an amount of principal equal
to the Initial Class A-1 Note Principal Balance and (ii) Class A-1 Note
Interest, (b) to the Class A-2 Noteholders (i) an amount of principal equal to
the Initial Class A-2 Note Principal Balance and (ii) Class A-2 Note Interest
and (c) to the Class B Noteholders (i) an amount of principal equal to the
Initial Class B Note Principal Balance and (ii) Class B Note Interest, in each
case, at the times, from the sources and on the terms and conditions set forth
in the Indenture and in the respective Offered Notes.
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<PAGE> 36
The _____% Class A-1 Equipment Contract Backed Notes (the "Class A-1
Notes") in the initial principal amount of $_____________ (the "Initial Class
A-1 Note Principal Balance"), the _____% Class A-2 Equipment Contract Backed
Notes (the "Class A-2 Notes" and, together with the Class A-1 Notes, the "Class
A Notes") in the initial principal amount of $____________ (the "Initial Class
A-2 Note Principal Balance"), the _____% Class B Equipment Contract Backed Notes
(the "Class B Notes," together with the Class A Notes, the "Offered Notes") in
the initial principal amount of $____________ (the "Initial Class B Note
Principal Balance"), which Offered Notes aggregate $_____ in initial principal
amount (the "Initial Offered Note Principal Balance"), will each be issued
pursuant to the Indenture. The Initial Class A-1 Note Principal Balance and the
Initial Class A-2 Note Principal Balance shall be referred to herein as the
"Initial Class A Note Principal Balance." The Initial Class A Note 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. The Initial Class B Note Principal Balance to be issued hereunder
is equal to approximately _____% (the "Class B Percentage") of the Initial
Aggregate Discounted Contract Principal Balance of the Contracts. Each Class of
Offered Notes 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 Notes are required to be made by the
Indenture Trustee on each Payment Date.
The first Payment Date for distributions to the Offered Noteholders
will be ________. Payments are required to be made by the Indenture Trustee, by
check mailed or, if requested by the Noteholder, by wire transfer of immediately
available funds, to Noteholders entitled thereto at the address appearing on the
certificate register on the Record Date, which, for so long as the Offered Notes
are in book-entry form through The Depository Trust Company, will be Cede & Co.
In addition to the Offered Notes, the Trust will also issue four
classes of subordinate securities, the _____% Class C Equipment Contract Backed
Notes (the "Class C Notes"), the _____% Class D Equipment Contract Backed Notes
(the "Class D Notes"), the _____% Class E Equipment Contract Backed Notes (the
"Class E Notes" and, collectively with the Class C Notes and the Class D Notes,
the "Non-Offered Notes" and the Non-Offered Notes, collectively with the Offered
Notes, the "Notes") and the Trust Certificate (the "Trust Certificate," together
with the Non-Offered Notes, the "Subordinate Securities," and collectively with
the Non-Offered Notes, the Class B Notes and the Class A Notes, the
"Securities").
The Non-Offered Notes 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 Non-Offered Notes will be privately placed with one or more
qualified institutional investors. The Residual Holder will be required to
retain the Trust Certificate.
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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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 Indenture 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
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 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
Indenture Trustee, including that: (i) 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 Indenture 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; (ii) 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; (iii) 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; (iv) 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; (v) 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; (vi) 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; (vii) 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; (viii) 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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insurance relating thereto; (ix) the Contract provides for periodic Scheduled
Payments, which are principally due and payable on a monthly, quarterly,
semi-annual, or annual basis; (x) 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; (xi) under the terms of the Contract the Obligor may not
elect to utilize its security deposit to offset any Scheduled Payment; (xii) if
obtained during the original approval, the Contracts provide a personal
guarantee of the Obligor; (xiii) all of the Contracts originated by a Source
permit the Source to accelerate Scheduled Payments if an Obligor is in default
under the Contract; (xiv) all the Contracts meet the Originator's credit and
collections policies and procedures; (xv) each Source has entered into valid
sale and assignment of each Contract originated by such Source; (xvi) 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); (xvii) 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; (xviii) as of the Closing
Date, all action required by the Receivables Transfer Agreement and the
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; (xix) 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 Indenture 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 Servicing Agreement have been made in all appropriate jurisdictions and
are in full force and effect; (xx) 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 (xxi) 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 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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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 Indenture Trustee and the Noteholders
for a breach of a representation or warranty made by First Sierra with respect
to the required characteristics of the Receivables.
INDEMNIFICATION
The Servicing Agreement will provide that the Servicer will defend and
indemnify the Depositor, First Sierra, the Indenture Trustee, the Owner Trustee,
the Trust and the Noteholders 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 Servicing Agreement or (B) in the case of the
Indenture Trustee or the Owner Trustee, the performance of their respective
duties, except to the extent that such cost, expense, loss, damage, claim or
liability resulted from the Indenture Trustee's or the Owner Trustee's
respective gross negligence or willful misconduct. First Sierra's obligations,
as Servicer, to indemnify the Depositor, First Sierra, the Indenture Trustee,
the Trust and the Noteholders 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 Servicing Agreement two accounts: the Lockbox Account and the Collection
Account. The Collection Account is to be held by the Indenture Trustee in the
name of the Trust and for the benefit of Noteholders. 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 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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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 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 Noteholders 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 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 Indenture Trustee shall draw on
the Collection Account to repay such Servicer Advances in accordance with the
provisions of the Indenture.
FLOW OF FUNDS
On each Determination Date, the Servicer is required to deliver to the
Indenture Trustee 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 Notes.
On each Payment Date, the Indenture 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, an amount equal to any unreimbursed
Servicer Advances (other than Servicer Advances for the related
Collection Period);
(ii) to the Servicer, an amount equal to 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) [reserved];
(v) to the Indenture Trustee, the Indenture Trustee Fees then
due, together with any Indenture Trustee Fees from prior Collection
Periods;
(vi) to the Indenture Trustee, the Indenture Trustee Expenses
then due, together with any Indenture Trustee Expenses from prior
Collection Periods;
(vii) to the Class A-1 Noteholders, the Class A-1 Note
Interest and to the Class A-2 Noteholders, the Class A-2 Note Interest,
pari passu;
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(viii) to the Class B Noteholders, the Class B Note Interest
for the related Collection Period (to the extent the disbursement of
the Class B Note Interest will not result in an Available Funds
Shortfall);
(ix) to the Class C Noteholders, the Class C Note Interest for
the related Collection Period (to the extent the disbursement of the
Class C Note Interest will not result in an Available Funds Shortfall);
(x) to the Class D Noteholders, the Class D Note Interest for
the related Collection Period (to the extent the disbursement of the
Class D Note Interest will not result in an Available Funds Shortfall);
(xi) to the Class E Noteholders, the Class E Note Interest for
the related Collection Period (to the extent the disbursement of the
Class E Note Interest will not result in an Available Funds Shortfall);
(xii) until the Class A Note Principal Balance has been
reduced to zero, to the Class A Noteholders, the sum of (a) the Class A
Base Principal Distribution Amount for such Payment Date, and (b) any
Class A Overdue Principal, such amount to be applied sequentially, with
100% of such amount being applied to reduce the applicable Note
Principal Balance of the Class A Notes then outstanding and having the
lowest numerical designation (e.g., first to the Class A-1 Notes) to
zero before any principal payment is made to the next Class;
(xiii) until the Class B Note Principal Balance has been
reduced to zero, to the Class B Noteholders, from the Available Funds
then remaining in the Collection Account, the sum of (a) the Class B
Base Principal Distribution Amount for such Payment Date, and (b) any
Class B Overdue Principal; provided, however, that if a Restricting
Event exists on such Payment Date and the Class A Note Principal
Balance on such Payment Date (after giving effect to all prior payments
of principal to the Class A Noteholders made on such Payment Date)
exceeds zero, the amount otherwise required to be paid to the Class B
Noteholders under this clause (xiii), shall instead be paid to the
Class A Noteholders pursuant to this clause (xiii) during such time as
a Restricting Event is continuing as an additional reduction of the
Class A Note Principal Balance up to the amount necessary to reduce the
Class A Note Principal Balance to zero (and shall be paid in the
sequential-pay fashion described in clause (xii) above);
(xiv) until the Class C Note Principal Balance has been
reduced to zero, to the Class C Noteholders, from the Available Funds
then remaining in the Collection Account, the sum of (a) the Class C
Base Principal Distribution Amount for such Payment Date, and (b) any
Class C Overdue Principal; provided, however, that if a Restricting
Event exists on such Payment Date, and the Class A Note Principal
Balance on such Payment Date (after giving effect to all prior payments
of principal to the Class A Noteholders made on such Payment Date)
exceeds zero, the amount otherwise required to be paid to the Class C
Noteholders under this clause (xiv), shall instead be paid (x) if the
Class A Noteholders pursuant to this clause (xiv) during such time as a
Restricting Event is continuing as an additional reduction of the Class
A Note Principal Balance up to the amount necessary to reduce the Class
A Note Principal Balance to zero (and shall be paid in the
sequential-pay fashion described in clause (xii) above), and (y) if the
Class A Note
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Principal Balance up to the amount necessary to reduce the
Class A Note Principal Balance to zero (and shall be paid in
the sequential-pay fashion described in clause (xii) above),
and (y) if the Class A Note Principal Balance is zero, but the
Class B Note Principal Balance on such Payment Date (after
giving effect to all prior payments of principal to the Class
B Noteholders made on such Payment Date) exceeds zero, the
amount otherwise required to be paid to the Class C
Noteholders under this clause (xiv) shall instead be paid to
the Class B Noteholders during such time as a Restricting
Event is continuing as an additional reduction of the Class B
Note Principal Balance up to the amount necessary to reduce
such balance to zero;
(xv) until the Class D Note Principal Balance has
been reduced to zero, to the Class D Noteholders, from the
Available Funds then remaining in the Collection Account, the
sum of (a) the Class D Base Principal Distribution Amount for
such Payment Date, and (b) any Class D Overdue Principal;
provided, however, that if a Restricting Event exists on such
Payment Date; the amount otherwise required to be paid to the
Class D Noteholders under this clause (xv), shall instead be
paid (x) if the Class A Note Principal Balance on such Payment
Date (after giving effect to all prior payments of principal
to the Class A Noteholders made on such Payment Date) exceeds
zero, to the Class A Noteholders pursuant to this clause (xv)
during such time as a Restricting Event is continuing as an
additional reduction of the Class A Note Principal Balance up
to the amount necessary to reduce the Class A Note Principal
Balance to zero (and shall be paid in the sequential-pay
fashion described in clause (xii) above), (y) if the Class A
Note Principal Balance is zero, but the Class B Note Principal
Balance on such Payment Date (after giving effect to all prior
payments of principal to the Class B Noteholders made on such
Payment Date) exceeds zero, the amount otherwise required to
be paid to the Class D Noteholders under this clause (xv)
shall instead be paid (x) to the Class B Noteholders during
such time as a Restricting Event is continuing as an
additional reduction of the Class B Note Principal Balance up
to the amount necessary to reduce such balance to zero, and
(z) if the Class A Note Principal Balance and the Class B Note
Principal Balance is zero, but the Class C Principal Balance
on such Payment Date (after giving effect to all prior
payments of principal to the Class C Noteholders made on such
Payment Date) exceeds zero, the amount otherwise required to
be paid to the Class D Noteholders under this clause (xv)
shall instead be paid to the Class C Noteholders during such
time as a Restricting Event is continuing as an additional
reduction of the Class C Note Principal Balance up to the
amount necessary to reduce such balance to zero;
(xvi) until the Class E Note Principal Balance has
been reduced to zero, to the Class E Noteholders, from the
Available Funds then remaining in the Collection Account, the
sum of (a) the Class E Base Principal Distribution Amount for
such Payment Date, and (b) any Class E Overdue Principal;
provided, however, that if a Restricting Event exists on such
Payment Date, the amount otherwise required to be paid to the
Class E Noteholders under this clause (xvi) shall instead be
paid (w) if the Class A Note Principal Balance on such Payment
Date (after giving effect to all prior payments of principal
to the Class A Noteholders made on such Payment Date) exceeds
zero, to the Class A Noteholders pursuant to this clause (xvi)
during such time as a Restricting Event is continuing as an
additional reduction of the Class A Note Principal Balance up
to the amount necessary to reduce such balance to zero (and
shall be paid in the sequential-pay fashion described in
clause (xii) above), (x) if the Class A Note Principal Balance
is zero, but the Class B Note Principal Balance on such
Payment Date (after giving effect to all prior payments of
principal to the Class B Noteholders made on such Payment
Date) exceeds zero, the amount
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otherwise required to be paid to the Class E Noteholders under
this clause (xvi) shall instead be paid to the Class B
Noteholders during such time as a Restricting Event is
continuing as an additional reduction of the Class B Note
Principal Balance up to the amount necessary to reduce such
balance to zero, (y) if the Class A Note Principal Balance and
the Class B Note Principal Balance is zero, but the Class C
Note Principal Balance on such Payment Date (after giving
effect to all prior payments of principal to the Class C
Noteholders made on such Payment Date) exceeds zero, the
amount otherwise required to be paid to the Class E
Noteholders under this clause (xvi) shall instead be paid to
the Class C Noteholders during such time as a Restricting
Event is continuing as an additional reduction of the Class C
Note Principal Balance up to the amount necessary to reduce
such balance to zero, and (z) if the Class A Note Principal
Balance, the Class B Note Principal Balance and the Class C
Note Principal Balance are zero, but the Class D Note
Principal Balance on such Payment Date (after giving effect to
all prior payments of principal to the Class D Noteholders
made on such Payment Date) exceeds zero, the amount otherwise
required to be paid to the Class E Noteholders under this
clause (xvi) shall instead be paid to the Class D Noteholders
during such time as a Restricting Event is continuing as an
additional reduction of the Class D Note Principal Balance up
to the amount necessary to reduce such balance to zero;
(xvii) to the Servicer, any other amounts due the
Servicer as expressly provided in the Servicing Agreement; and
(xviii) 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 (v) the Class A Note Principal
Balance, ---- (w) the Class B Note Principal
Balance, (x) the Class C Note Principal
Balance, (y) the Class D Note Principal
Balance and (z) the Class E Note Principal
Balance (calculated with respect to clauses
(v), (w), (x), (y) and (z) 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
(xviii) to the Class A Noteholders (in the
sequential-pay fashion described in clause
(xii) above), the Class B Noteholders, the
Class C Noteholders, the Class D Noteholders
and the Class E Noteholders 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
Percentage, the Class C Percentage, the
Class D Percentage, or the Class E
Percentage, as the case may be, and the
denominator of which is the sum of the Class
A Percentage, the Class B Percentage, the
Class C Percentage, the Class D Percentage
and the Class E Percentage and (B) the
amount that would otherwise be paid to the
Residual Holder pursuant to this clause
(xviii); 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 (xviii) shall instead be paid (v) if
the Class A Note Principal Balance on such
Payment Date (after giving effect to all
prior payments of principal to the Class A
Noteholders made on such Payment Date)
exceeds zero, to the Class A Noteholders
pursuant to this clause (xviii) during such
time as a Restricting Event is continuing as
an additional reduction of the Class A Note
Principal Balance up to the amount necessary
to reduce such balance to zero (in the
sequential-pay fashion described in clause
above); (w) if the Class A Note Principal
Balance is zero, but the Class B Note
Principal Balance on such Payment Date
(after giving effect to all prior payments
of principal to the Class B Noteholders made
on such Payment Date) exceeds zero, the
amount otherwise required to be paid to the
Residual Holder under this clause (xviii)
shall instead be paid to the Class B
Noteholders pursuant to this clause (xviii)
during such time as a Restricting Event is
continuing as an additional reduction of the
Class B Note Principal Balance up to the
amount necessary to reduce such balance to
zero, (x) if the Class A Note Principal
Balance and the Class B Note Principal
Balance are both zero, but the Class C Note
Principal Balance on such Payment Date
(after giving effect to all prior payments
of principal to the Class C Noteholders made
on such Payment Date) exceeds zero, the
amount otherwise required to be paid to the
Residual Holder under this clause (xviii)
shall instead be paid to the Class C
Noteholders pursuant to this clause (xviii)
during such time as a Restricting Event is
continuing as an additional reduction of the
Class C Note Principal Balance up to the
amount necessary to reduce such balance to
zero, (y) if each of the Class A Note
Principal Balance, the Class B Note
Principal Balance and the Class C Note
Principal Balance are zero, but the Class D
Note Principal Balance on such Payment Date
(after giving effect to all prior payments
of principal to the Class D Noteholders made
on such Payment Date) exceeds zero, the
amount otherwise required to be paid to the
Residual Holder under this clause (xviii)
shall instead be paid to the Class D
Noteholders pursuant to this clause (xviii)
during such time as a Restricting Event is
continuing as an additional reduction of the
Class D Note Principal Balance up to the
amount necessary to reduce such balance to
zero and (z) if each of the Class A Note
Principal Balance, the Class B Note
Principal Balance, the Class C Note
Principal Balance and the Class D Note
Principal Balance are zero, but the Class E
Note Principal Balance on such Payment Date
(after giving effect to all prior payments
of principal to the Class E Noteholders made
on such Payment Date) exceeds zero, the
amount otherwise required to be paid to the
Residual Holder under this clause (xviii)
shall instead be paid to the Class E
Noteholders pursuant to this clause (xviii)
during such time as a Restricting Event is
continuing as an additional
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reduction of the Class E Note Principal
Balance up to the amount necessary to reduce
such balance to zero.
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 Note Principal Balance: The aggregate of the Initial
Class A Note Principal Balance, the Initial Class B Note Principal Balance, the
Initial Class C Note Principal Balance, the Initial Class D Note Principal
Balance and the Initial Class E Note Principal Balance.
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 Class A Base Principal Distribution Amount 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.
Class A Base Principal Distribution Amount: (a) With respect to any
Collection Period prior to the Class B Termination Date, the Class C Termination
Date, the Class D Termination Date or the Class E Termination Date, the product
of (i) the Class A Percentage and (ii) the Base Principal Amount for such
Collection Period; (b) with respect to the Class B Termination Date, the Class C
Termination Date, the Class D Termination Date or the Class E Termination Date,
as the case may be, the amount described in clause (a) above plus the portion of
the Class B Base Principal Distribution Amount, the Class C Base Principal
Distribution Amount, the Class D Base Principal Distribution Amount or the Class
E Base Principal Distribution Amount, as applicable, not applied as a reduction
of the Class B Note Principal Balance, the Class C Note Principal Balance, the
Class D Note Principal Balance or the Class E Note Principal Balance,
respectively, on such date; and (c) with respect to any Collection Period
following the Class B Termination Date, the Class C Termination Date, the Class
D Termination Date or the Class E Termination Date, as the case may be, the
amount described in clause (a) above plus the Class B Base Principal
Distribution Amount, the Class C Base Principal Distribution Amount, the Class D
Base Principal Distribution Amount and/or the Class E Base Principal
Distribution Amount, as the case may be, for such Collection Period.
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Class A Note Principal Balance: At any time, the Initial Class A Note
Principal Amount minus all payments theretofore received by the Class A
Noteholders on account of principal.
Class A Overdue Principal: With respect to any Payment Date, the
difference, if any, equal to (a) the aggregate of the Class A Base Principal
Distribution Amounts due on all prior Payment Dates and (b) the aggregate amount
of the principal (from whatever source) actually distributed to Class A
Noteholders on all prior Payment Dates.
Class A-1 Maturity Date: ______________, _____.
Class A-1 Note Current Interest: With respect to any Collection Period,
the interest accrued during the related Interest Accrual Period, equal to 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 Class A-1 Note Rate and (z) the aggregate Class A-1 Note Principal
Balance outstanding immediately prior to such Payment Date.
Class A-1 Note Interest: With respect to any Collection Period, the
Class A-1 Note Current Interest and the Class A-1 Overdue Interest.
Class A-1 Note Principal Balance: At any time, the Initial Class A-1
Note Principal Balance minus all payments theretofore received by the Class A-1
Noteholders on account of principal.
Class A-1 Note Rate: ______%.
Class A-1 Overdue Interest: With respect to any Payment Date, the
difference between (a) the sum of (i) the excess, if any, of any Class A-1 Note
Interest due on the immediately preceding Payment Date over the Class A-1 Note
Interest paid on such immediately preceding Payment Date, (ii) without
duplication of the amount described in clause (i), the amount of the Class A-1
Overdue Interest due and unpaid as of the immediately preceding Payment Date and
(iii) 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 Note Rate plus 1%, and (b) any Class A-1 Overdue Interest paid on such
Payment Date.
Class A-2 Maturity Date: _________, _______.
Class A-2 Note Current Interest: With respect to any Collection Period,
the interest accrued during the related Interest Accrual Period, equal to the
product of (x) one-twelfth of the Class A-2 Note Rate and (y) the aggregate
Class A-2 Note Principal Balance outstanding immediately prior to such Payment
Date.
Class A-2 Note Interest: With respect to any Collection Period, the
Class A-2 Note Current Interest and the Class A-2 Overdue Interest.
Class A-2 Note Principal Balance: At any time, the Initial Class A-2
Note Principal Balance minus all payments theretofore received by the Class A-2
Noteholders on account of principal.
Class A-2 Note Rate: _____%.
Class A-2 Overdue Interest: With respect to any Payment Date, the
difference between (a) the sum of (i) the excess, if any, of any Class A-2 Note
Interest due on the immediately preceding Payment Date over the Class A-2 Note
Interest paid on such immediately preceding Payment Date, (ii)
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without duplication of the amount described in clause (i), the amount of the
Class A-2 Overdue Interest due and unpaid as of the immediately preceding
Payment Date and (iii) the product of (x) the sum of clauses (i) and (ii) and
(y) one-twelfth of the sum of the Class A-2 Note Rate plus 1%, and (b) any Class
A-2 Overdue Interest paid on such Payment Date.
Class B Base Principal Distribution Amount: With respect to any Payment
Date, the product of (a) the Class B Percentage and (b) the Base Principal
Amount for such Payment Date.
Class B Maturity Date: ___________, _______.
Class B Note Current Interest: With respect to any Collection Period,
the interest accrued during the related Interest Accrual Period, equal to the
product of (x) one-twelfth of the Class B Note Rate and (y) the aggregate Class
B Note Principal Balance outstanding immediately prior to such Payment Date.
Class B Note Interest: With respect to any Collection Period, the Class
B Note Current Interest and the Class B Overdue Interest.
Class B Note Principal Balance: At any time, the Initial Class B Note
Principal Balance minus all payments theretofore received by the Class B
Noteholders on account of principal.
Class B Note Rate: ______%.
Class B Overdue Interest: With respect to any Payment Date, the
difference between (a) the sum of (i) the excess, if any, of any Class B Note
Interest due on the immediately preceding Payment Date over the Class B Note
Interest paid on such immediately preceding Payment Date, (ii) without
duplication of the amount described in clause (i), the amount of the Class B
Overdue Interest due and unpaid as of the immediately preceding Payment Date and
(iii) the product of (x) the sum of clauses (i) and (ii) and (y) one-twelfth of
the sum of the Class B Note Rate plus 1%, and (b) any Class B Overdue Interest
paid on such Payment Date.
Class B Overdue Principal: With respect to any Payment Date, the
difference, if any, equal to (a) the aggregate of the Class B Base Principal
Distribution Amounts due on all prior Payment Dates -------------------------
and (b) the aggregate amount of the Principal (from whatever source) actually
distributed to Class B Noteholders on all prior Payment Dates.
Class B Termination Date: The Payment Date on which the Class B Note
Principal Balance is reduced to zero.
Class C Base Principal Distribution Amount: With respect to any Payment
Date, the product of (a) the Class C Percentage and (b) the Base Principal
Amount for such Payment Date.
Class C Maturity Date: ___________, ________.
Class C Note Current Interest: With respect to any Payment Date, the
interest accrued during the related Interest Accrual Period, equal to the
product of (x) one-twelfth of the Class C Note Rate and (y) the aggregate Class
C Note Principal Balance outstanding immediately prior to such Payment Date.
Class C Note Interest: With respect to any Payment Date, the Class C
Note Current Interest and the Class C Overdue Interest.
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Class C Note Principal Balance: At any time, the Initial Class C Note
Principal Balance minus all payments theretofore received by the Class C
Noteholders on account of principal.
Class C Note Rate: _____%.
Class C Overdue Interest: With respect to any Payment Date, the
difference between (a) the sum of (i) the excess, if any, of any Class C Note
Interest due on the immediately preceding Payment Date over the Class C Note
Interest paid on such immediately preceding Payment Date, (ii) without
duplication of the amount described in clause (i), the amount of the Class C
Overdue Interest due and unpaid as of the immediately preceding Payment Date and
(iii) the product of (x) the sum of clauses (i) and (ii) and (y) one-twelfth of
the sum of the Class C Note Rate plus 1%, and (b) any Class C Overdue Interest
paid on such Payment Date.
Class C Overdue Principal: With respect to any Payment Date, the
difference, if any, equal to (a) the aggregate of the Class C Base Principal
Distribution Amounts due on all prior Payment Dates and (b) the aggregate amount
of the principal (from whatever source) actually distributed to Class C
Noteholders on all prior Payment Dates.
Class C Termination Date: The Payment Date on which the Class C Note
Principal Balance is reduced to zero.
Class D Base Principal Distribution Amount: With respect to any Payment
Date, the product of (a) the Class D Percentage and (b) the Base Principal
Amount for such Payment Date.
Class D Maturity Date: ____________, _____.
Class D Note Current Interest: With respect to any Payment Date, the
interest accrued during the related Interest Accrual Period, equal to the
product of (x) one-twelfth of the Class D Note Rate and (y) the aggregate Class
D Note Principal Balance outstanding immediately prior to such Payment Date.
Class D Note Interest: With respect to any Payment Date, the Class D
Note Current Interest and the Class D Overdue Interest.
Class D Note Principal Balance: At any time, the Initial Class D Note
Principal Balance minus all payments theretofore received by the Class D
Noteholders on account of principal.
Class D Note Rate: _____%.
Class D Overdue Interest: With respect to any Payment Date, the
difference between (a) the sum of (i) the excess, if any, of any Class D Note
Interest due on the immediately preceding Payment Date over the Class D Note
Interest paid on such immediately preceding Payment Date, (ii) without
duplication of the amount described in clause (i), the amount of the Class D
Overdue Interest due and unpaid as of the immediately preceding Payment Date and
(iii) the product of (x) the sum of clauses (i) and (ii) and (y) one-twelfth of
the sum of the Class D Note Rate plus 1%, and (b) any Class D Overdue Interest
paid on such Payment Date.
Class D Overdue Principal: With respect to any Payment Date, the
difference, if any, equal to (a) the aggregate of the Class D Base Principal
Distribution Amounts due on all prior Payment
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Dates and (b) the aggregate amount of the principal (from whatever source)
actually distributed to Class D Noteholders on all prior Payment Dates.
Class D Termination Date: The Payment Date on which the Class D Note
Principal Balance is reduced to zero.
Class E Base Principal Distribution Amount: With respect to any Payment
Date, the product of (a) the Class E Percentage and (b) the Base Principal
Amount for such Payment Date.
Class E Maturity Date: ____________, _____.
Class E Note Current Interest: With respect to any Payment Date, the
interest accrued during the related Interest Accrual Period, equal to the
product of (x) one-twelfth of the Class E Note Rate and (y) the aggregate Class
E Note Principal Balance outstanding immediately prior to such Payment Date.
Class E Note Interest: With respect to any Payment Date, the Class E
Note Current Interest and the Class E Overdue Interest.
Class E Note Principal Balance: At any time, the Initial Class E Note
Principal Balance minus all payments theretofore received by the Class E
Noteholders on account of principal.
Class E Note Rate: _____%.
Class E Overdue Interest: With respect to any Payment Date, the
difference between (a) the sum of (i) the excess, if any, of any Class E Note
Interest due on the immediately preceding Payment Date over the Class E Note
Interest paid on such immediately preceding Payment Date, (ii) without
duplication of the amount described in clause (i), the amount of the Class E
Overdue Interest due and unpaid as of the immediately preceding Payment Date and
(iii) the product of (x) the sum of clauses (i) and (ii) and (y) one-twelfth of
the sum of the Class E Note Rate plus 1%, and (b) any Class E Overdue Interest
paid on such Payment Date.
Class E Overdue Principal: With respect to any Payment Date, the
difference, if any, equal to (a) the aggregate of the Class E Base Principal
Distribution Amounts due on all prior Payment Dates and (b) the aggregate amount
of the principal (from whatever source) actually distributed to Class E
Noteholders on all prior Payment Dates.
Class E Termination Date: The Payment Date on which the Class E Note
Principal Balance is reduced to zero.
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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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 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 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 Class A Note Principal Balance: $___________.
Initial Class A-1 Note Principal Balance: $__________.
Initial Class A-2 Note Principal Balance: $__________.
Initial Class B Note Principal Balance: $__________.
Initial Class C Note Principal Balance: $__________.
Initial Class D Note Principal Balance: $__________.
Initial Class E Note Principal Balance: $__________.
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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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
September __, 1998 to but excluding such Payment Date.
Majority Holders: The applicable Noteholders that together own Notes
with an aggregate Percentage Interest in excess of 50%.
Percentage Interest: With respect to a Noteholder and a Class of Notes
on any date of determination, the percentage obtained by dividing the Note
Principal Balance of the Note held by such Noteholder as of the Closing Date by
the related Note Principal Balance of the related Class of Notes 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 Indenture); (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.
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 Indenture);
(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 Servicing
Agreement and is not cured within the grace period set forth in the Servicing
Agreement, (b) a Gross Charge-Off Event exists, or (c) a Delinquency Trigger
Event exists.
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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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.
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 (v) the
outstanding Class A Note Principal Balance, (w) the outstanding Class B Note
Principal Balance; (x) the outstanding Class C Note Principal Balance, (y) the
outstanding Class D Note Principal Balance and (z) the outstanding Class E Note
Principal Balance, 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 and the Indenture Trustee pursuant to
the Indenture and payable out of Available Funds in priority to amounts owing
the Noteholders.
WITHHOLDING
The Indenture Trustee is required to comply with all applicable federal
income tax withholding requirements respecting payments to Noteholders of
interest with respect to the Notes. The consent of Noteholders is not required
for such withholding. In the event the Noteholder is other than The Depository
Trust Company, then in the event that the Indenture Trustee does withhold or
causes to be withheld any amount from interest payments or advances thereof to
any Noteholders pursuant to federal income tax withholding requirements, the
Indenture Trustee shall indicate the amount withheld annually to such
Noteholders.
REPORTS TO NOTEHOLDERS
On each Payment Date the Indenture Trustee will furnish or cause to be
furnished with each payment to Noteholders, a statement prepared by the Servicer
setting forth the following information (per $1,000 of Initial Note Principal
Amount as to (a) and (b) below):
a. With respect to a statement to a Class A Noteholder, a
Class B Noteholder or a Subordinate Noteholder, the amount of such
payment allocable to such Noteholder's required payment of the Base
Principal Amount and Class A Overdue Principal, Class B Overdue
Principal, Class C Overdue Principal, Class D Overdue Principal or
Class E Overdue Principal;
b. With respect to a statement to a Class A Noteholder, a
Class B Noteholder or a Subordinate Noteholder, the amount of such
payment allocable to Class A-1 Note Current Interest, Class A-2 Note
Current Interest, Class B Note Current Interest, Class C Note Current
Interest, Class D Note Current Interest or Class E Note Current
Interest and Class A-1, Class A-2, Class B, Class C, Class D or Class E
Overdue Interest;
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c. The aggregate amount of fees and compensation received by
the Servicer pursuant to the Servicing Agreement for the Collection
Period;
d. The aggregate Class A Note Principal Balance (and,
individually, the Class A-1 Note Principal Balance and the Class A-2
Note Principal Balance), the aggregate Class B Note Principal Balance,
the aggregate Class C Note Principal Balance, the aggregate Class D
Note Principal Balance, the aggregate Class E Note Principal Balance,
the Class A Note Factor, the Class B Note Factor, the Class C Note
Factor, the Class D Note Factor, the Class E Note Factor, 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.
The "Class A Note 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 Class A Note Principal Balance which will be outstanding on the next
Payment Date (after taking into account all distributions to be made on such
Payment Date) to (y) the Initial Class A Note Principal Balance.
The "Class B Note 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 Class B Note Principal Balance which will be outstanding on the next
Payment Date (after taking into account all distributions to be made on such
Payment Date) to (y) the Initial Class B Note Principal Balance.
The "Class C Note 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 Class C Note Principal Balance which will be outstanding on the next
Payment Date (after taking into account all distributions to be made on such
Payment Date) to (y) the Initial Class C Note Principal Balance.
The "Class D Note 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 Class D Note Principal Balance which will be outstanding on the next
Payment Date (after taking into account all distributions to be made on such
Payment Date) to (y) the Initial Class D Note Principal Balance.
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The "Class E Note 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 Class E Note Principal Balance which will be outstanding on the next
Payment Date (after taking into account all distributions to be made on such
Payment Date) to (y) the Initial Class E Note Principal Balance.
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 Notes are outstanding, commencing January 31, 1999, the
Indenture Trustee will furnish to each Noteholder of record at any time during
such preceding calendar year, information as to the aggregate of amounts
reported pursuant to items (a) and (b) above for such calendar year to enable
Noteholders to prepare their federal income tax returns.
OPTIONAL REDEMPTION
The Indenture will provide that following the Record Date on which the
Aggregate Outstanding Principal Balance of the Notes is less than 10% of the
Aggregate Initial Note Principal Balance, the Residual Holder will have the
option to cause the early retirement of the Notes. In the event of such a
redemption, the entire outstanding Class A-1 Note Principal Balance, Class A-2
Note Principal Balance, Class B Note Principal Balance, Class C Note Principal
Balance, Class D Note Principal Balance, Class E Note Principal Balance,
together with accrued interest thereon at the related Note Rate, will be
required to be paid to the Class A-1 Noteholders, the Class A-2 Noteholders, the
Class B Noteholders, the Class C Noteholders, the Class D Noteholders, and the
Class E Noteholders, 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 or the Noteholders 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 Noteholders. However, the Servicer will covenant in the 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 Noteholders, 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 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 Indenture Trustee
with respect to distributions, making Servicer Advances (at its sole
discretion), providing appropriate federal income tax information for use in
providing information to Noteholders, collecting and remitting sales and
property taxes on behalf of taxing authorities and maintaining the perfected
security interest of the Trust in the Equipment and the Contracts.
EVIDENCE AS TO COMPLIANCE
The Servicing Agreement requires that the Servicer cause an independent
accountant (who may also render other services to the Servicer) to prepare a
statement to the Indenture Trustee and each Rating Agency dated not later than
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 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 Indenture Trustee and each Rating Agency a copy of
such statement.
The Servicing Agreement will also provide for annual delivery of a
report (the "Supplementary Report") by the Servicer to the Indenture Trustee not
later than 120 days after the end of each fiscal year, signed by an authorized
officer of the Servicer (a "Servicing Officer") on behalf of the Servicer and
dated as of the last day of such fiscal year, stating that (a) a review of the
activities of the Servicer and the Servicer's performance under the Servicing
Agreement for the previous 12-month period has been made under such Servicing
Officer's supervision and (b) nothing has come to such Servicing Officer's
attention to indicate that an Event of Servicing Termination has occurred, or,
if such Event of Servicing Termination has so occurred and is continuing,
specifying each such event known to the officer, the nature and status thereof
and the steps necessary to remedy such event.
The Servicing Agreement will provide that the Servicer, upon request of
the Indenture Trustee, will furnish to the Indenture Trustee such underlying
data necessary for administration of the Trust or enforcement actions as can be
generated by the Servicer's existing data processing system.
CERTAIN MATTERS RELATING TO THE SERVICER
The Servicing Agreement will provide that the Servicer may not resign
from its obligations and duties as Servicer thereunder, except upon consent of
the Indenture Trustee 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 Servicing Agreement will
occur (a) if the Servicer fails to make any payment or deposit required under
the 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 Servicing Agreement or the Notes 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 Indenture Trustee, the Trust or the Noteholders and
continues unremedied for 30 days after the earlier to occur of (x) written
notice to the Servicer by the Indenture Trustee or to the Indenture Trustee or
the Servicer by the Trust or any Noteholders or (y) the date on which any
Servicing Officer is required pursuant to the terms of the Servicing Agreement
to provide notice to the Noteholders 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 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.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
If an Event of Servicing Termination has occurred and is continuing,
the Indenture Trustee or the Majority Holders may terminate all (but not less
than all) of the Servicer's rights and obligations under the Servicing
Agreement. Upon such termination, the Indenture Trustee or such successor
Servicer as may be appointed in accordance with the procedures set forth in the
Servicing Agreement will succeed to all the responsibilities, duties and
liabilities of the Servicer under the Servicing Agreement; provided, however,
that the Indenture 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 Indenture Trustee, upon
the direction of the Controlling Parties, shall declare the unpaid principal
amount of all the Notes 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 Indenture
Trustee, for the benefit of the Noteholders, all or part of any payment of
interest required to be made under the terms of such Notes or the Indenture when
due; or
(ii) failure to distribute or cause to be distributed (x) to the
Indenture Trustee, for the benefit of the Noteholders, on any Payment Date an
amount equal to the principal due on the outstanding Notes 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 Class A-1 Maturity Date, Class A-2 Maturity
Date, Class B Maturity Date, Class C Maturity Date, Class D Maturity Date or the
Class E Maturity Date, as the case may be, any remaining principal owed on the
outstanding Class A-1 Notes, Class A-2 Notes, Class B Notes, Class C Notes,
Class D Notes or Class E Notes, as the case may be.
"Controlling Parties" means: (i) with respect to an Event of Default
resulting only from the failure to make a required payment on the Class E Notes,
(a) the Majority Holders of the Class C Notes, the Class D Notes and the Class E
Notes and (b) the Majority Holders of the Class A Notes, (ii) with respect to an
Event of Default resulting only from the failure to make a required payment on
the Class D Notes and the Class E Notes, (a) the Majority Holders of the Class C
Notes and the Class D Notes and (b) the Majority Holders of the Class A Notes;
(iii) with respect to an Event of Default resulting only from the failure to
make a required payment on the Class C Notes, the Class D and the Class E Notes,
(a) the Majority Holders of the Class C Notes and (b) the Majority Holders of
the Class A Notes; (iv) with respect to an Event of Default resulting only from
the failure to make a required payment on the Class B Notes, (a) the Majority
Holders of the Class B Notes and (b) the Majority Holders of the Class A Notes;
and (v) with respect to an Event of Default resulting from the failure to make a
required payment on the Class A Notes, the Majority Holders of the Class A
Notes.
TERMINATION OF THE TRUST
The Trust and the Indenture will terminate, (i) at the option of the
Residual Holder, at any time which is 123 days after the payment to the Class A
Noteholders, the Class B Noteholders, the Class C Noteholders, the Class D
Noteholders and the Class E Noteholders of all amounts required to be paid to
them pursuant to the Indenture, reducing the Class A Note Principal Balance, the
Class B Note Principal Balance, the Class C Note Principal Balance, the Class D
Note Principal Balance and the Class E Note Principal Balance to zero; or (ii)
after the 120th day following the Class B Maturity Date. Upon termination of the
Trust and the reduction of the Class A Note Principal Balance, the Class B Note
Principal Balance, the Class C Note Principal Balance, the Class D Note
Principal Balance and the Class E Note Principal Balance to zero and payment of
any amounts then owing to the Indenture 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 Indenture.
AMENDMENT
The Transaction Documents may be amended by agreement of the Indenture
Trustee, the Depositor and the Servicer at any time, without consent of the
Noteholders, 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 Noteholder.
The Transaction Documents may also be amended from time to time by the
Indenture 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 Noteholders; 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 Note without the consent of the holder of such Note or (b) reduce the
aforesaid percentage of Noteholders required to consent to any amendment,
without unanimous consent of the Noteholders.
The Indenture Trustee is required under the Indenture to furnish
Noteholders and the Rating Agencies with written notice of the substance of any
such amendment to the Indenture promptly upon execution of such amendment.
THE INDENTURE TRUSTEE
GENERAL
The Indenture Trustee, Bankers Trust Company, has an office at Four
Albany Street, New York, New York 10006.
The Indenture Trustee may resign, subject to the conditions set forth
below, at any time upon written notice to the Servicer, in which event the
Servicer will be obligated to appoint a successor Indenture Trustee. If no
successor Indenture Trustee shall have been so appointed and have accepted such
appointment within 30 days after the giving of such notice of resignation, the
resigning Indenture Trustee may petition a court of competent jurisdiction for
the appointment of a successor Indenture Trustee. Any successor Indenture
Trustee shall meet the financial and other standards for qualifying as a
successor Indenture Trustee under the Indenture. The Servicer or the Noteholders
of any Class evidencing more than 25% of the Percentage Interests of such Class
may also remove the Indenture Trustee if the Indenture Trustee ceases to be
eligible to continue as such under the Indenture and fails to resign after
written request therefor, or is legally unable to act, or if the Indenture
Trustee is adjudicated to be insolvent. In such circumstances, the Servicer or
such Noteholders will also be obligated to appoint a successor Indenture
Trustee. Any resignation or removal of the Indenture Trustee and appointment of
a successor Indenture Trustee will not become effective until acceptance of the
appointment by the successor Indenture Trustee.
DUTIES AND IMMUNITIES OF THE INDENTURE TRUSTEE
The Indenture Trustee will make no representations as to the validity
or sufficiency of the Servicing Agreement, the Notes (other than the
authentication thereof) or of any 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 Notes. If no Event of Servicing
Termination has occurred, then the Indenture Trustee will be required to perform
only those duties specifically required of it under the Servicing Agreement.
However, upon receipt of the various resolutions, certificates, statements,
opinions, reports, documents, orders or other instruments required to be
furnished to it, the Indenture Trustee will be required to examine them to
determine whether they conform as to form to the requirements of the Servicing
Agreement.
No recourse is available based on any provision of the Servicing
Agreement, the Notes or any 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 Noteholder 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 Indenture Trustee's own negligence or
willful misconduct.
The Indenture Trustee will be entitled to receive, pursuant to the
priority set forth in the Indenture, (a) reasonable compensation for its
services (the "Indenture Trustee Fee"), (b) reimbursement for its reasonable
expenses and (c) indemnification for loss, liability or expense incurred without
negligence or bad faith on its part, arising out of performance of its duties
thereunder ((b) and (c) collectively, the "Indenture Trustee Expenses").
THE OWNER TRUSTEE
First Union Trust Company, National Association will act as the Owner
Trustee under the Trust Agreement. First Union Trust Company, National
Association is a national banking corporation, and its principal offices are
located at One Rodney Square, 920 King Street, Suite 102, Wilmington, Delaware
19801.
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on, and the weighted average life of,
the Offered Notes 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 Noteholders
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 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 Notes is ______,
1999, for the Class A-2 Notes is ____________ , ____, for the Class B Notes is
________, ____, for the Class D Notes is __________, ____ and for the Class E
Notes is __________, ____. Such dates are the dates on which the related Note
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 Notes 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 Notes 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 Notes 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 Notes 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 NOTES
For the purpose of the tables below, it is assumed, among other things,
that: (i) the Closing Date for the Notes occurs on September __, 1998, (ii)
distributions on the Notes are made on the 12th day of each month regardless of
the day on which the Payment Date actually occurs, commencing in October 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 October 1, 1998 (vii) no Restricting Event
occurs, (viii) the Class A-1 Note Rate is ______% per annum, the Class A-2 Note
Rate is ______% per annum, the Class B Note Rate is ______% per annum, the Class
C Note Rate is ______% per annum, the Class D Note Rate is ______% per annum,
and the Class E Note 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 Class A Note Principal Balance outstanding and the Initial Class B Note
Principal Balance outstanding and the weighted average lives of the Offered
Notes 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 Notes, the Class A-2 Notes and the Class B Notes 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 NOTE
PRINCIPAL BALANCE OUTSTANDING
CLASS A-1 NOTES
<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%
September __, 1999 % % % % %
September __, 2000 % % % % %
September __, 2001 % % % % %
September __, 2002 % % % % %
September __, 2003 % % % % %
September __, 2004 % % % % %
September __, 2005 % % % % %
September __, 2006 % % % % %
- --------------------------------------------------------------------------------
Weighted Average
Life (years)
</TABLE>
PERCENTAGE OF INITIAL NOTE
PRINCIPAL BALANCE OUTSTANDING
CLASS A-2 NOTES
<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%
September __, 1999 % % % % %
September __, 2000 % % % % %
September __, 2001 % % % % %
September __, 2002 % % % % %
September __, 2003 % % % % %
September __, 2004 % % % % %
September __, 2005 % % % % %
September __, 2006 % % % % %
- ---------------------------------------------------------------------------------------
Weighted Average
Life (years)
</TABLE>
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PERCENTAGE OF INITIAL NOTE
PRINCIPAL BALANCE OUTSTANDING
CLASS B NOTES
<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%
September __, 1999 % % % % %
September __, 2000 % % % % %
September __, 2001 % % % % %
September __, 2002 % % % % %
September __, 2003 % % % % %
September __, 2004 % % % % %
September __, 2005 % % % % %
September __, 2006 % % % % %
- ----------------------------------------------------------------------
Weighted Average
Life (years)
</TABLE>
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 Notes will be
as calculated above. Because the rate of distributions of principal of the
Offered Notes 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 Notes 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 Noteholders will depend upon, among
other things, the price at which such Offered Notes are purchased, and the
amount of and rate at which principal, including both scheduled and unscheduled
payments thereof, is paid to the Offered Noteholders. See "Material Risks" in
the Prospectus.
Due to the subordination provisions applicable to the Notes, it is
likely that the Class A Note Principal Balance will amortize more rapidly than
will the Initial Aggregate Discounted Contract Principal Balance. See "Summary
of Terms -- Subordination Provisions" and "Description of Notes -- Flow of
Funds" in this Prospectus Supplement.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material anticipated
federal income tax considerations to investors of the purchase, ownership and
disposition of the securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
considerations applicable to all categories of investors, some of which may be
subject to special rules. Investors are recommended to 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.
TAX CHARACTERIZATION OF THE TRUST
Dewey Ballantine LLP, tax counsel to the Trust ("Tax Counsel"), is of
the opinion that, assuming compliance with the terms of the Trust Agreement and
related documents, the Trust will not be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The parties to the transaction
agree, and the Noteholders will agree by their purchase of Offered Notes, to
treat the Offered Notes as debt for all federal, state and local income tax
purposes. There are no regulations, published rulings or judicial decisions
involving the characterization for federal income tax purposes of securities
with terms substantially the same as the Offered Notes. In general, whether
instruments such as the Offered Notes constitute indebtedness for federal income
tax purposes is a question of fact, the resolution of which is based primarily
upon the economic substance of the instruments and the transaction pursuant to
which they are issued rather than merely upon the form of the transaction or the
manner in which the instruments are labeled. The Internal Revenue Service (the
"IRS") and the courts have set forth various factors to be taken into account in
determining, for federal income tax purposes, whether or not an instrument
constitutes indebtedness and whether a transfer of property is a sale because
the transferor has relinquished substantial incidents of ownership in the
property or whether such transfer is a borrowing secured by the property. On the
basis of its analysis of such factors as applied to the facts and its analysis
of the economic substance of the contemplated transaction, Tax Counsel is
expected to conclude that, for federal income tax purposes, the Offered Notes
will be treated as indebtedness of the Trust, and not as an ownership interest
in the Receivables, or an equity interest in the Trust or in a separate
association taxable as a corporation or other taxable entity.
If the Offered Notes are characterized as indebtedness, interest paid
or accrued on an Offered Note will be treated as ordinary income to the
Noteholders and principal payments on an Offered Note will be treated as a
return of capital to the extent of the Noteholder's basis in the Offered Note
allocable thereto. An accrual method taxpayer will be required to include in
income interest on the Offered Notes when earned, even if not paid, unless it is
determined to be uncollectible. The Trust will report to Noteholders of record
and the IRS in respect of the interest paid and original discount, if any,
accrued on the Offered Notes to the extent required by law.
Although, as described above, it is the opinion of Tax Counsel that,
for federal income tax purposes, the Offered Notes will be characterized as
debt, such opinion is not binding on the IRS and
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thus no assurance can be given that such a characterization will prevail. If the
IRS successfully asserted that the Offered Notes did not represent debt for
federal income tax purposes, holders of the Offered Notes would likely be
treated as owning an interest in a partnership and not an interest in an
association (or publicly traded partnership) taxable as a corporation. If the
Noteholders were treated as owning an equitable interest in a partnership, the
partnership itself would not be subject to federal income tax; rather each
partner would be taxed individually on their respective distributive share of
the partnership's income, gain, loss, deductions and credits. The amount, timing
and characterization of items of income and deductions for a Noteholder would
differ if the Notes were held to constitute partnership interests, rather than
indebtedness. Since the Trust will treat the Offered Notes as indebtedness for
federal income tax purposes, the Servicer will not attempt to satisfy the tax
reporting requirements that would apply under this alternative characterization
of the Offered Notes. Investors that are foreign persons are strongly advised to
consult their own tax advisors in determining the federal, state, local and
other tax consequences to them of the purchase, ownership and disposition of the
Offered Notes.
Original Issue Discount. It is anticipated that the Offered Notes will
not have any original issue discount ("OID") other than possibly OID of a de
minimis amount and that accordingly the provisions of sections 1271 through 1273
and 1275 of the Internal Revenue Code of 1986, as amended (the "Code"),
generally will not apply to the Offered Notes. OID will be considered de minimis
if it is less than 0.25% of the principal amount of a Note multiplied by its
expected weighted average life. The prepayment assumption that will be used for
purposes of computing OID, if any, for federal income tax purposes is 100% of
the CPR.
Market Discount. A subsequent purchaser who buys an Offered Note for
less than its principal amount may be subject to the "market discount" rules of
Section 1276 through 1278 of the Code. If a subsequent purchaser of an Offered
Note disposes of such Class A Note (including certain nontaxable dispositions
such as a gift), or receives a principal payment, any gain upon such sale or
other disposition will be recognized, or the amount of such principal payment
will be treated as ordinary income to the extent of any "market discount"
accrued for the period that such purchaser holds the Offered Note. Such holder
may instead elect to include market discount in income as it accrues with
respect to all debt instruments acquired in the year of acquisition of the
Offered Notes and thereafter. Market discount generally will equal the excess,
if any, of the then current unpaid principal balance of the Note over the
purchaser's basis in the Offered Note immediately after such purchaser acquired
the Note. In general, market discount on an Offered Note will be treated as
accruing over the term of such Offered Note in the ratio of interest for the
current period over the sum of such current interest and the expected amount of
all remaining interest payments, or at the election of the holder, under a
constant yield method (taking into account the CPR). At the request of a holder
of an Offered Note, information will be made available that will allow the
holder to compute the accrual of market discount under the first method
described in the preceding sentence.
The market discount rules also provide that a holder who incurs or
continues indebtedness to acquire an Offered Note at a market discount may be
required to defer the deduction of all or a portion of the interest on such
indebtedness until the corresponding amount of market discount is included in
income.
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Notwithstanding the above rules, market discount on an Offered Note
will be considered to be zero if it is less than a de minimis amount, which is
0.25% of the remaining principal balance of the Note multiplied by its expected
weighted average remaining life. If OID or market discount is de minimis, the
actual amount of discount must be allocated to the remaining principal
distributions on the Offered Notes and, when each such distribution is received,
capital gain equal to the discount allocated to such distribution will be
recognized.
Market Premium. A subsequent purchaser who buys an Offered Note for
more than its principal amount generally will be considered to have purchased
the Offered Note at a premium. Such holder may amortize such premium, using a
constant yield method, over the remaining term of the Offered Note and, except
as future regulations may otherwise provide, may apply such amortized amounts to
reduce the amount of interest reportable with respect to such Offered Note over
the period from the purchase date to the date of maturity of the Offered Note.
Legislative history to the Tax Reform Act of 1986 indicates that the
amortization of such premium on an obligation that provides for partial
principal payments prior to maturity should be governed by the methods for
accrual of market discount on such an obligation (described above). Proposed
regulations implementing the provisions of the Tax Reform Act of 1986 provide
for the use of the constant yield method to determine the amortization of
premiums. Such proposed regulations will apply to bonds acquired on or after 60
days after the final regulations are published. A holder that elects to amortize
premium must reduce his tax basis in the related obligation by the amount of the
aggregate deductions (or interest offsets) allowable for amortizable premium. If
a debt instrument purchased at a premium is redeemed in full prior to its
maturity, a purchaser who has elected to amortize premium should be entitled to
a deduction for any remaining unamortized premium in the taxable year of
redemption.
Sale or Redemption of Notes. If an Offered Note is sold or retired, the
seller will recognize gain or loss equal to the difference between the amount
realized on the sale and such Holder's adjusted basis in the Offered Note. Such
adjusted basis generally will equal the cost of the Offered Note to the seller,
increased by any original issue discount included in the seller's gross income
in respect of the Offered Note (and by any market discount which the taxpayer
elected to include in income or was required to include in income), and reduced
by payments other than payments of qualified stated interest in respect of the
Offered Note received by the seller and by any amortized premium. Similarly, a
holder who receives a payment other than a payment of qualified stated interest
in respect of an Offered Note, either on the date on which such payment is
scheduled to be made or as a prepayment, will recognize gain equal to the
excess, if any, of the amount of the payment over his adjusted basis in the Note
allocable thereto. A Noteholder who receives a final payment which is less than
his adjusted basis in the Offered Note will generally recognize a loss in the
amount of the shortfall on the last day of his taxable year. Generally, any such
gain or loss realized by an investor who holds a Note as a "capital asset"
within the meaning of Code Section 1221 should be capital gain or loss, except
as described above in respect of market discount and except that a loss
attributable to accrued but unpaid interest may be an ordinary loss.
Information Reporting and Backup Withholding. The Issuer will be
required to report annually to the IRS, and to each related Noteholder of
record, the amount of interest paid on the Notes, the amount of any OID on the
Notes, and the amount of interest withheld for federal income taxes, if any, for
each calendar year, except as to exempt Noteholders (generally, corporations,
tax-exempt organizations, qualified pension and profit-sharing trusts, and
individual retirement accounts). Each
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Noteholder (other than Noteholders who are not subject to the reporting
requirements, or foreign persons who provide certification as to their status as
described below) will be required to provide to the Issuer, under penalties of
perjury, a certificate on IRS Form W-9 or its equivalent containing the
Noteholder's name, address, correct federal taxpayer identification number and a
statement that the Noteholder is not subject to backup withholding. Should a
nonexempt Noteholder fail to provide the required certification, the Issuer will
be required to withhold with respect to amounts otherwise payable to the
Noteholder equal to 31% of such interest and OID (if any) and remit the withheld
amounts to the IRS as a credit against the Noteholder's federal income tax
liability.
The IRS recently issued final regulations (the "Withholding
Regulations"), which change certain of the rules relating to certain
presumptions currently available relating to information reporting and backup
withholding. The Withholding Regulations provide alternative methods of
satisfying the beneficial ownership certification requirement. The Withholding
Regulations are effective January 1, 2000, although valid withholding
certificates that are held on December 31, 1999 remain valid until the due date
or expiration of the certificate under the rules as currently in effect.
Foreign Investors. Interest, including OID (if any), distributable to a
Noteholder who or which is not a United States person (other than a foreign bank
and certain other persons) generally will not be subject to United States
withholding tax (possibly reduced by treaty) imposed with respect to such
payments, provided that such Noteholder fulfills certain certification
requirements. For these purposes, "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, an estate that is subject to United States federal income tax,
regardless of the source of its income, or a trust if a court within the United
States can exercise primary supervision over its administration and at least one
United States person has the authority to control all substantial decisions of
the trust. Under the certification requirements, a foreign Noteholder must
certify, under penalties of perjury, that it is not a United States person and
provide its name and address. The Withholding Regulations, which will be
effective for payments made after December 31, 1999, provide alternative
certification requirements and means for claiming the exemption from federal
income and withholding tax. If income or gain with respect to a Note is
effectively connected with a United States trade or business carried on by a
Noteholder who or which is not a United States person, the withholding tax will
not apply, but such Noteholder will be subject to United States federal income
tax at graduated rates applicable to United States persons. Potential investors
who are non-United States persons should consult their own tax advisors
regarding certification requirements and the specific tax consequences to them
of owning the Notes.
STATE AND LOCAL TAX CONSIDERATIONS
Potential Noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the Offered Notes.
State and local income tax laws may differ substantially from the corresponding
federal law, and this discussion does not purport to describe any aspect of the
income tax laws of any state or locality. Therefore, potential Noteholders
should consult their own tax advisors with respect to the various state and
local tax consequences of an investment in the Offered Notes.
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ERISA CONSIDERATIONS
Section 406 of 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 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.
In addition to the matters described below, purchasers of the Offered
Notes that are insurance companies should consult with their counsel with
respect to the United States Supreme Court case interpreting the fiduciary
responsibility rules of ERISA, John Hancock Mutual Life Insurance Co. v. Harris
Trust and Savings Bank, 510 U.S. 86 (1993). In John Hancock, the Supreme Court
ruled that assets held in an insurance company's general account may be deemed
to be "plan assets" for ERISA purposes under certain circumstances. Prospective
purchasers should determine whether the decision affects their ability to make
purchases of the Offered Notes.
Certain transactions involving the Trust might be deemed to constitute
prohibited transactions under ERISA and the Code if assets of the Trust were
deemed to be "plan assets" of a Benefit Plan. Under a regulation issued by the
United States Department of Labor (the "Plan Assets Regulation"), the assets of
the Trust would be treated as plan assets of a Benefit Plan for the purposes of
ERISA and the Code only if the Benefit Plan acquired an "equity interest" in the
Trust and none of the exceptions contained in the Plan Assets Regulation were
applicable. An equity interest is defined under the Plan Assets Regulation as an
interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. The Offered
Notes should be treated as indebtedness without substantial equity features for
purposes of the Plan Assets Regulation. This determination is based in part upon
the traditional debt features of the Offered Notes, including the reasonable
expectation of purchasers of the Offered Notes that the Offered Notes will be
repaid when due, as well as the absence of conversion rights, warrants and other
typical equity features. The debt treatment of the Offered Notes for ERISA
purposes could change if the Trust incurred losses. However, without regard to
whether the Offered Notes are treated as an equity interest for such purposes,
the acquisition or holding of the Offered Notes by or on behalf of a Benefit
Plan could be considered to give rise to a prohibited transaction if the Trust
or any of its affiliates is or becomes, a party in interest or disqualified
person with respect to such Benefit Plan. In such case, certain exemptions from
the prohibited transaction rules could be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire an Offered
Note. Included among these exemptions are: Prohibited Transaction Class
Exemption ("PTCE") 90-1, regarding investments by insurance company pooled
separate accounts; PTCE 95-60, regarding investments by insurance company
general accounts; PTCE 96-23, regarding transactions by "in-house asset
managers"; and PTCE 84-14, regarding transactions by "qualified professional
assets managers." Each investor using the assets of a Benefit Plan which
acquires the Offered Notes, or to whom the Offered Notes are transferred, will
be deemed to have represented that the
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<PAGE> 70
acquisition and continued holding of the Offered Notes will be covered by a
Department of Labor Class Exemption.
Employee plans that are governmental plans (as defined in Section 3(32)
of ERISA) and certain church plans (as defined in Section 3(33) of ERISA), are
not subject to ERISA; however, such plans may be subject to comparable state law
restrictions.
Any Benefit Plan fiduciary considering the purchase of an Offered Note
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to such investment. Moreover, each Benefit Plan fiduciary
should determine whether, under the general fiduciary standards of investment
prudence and diversification, an investment in the Offered Notes is appropriate
for the Benefit Plan, taking into account the overall investment policy of the
Benefit Plan and the composition of the Benefit Plan's investment portfolio. The
sale of Offered Notes to a Benefit Plan is in no respect a representation by the
Depositor or the Placement Agent that this investment meets all relevant legal
requirements with respect to investments by Benefit Plans generally or any
particular Benefit Plan, or that this investment is appropriate for Benefit
Plans generally or any particular Benefit Plan.
LEGAL INVESTMENT
The Class A-1 Notes 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 Notes, the Class A-1
Notes must be rated "P-1" by S&P, "D-1+" by DCR and "____" by Fitch; as a
condition to the issuance of the Class A-2 Notes, the Class A-2 Notes must be
rated "AAA" by S&P, DCR and Fitch; and as a condition to the issuance of the
Class B Notes, the Class B Notes must be rated "A" by S&P, DCR and Fitch.] 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 Notes address the likelihood of the receipt by the Offered Noteholders
of all distributions to which such Offered Noteholders are entitled. The ratings
assigned to the Offered Notes do not represent any assessment of the likelihood
that principal prepayments might differ from those originally anticipated or
address the possibility that Offered Noteholders 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 Notes dated
_________, 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 Notes. In
addition, First Union Corporation, the parent corporation of First Union, owns
approximately 3.3% of the outstanding common stock of First Sierra.
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<PAGE> 71
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions therein, to purchase all the Offered Notes offered
hereby if any of such Offered Notes are purchased.
The Underwriters have advised the Depositor that they propose to offer
the Offered Notes 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
Notes to or through a dealer, and such dealer may receive compensation in the
form of underwriting discounts, concessions or commissions from the Underwriters
or purchasers of the Offered Notes for whom they may act as agent. Any dealers
that participate with the Underwriters in the distribution of the Offered Notes
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 Notes 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").
For further information regarding any offer or sale of the Offered
Notes 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.
LEGAL MATTERS
Certain legal matters relating to the Notes 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.
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<PAGE> 72
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.]
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<PAGE> 73
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.
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<PAGE> 74
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 Delaware 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 _______________.
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<PAGE> 75
INDEX OF PRINCIPAL DEFINED TERMS
<TABLE>
<CAPTION>
Page
<S> <C>
Advance Payment...............................................................44
Advance Payments..............................................................38
Aggregate Discounted Contract Principal Balance..........................7,12,18
Aggregate Initial Note Principal Balance......................................44
Aggregate Note Principal Balance...............................................7
Available Distribution Amount.................................................44
Available Funds.............................................................8,44
Available Funds Shortfall...................................................8,44
Bankers Trust Company..........................................................5
Base Principal Amount.......................................................7,44
Class..........................................................................6
Class A Base Principal Distribution Amount....................................44
Class A Initial Note Principal Balance.........................................6
Class A Note Factor...........................................................53
Class A Note Principal Balance................................................45
Class A Notes...............................................................6,35
Class A Overdue Principal.....................................................45
Class A Percentage............................................................35
Class A-1 Maturity Date.......................................................45
Class A-1 Note Current Interest...............................................45
Class A-1 Note Interest.......................................................45
Class A-1 Note Principal Balance..............................................45
Class A-1 Note Rate...........................................................45
Class A-1 Notes.............................................................6,35
Class A-1 Overdue Interest....................................................45
Class A-2 Maturity Date.......................................................45
Class A-2 Note Current Interest...............................................45
Class A-2 Note Interest.......................................................45
Class A-2 Note Principal Balance..............................................45
Class A-2 Note Rate...........................................................45
Class A-2 Notes.............................................................6,35
Class A-2 Overdue Interest....................................................45
Class B Base Principal Distribution Amount....................................46
Class B Maturity Date.........................................................46
Class B Note Current Interest.................................................46
Class B Note Factor...........................................................53
Class B Note Interest.........................................................46
Class B Note Principal Balance................................................46
Class B Note Rate.............................................................46
Class B Notes...............................................................6,35
Class B Overdue Interest......................................................46
Class B Percentage............................................................35
Class C Base Principal Distribution Amount....................................46
Class C Maturity Date.........................................................46
Class C Note Current Interest.................................................46
Class C Note Factor...........................................................53
Class C Note Interest.........................................................46
Class C Note Principal Balance................................................47
Class C Note Rate.............................................................47
Class C Notes...............................................................6,35
Class C Overdue Interest......................................................47
</TABLE>
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<TABLE>
<S> <C>
Class C Overdue Principal.....................................................47
Class C Termination Date......................................................47
Class D Base Principal Distribution Amount....................................47
Class D Maturity Date.........................................................47
Class D Note Current Interest.................................................47
Class D Note Factor...........................................................53
Class D Note Interest.........................................................47
Class D Note Principal Balance................................................47
Class D Notes...............................................................6,35
Class D Overdue Interest......................................................47
Class D Overdue Principal.....................................................47
Class D Termination Date......................................................48
Class E Base Principal Distribution Amount....................................48
Class E Maturity Date.........................................................48
Class E Note Current Interest.................................................48
Class E Note Factor...........................................................54
Class E Note Interest.........................................................48
Class E Note Principal Balance................................................48
Class E Notes...............................................................6,35
Class E Overdue Interest......................................................48
Class E Overdue Principal.....................................................48
Class E Termination Date......................................................48
Closing Date...................................................................7
Code..........................................................................66
Collection Period..............................................................7
Conditional Prepayment Rate...................................................61
Contract Files................................................................34
Contracts...................................................................6,10
Controlling Parties...........................................................58
CPR...........................................................................61
Cut-Off Date..................................................................10
Defaulted Contract............................................................48
Defaulted Contract Recoveries.................................................48
Delinquency Trigger Event...................................................8,49
Delinquency Trigger Ratio.....................................................49
Delinquent Contract...........................................................49
Delinquent Contracts...........................................................9
Depositor......................................................................5
Determination Date............................................................49
Discount Rate..............................................................11,17
Discounted Contract Principal Balance....................................1,18,49
Early Termination Contract....................................................49
Equipment.....................................................................10
ERISA.........................................................................15
Event of Servicing Termination................................................56
Events of Default.............................................................57
Excluded Amounts..............................................................50
Expected Final Payment Date....................................................6
Expired Contract..............................................................50
Final Scheduled Payment.......................................................50
First Sierra...................................................................5
First Union...................................................................70
Fitch IBCA....................................................................15
Gross Charge-Off Event......................................................8,50
Gross Charge-Off Ratio........................................................50
Indenture......................................................................6
</TABLE>
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<PAGE> 77
<TABLE>
<S> <C>
Indenture Trustee..............................................................5
Indenture Trustee Expenses....................................................60
Indenture Trustee Fee.........................................................60
Initial Class A Note Principal Balance.....................................35,50
Initial Class A-1 Note Principal Balance...................................35,50
Initial Class A-2 Note Principal Balance...................................35,50
Initial Class B Note Principal Balance.....................................35,50
Initial Class C Note Principal Balance........................................50
Initial Class D Note Principal Balance........................................50
Initial Class E Note Principal Balance........................................50
Initial Note Principal Balance.................................................6
Initial Offered Note Principal Balance......................................6,35
Initial Unpaid Amount.........................................................50
Insurance Policies............................................................34
Interest Accrual Period.......................................................51
IRS...........................................................................65
Legal Final Maturity Date......................................................6
Lockbox Bank..................................................................38
Majority Holders..............................................................51
Modeling Assumptions..........................................................61
Non-Offered Notes...........................................................6,35
Note Current Interest..........................................................7
Note Rate......................................................................6
Noteholders....................................................................6
Notes..........................................................................6
Obligor.......................................................................11
Offered Notes...............................................................6,35
OID...........................................................................66
Originator.....................................................................5
Overdue Interest...............................................................7
Overdue Principal.............................................................8
Owner Trustee..................................................................5
Payment Date...................................................................7
Percentage Interest...........................................................51
Plan Assets Regulation........................................................69
Pool Factor...................................................................54
Prepayment....................................................................51
Prepayment Amount.............................................................51
Principal Payment Percentage...................................................8
Private Label.................................................................28
Prudential....................................................................70
PTCE..........................................................................69
Rating Agencies...............................................................15
Receivables.................................................................6,10
Receivables Transfer Agreement................................................10
Record Date....................................................................7
Repurchase Amount..........................................................19,51
Residual Holder................................................................7
Restricting Event...........................................................8,51
S&P...........................................................................15
Scheduled Payments......................................................11,18,51
Securities....................................................................35
Securities Act................................................................71
Sellers.....................................................................5,27
Servicer....................................................................5,30
Servicer Advance...........................................................14,39
</TABLE>
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<PAGE> 78
<TABLE>
<S> <C>
Servicer Fee") equal to the product of (i) one-twelfth of 0.50................12
Servicer's Certificate........................................................39
Servicing Agreement...........................................................11
Servicing Charges.............................................................13
Servicing Fee Rate............................................................12
Servicing Officer.............................................................56
Servicing Standard............................................................20
Source........................................................................10
Source Agreement..............................................................10
Statistic Calculation Date....................................................11
Statistical Discount Rate..................................................11,17
Statistical Discounted Contract Principal Balance..........................11,17
Subordinate Securities........................................................35
Substitute Contract...........................................................19
Substitute Contract Cut-Off Date..............................................52
Supplementary Report..........................................................56
Tax Counsel................................................................15,65
Transaction Documents.........................................................11
Transfer Date.................................................................36
Trust..........................................................................5
Trust Agreement................................................................5
Trust Assets................................................................6,10
Trust Certificate...........................................................6,35
Trust Certificate Principal Balance.........................................7,52
Trust Operating Expenses......................................................52
UCC...........................................................................14
Underwriters..................................................................70
Underwriting Agreement........................................................70
</TABLE>
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<PAGE> 79
================================================================================
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-
Risk Factors.....................................................................................................S-
The Receivables..................................................................................................S-
The Sellers......................................................................................................S-
First Sierra.....................................................................................................S-
The Servicer.....................................................................................................S-
Formation Of The Trust...........................................................................................S-
Description Of The Notes.........................................................................................S-
The Indenture Trustee............................................................................................S-
The Owner Trustee................................................................................................S-
Prepayment And Yield Considerations..............................................................................S-
Certain Federal Income Tax Consequences..........................................................................S-
State And Local Tax Considerations...............................................................................S-
Erisa Considerations.............................................................................................S-
Legal Investment.................................................................................................S-
Ratings..........................................................................................................S-
Method Of Distribution...........................................................................................S-
Legal Matters....................................................................................................S-
Index Of Principal Defined Terms...................................................................................
PROSPECTUS
Available Information..............................................................................................
Incorporation of Certain Documents by Reference....................................................................
Reports to Securityholders.........................................................................................
Summary............................................................................................................
Material Risks.....................................................................................................
Use of Proceeds....................................................................................................
The Issuers........................................................................................................
The Asset Pools....................................................................................................
The Receivables....................................................................................................
First Sierra.......................................................................................................
The Servicer.......................................................................................................
Prepayment and Yield Considerations................................................................................
Pool Factors.......................................................................................................
The Company........................................................................................................
The Trustees.......................................................................................................
Description of the Securities......................................................................................
Description of the Trust Agreements................................................................................
Certain Legal Matters Affecting the Receivables....................................................................
Material Federal Income Tax Consequences...........................................................................
ERISA Considerations...............................................................................................
Method of Distribution.............................................................................................
Certain Legal Matters..............................................................................................
Financial Information..............................................................................................
Additional Information.............................................................................................
Index of Terms.....................................................................................................
</TABLE>
Until 90 days after the date of this Prospectus Supplement, all dealers that
effect transactions in the Offered Notes, whether or mot 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
$_____________ _____%
EQUIPMENT CONTRACT BACKED NOTES, CLASS B
--------------------------
PROSPECTUS SUPPLEMENT
--------------------------
FIRST UNION CAPITAL MARKETS
PRUDENTIAL SECURITIES INCORPORATED
____________, 1998
================================================================================
