PROSPECTUS SUPPLEMENT
(To Prospectus dated November 7, 1996)
$62,098,000
NATIONAL AUTO FINANCE 1996-1 TRUST
6.33% AUTOMOBILE RECEIVABLES-BACKED CERTIFICATES
NATIONAL FINANCIAL AUTO FUNDING TRUST
(SELLER)
NATIONAL AUTO FINANCE COMPANY L.P.
(SERVICER)
The 6.33% Automobile Receivables-Backed Certificates, Series 1996-1
(the "Certificates") will evidence in the aggregate an undivided ownership
interest of 91% of the National Auto Finance 1996-1 Trust (the "Trust") to be
formed pursuant to a Pooling and Servicing Agreement dated as of October 21,
1996 (the "Pooling and Servicing Agreement") among National Financial Auto
Funding Trust, as seller (the "Seller"), National Auto Finance Company L.P., as
master servicer (the "Servicer" or "NAFCO"), and Harris Trust and Savings Bank,
as trustee (the "Trustee"). The assets of the Trust (the "Trust Property") will
include a pool of non-prime motor vehicle retail installment sale contracts (the
"Receivables"), all monies paid or payable thereunder on or after the applicable
Cut-off Date (as defined herein), security interests in the new and used
automobiles, light-duty trucks, vans and minivans financed thereby, the
Certificate Policy (as defined below), certain bank accounts described herein,
all proceeds of the foregoing, and certain other property. In addition, the
Trust Property will include funds on deposit in a revolving account (a
"Revolving Account") and a prefunding account (a "Pre-Funding Account")
established by and maintained with the Trustee. Approximately $15,524,168.66
will be deposited in the Pre-Funding Account on the date of the issuance of the
Certificates. Funds on deposit in the Pre-Funding Account will be paid to the
Seller in exchange for the transfer to the Trust of Additional Receivables (as
defined herein) from time to time during the period from and including the
Closing Date (as defined herein) until the earliest of (i) the date on which an
Amortization Event (as defined herein) occurs, (ii) the date on which the
balance of funds on deposit in the Pre-Funding Account is reduced to zero and
(iii) the close of business on January 31, 1997 (the "Pre-Funding Period").
Principal collections received on the Receivables during the period from and
including the Cut-Off Date until the earlier of (i) the date on which an
Amortization Event (as defined herein) occurs and (ii) the close of business on
April 30, 1997 (the "Revolving Period") will be deposited in the Revolving
Account and will not be distributable to the Certificateholders except as
described herein. Funds on deposit in the Revolving Account will be paid to the
Seller in exchange for the transfer to the Trust of Additional Receivables from
time to time during the Revolving Period. The Seller will own the undivided
interest in the Trust not represented by the Certificates (the "Seller
Interest"). The Seller Interest will be subordinated to the Certificates as
described herein.
The Certificates will represent the right to receive distributions
equal to the original outstanding principal balance of the Certificates and
interest on the outstanding principal balance of the Certificates at the rate of
6.33% per annum (the "Certificate Rate") in the manner, in the amounts and at
the times described herein. Such distributions will be made on the twenty first
day of each month (or, if such day is not a Business Day, the next succeeding
Business Day), beginning on November 21, 1996 (each, a "Distribution Date"), and
will be applied first to accrued and unpaid interest due on such Certificates
and then to unpaid principal. To the extent not previously distributed to the
holders of the Certificates (each, a "Certificateholder" or "Holder"), the
remaining outstanding principal balance of such Certificates will be distributed
to such Holders on the Distribution Date occurring in December, 2002 (the "Final
Scheduled Distribution Date"). However, payment in full of the Certificates
could occur earlier than such date as described herein. Full and complete
payment of the Guaranteed Distributions (as defined herein) with respect to the
Certificates on each Distribution Date is unconditionally and irrevocably
guaranteed pursuant to a financial guaranty insurance policy (the "Certificate
Policy") to be issued by:
[FSA LOGO]
There currently is no secondary market for the Certificates. The
Underwriters expect, but are not obligated, to make a market in the
Certificates. There is no assurance that any such market will develop or
continue.
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE CERTIFICATES, SEE "RISK FACTORS" ON PAGE S-16
HEREIN AND ON PAGE 20 OF THE ACCOMPANYING PROSPECTUS.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST AND DO NOT REPRESENT INTERESTS
IN OR OBLIGATIONS OF NAFCO THE SELLER OR ANY AFFILIATE OF EITHER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO THE
PUBLIC (1) DISCOUNT SELLER (1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER CERTIFICATE........................................... 99,975 .300 99.6750
TOTAL..................................................... 62,082,475.50 186,294.00 61,896,181.50
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</TABLE>
(1) Before deducting estimated expenses of $585,200 payable by the Seller.
(2) In connection with the offering contemplated by this Prospectus Supplement,
First Union Corporation has received a fee from the Seller in respect of certain
advisory services relating to the structuring of the transaction. See
"Underwriting" herein.
The Certificates are offered hereby by the Underwriter named below,
subject to receipt and acceptance by the Underwriter and its right to reject any
order in whole or in part. It is expected that delivery of the Certificates will
be made in book-entry form only through the Same-Day Funds Settlement System of
The Depository Trust Company ("DTC"), CEDEL S.A. and the Euroclear System
against payment therefor in immediately available funds in New York, New York on
or about November 13, 1996.
FIRST UNION CAPITAL MARKETS CORP.
The date of this Prospectus Supplement is November 7, 1996.
<PAGE>
This Prospectus Supplement and the accompanying Prospectus may be used
by First Union Capital Markets Corp., affiliates of which have an ownership
interest in, or participate in banking transactions with NAFCO, in connection
with offers and sales related to market making transactions in the Certificates.
First Union Capital Markets Corp. may act as principal or agent in such
transactions. Such sales will be made at prices related to prevailing market
prices at the time of the sale or otherwise.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT
THE OFFERING OF THE CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE CERTIFICATES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
CERTIFICATES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
REPORTS TO CERTIFICATEHOLDERS
Unless and until Definitive Certificates are issued, unaudited monthly
and annual reports, containing information concerning the Trust and prepared by
the Servicer, will be sent on behalf of the Trust to the Trustee and Cede & Co.,
as registered holder of the Certificates and the nominee of DTC. See "Certain
Information Regarding the Securities--Book-Entry Registration and "--Reports to
Securityholders" in the accompanying Prospectus. Certificate Owners may receive
such reports, upon written request, together with a certification that they are
Certificate Owners and payment of any expenses associated with the distribution
of such reports, from the Trustee at its address at 311 West Monroe Street, 12th
Floor, Chicago, Illinois 60606. Such reports will not constitute financial
statements prepared in accordance with generally accepted accounting principles.
Neither the Seller, NAFCO nor the Certificate Insurer intends to send any of its
financial reports to Certificateholders. The Servicer, on behalf of the Trust,
will file with the Commission periodic reports concerning the Trust to the
extent required under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission thereunder.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed with the Commission by the Seller on
behalf of the Trust pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act, as amended, after the date of this Prospectus Supplement and prior
to the termination of the offering of the Certificates offered hereby, shall be
deemed to be incorporated by reference in this Prospectus Supplement and to be a
part of this Prospectus Supplement 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 Supplement to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is 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 Supplement.
S-2
<PAGE>
In addition to the documents described above and in the accompanying
Prospectus under "Incorporation of Certain Documents by Reference", the
financial statements of Financial Security Assurance Inc. and Subsidiaries
included in, or as exhibits to, the following documents, which have been filed
with the Commission by Financial Security Assurance Holdings Ltd. ("Holdings"),
are hereby incorporated by reference in this Prospectus Supplement:
(a) Annual Report on Form 10-K for the year ended December 31,
1995,
(b) Quarterly Report on Form 10-Q for the period ended March 31,
1996, and
(c) Quarterly Report on Form 10-Q for the period ended June 30,
1996.
All financial statements of Financial Security Assurance Inc.
("Financial Security") included in documents filed by Holdings pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus Supplement and prior to the termination of the offering of the
Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be part hereof from the respective dates of filing
of such documents.
The Seller will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon the oral or written request of such
person, a copy of any or all of the reports and financial statements
incorporated herein by reference. Requests for such copies should be directed to
National Financial Auto Funding Trust, c/o National Auto Finance Company L.P.,
One Park Place, Suite 200, 621 N.W. 53rd Street, Boca Raton, Florida 33487
(telephone (407) 997-2747), Attention: Chief Financial Officer.
S-3
<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND IN
THE ACCOMPANYING PROSPECTUS. CAPITALIZED TERMS USED HEREIN AND NOT OTHERWISE
DEFINED HEREIN SHALL HAVE THE RESPECTIVE MEANINGS ASCRIBED TO SUCH TERMS
ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT ON THE PAGES INDICATED IN THE "INDEX OF
DEFINED TERMS" HEREIN OR, TO THE EXTENT NOT DEFINED HEREIN, IN THE ACCOMPANYING
PROSPECTUS ON THE PAGES INDICATED UNDER THE CAPTION "INDEX OF DEFINED TERMS" IN
THE PROSPECTUS.
Issuer .........................National Auto Finance 1996-1 Trust (the
"Trust"), to be formed on or about November 13,
1996 (the "Closing Date"), by National Financial
Auto Funding Trust (the "Seller") pursuant to a
Pooling and Servicing Agreement, dated as of
October 21, 1996 (the "Agreement"), among the
Seller, NAFCO, as Servicer (in such capacity
referred to herein as the "Servicer") and the
Trustee.
Seller..........................National Financial Auto Funding Trust, a
wholly-owned subsidiary of NAFCO. See "The
Seller" in the accompanying Prospectus.
Servicer........................National Auto Finance Company L.P. See "National
Auto Finance Company L.P." in the accompanying
Prospectus.
Originators.....................Each of the Receivables will have been acquired
by NAFCO or Auto Credit Clearinghouse L.P., a
subsidiary of NAFCO ("ACCH" and, together with
NAFCO, the "Originators"). See "National Auto
Finance Company L.P." in the accompanying
Prospectus.
Trustee.........................Harris Trust and Savings Bank, an Illinois
banking corporation, as trustee under the
Pooling and Servicing Agreement (the "Trustee").
Backup Servicer and
Collateral Agent..............In addition to acting as Trustee under the
Pooling and Servicing Agreement, Harris Trust
and Savings Bank will agree in the Pooling and
Servicing Agreement to act as backup servicer
(in such capacity, the "Backup Servicer") and to
service the Receivables in the event NAFCO
resigns or is removed as Servicer. Harris Trust
and Savings Bank will also agree in the Spread
Account Agreement to act as collateral agent (in
such capacity, the "Collateral Agent") on behalf
of the Trust and the Certificate Insurer with
respect to the Spread Account and the amounts
deposited thereto.
Certificate Insurer.............Financial Security Assurance Inc., a financial
guaranty insurance company incorporated under
the laws of the State of New York
S-4
<PAGE>
(the "Certificate Insurer" or "Financial
Security"). See "The Certificate Insurer"
herein.
The Certificates................The Certificates will evidence in the aggregate
an undivided ownership interest of 91% (the
"Certificate Percentage") of the Trust,
initially representing approximately
$68,239,560.44. The Seller Interest is
subordinated to the Certificates to the extent
described herein.
Each Certificate will represent a fractional
undivided interest in the Trust. The
Certificates will be issued in an original
principal amount of $62,098,000. The assets of
the Trust (the "Trust Property") will include
(i) non-prime motor vehicle retail installment
sale contracts transferred to the Trust on the
Closing Date (the "Initial Receivables") and on
subsequent transfer dates (the "Additional
Receivables" and, together with the Initial
Receivables, the "Receivables"), (ii) all monies
paid or payable thereunder on or after the
applicable Cut-off Date, (iii) security
interests in the new and used automobiles,
light-duty trucks, vans and minivans financed
thereby (the "Financed Vehicles"), (iv) the
Receivable Files, (v) such assets as shall from
time to time be deposited in the collection
account (the "Collection Account"), the
certificate account (the "Certificate Account"),
the Revolving Account, the Pre-Funding Account
and the Pre-Funding Period Reserve Account (as
defined herein), each established pursuant to
the Pooling and Servicing Agreement, (vi)
property that secured a Receivable and that has
been acquired by repossession or otherwise,
(vii) all rights to insurance proceeds and
liquidation proceeds with respect to the
Receivables and the Financed Vehicles, (viii)
the Certificate Policy issued to the Trustee for
the benefit of the Certificateholders by the
Certificate Insurer, (ix) certain rights of the
Originators under the Dealer Agreements, (x) all
right, title and interest of the Seller in and
to the Purchase Agreements, and (xi) the income
and proceeds of the foregoing and the rights to
enforce the foregoing. The Certificates will be
available for purchase in fully registered form
in minimum denominations of $20,000 and integral
multiples of $1,000 in excess thereof. See "The
Certificates - Book-Entry Registration and
Definitive Certificates" herein and "Certain
Information Regarding the Securities--
Book-Entry Registration" in the accompanying
Prospectus.
The Receivables.................The Initial Receivables had an aggregate
outstanding principal balance of $51,180,034.44
as of October 21, 1996 (the "Initial Cut-off
Date"). Pursuant to the Pooling and Servicing
Agreement, the Seller may, subject to the prior
written consent of the Certificate Insurer and
satisfaction of certain conditions contained in
the Pooling and Servicing Agreement, transfer
Additional Receivables to the Trust from time to
time during the
S-5
<PAGE>
Pre-Funding Period to the extent that funds are
then on deposit in the Pre-Funding Account.
Following the expiration of the PreFunding
Period, the Seller may continue to transfer
Additional Receivables to the Trust to the
extent that funds are then on deposit in the
Revolving Account and there has not occurred an
Amortization Event. With respect to both the
Pre-Funding Period and the Revolving Period, the
transfer of Additional Receivables will be
subject to the satisfaction of certain
conditions, including the prior written consent
of the Certificate Insurer to the transfer of
such Additional Receivables. During the
Revolving Period, upon the Seller's written
direction to the Trustee and the Servicer from
time to time (but not more often than once
during each calendar month or as more frequently
consented to in writing by the Certificate
Insurer), the Trust will release funds in the
Revolving Account or the Pre-Funding Account, as
applicable, on the date of any such transfer
(each, a "Subsequent Transfer Date") to the
Seller in an amount equal to the product of (i)
the Additional Receivable Transfer Percentage
and (ii) the aggregate principal balance of the
Additional Receivables so transferred as of the
close of business on the third Business Day (as
defined below) prior to the applicable
Subsequent Transfer Date (each, a "Subsequent
Cut-off Date"; the Initial Cut-Off Date and all
Subsequent Cut-off Dates are collectively
referred to as the "Cutoff Dates").
The Seller will acquire (i) the Initial
Receivables from National Financial Auto Funding
Trust II ("Funding Trust II"), a Delaware
business trust wholly-owned by NAFCO and
affiliates of NAFCO, pursuant to the Sale
Agreement, dated as of October 21, 1996 (the
"Sale Agreement"), between the Seller and
Funding Trust II, and (ii) the Additional
Receivables from NAFCO pursuant to a Purchase
Agreement, dated as of October 21, 1996 (the
"Purchase Agreement" and, together with the Sale
Agreement, the "Purchase Agreements") between
the Seller and NAFCO. NAFCO and Funding Trust
II, in their capacities as transferors of the
Receivables to the Seller, are herein referred
to collectively as the "NAFCO Transferors." The
Initial Receivables constitute, as of the
Initial Cut-off Date, and the Additional
Receivables will constitute, as of the
applicable Subsequent Cut-off Date, a
substantial portion of the non-prime motor
vehicle retail installment sale contracts
originated by NAFCO and ACCH satisfying the
selection criteria described herein. The
Additional Receivables to be transferred to the
Trust on each Subsequent Transfer Date will be
comprised of motor vehicle retail installment
sale contracts acquired by the Originators on or
prior to the related Subsequent Cut-off Date and
after the preceding Cut-off Date. See "The
Receivables Pool--General" herein.
S-6
<PAGE>
As of the Initial Cut-off Date, the weighted
average annual percentage rate, as such term is
used with respect to the Federal
Truth-in-Lending Act ("APR") of the Initial
Receivables was approximately 18.88% and the
weighted average remaining scheduled maturity on
the Initial Receivables was approximately 50.27
months and the percentage of the aggregate
original balance of the Initial Receivables
relating to the financing of used Financed
Vehicles was 75.05%. The final scheduled payment
date on the Initial Receivable with the latest
maturity is November 1, 2001. The maturity dates
of the Receivables may be extended under certain
circumstances. The actual average life of the
Certificates may be less than the weighted
average life of the Receivables due to
prepayments on the Receivables. See "Risk
Factors--Yield and Prepayment Considerations"
herein and "The Receivables Pool--Average Life
of the Receivables" herein. Following the
transfer of any Additional Receivables to the
Trust, the weighted average APR of the
Receivables may be as low as 18.0%, the weighted
average remaining term of the Receivables may be
as high as 55 months, the percentage of the
aggregate outstanding principal balance of the
Receivables represented by Receivables relating
to loans for the purchase of used Financed
Vehicles may be as high as 80% and the final
scheduled payment date on the Receivable with
the latest maturity may be as late as April 30,
2002. See "The Receivables Pool" herein and "The
Receivables" in the accompanying Prospectus.
Pass-Through Rate...............6.33% per annum (the "Pass-Through Rate"),
payable monthly at one-twelfth of the annual
rate, calculated on the basis of a 360- day year
consisting of twelve 30-day months.
Distribution Date...............The 21st day of each month (or if the 21st day
is not a Business Day, the next succeeding
Business Day) commencing November 21, 1996
(each, a "Distribution Date"). A "Business Day"
is a day other than a Saturday, Sunday or other
day on which commercial banks located in New
York, Illinois or Florida are authorized or
obligated to be closed.
Final Scheduled
Distribution Date...............December 21, 2002 (the "Final Scheduled
Distribution Date").
Interest........................On each Distribution Date, interest equal to the
sum of (i) thirty (30) days of interest (or, in
the case of the initial Distribution Date, the
number of days from and including the Closing
Date to but not including such initial
Distribution Date) at the Certificate Rate on
the aggregate outstanding principal balance of
the Certificates on such Distribution Date
(before reduction by any principal distributions
made on such Distribution Date), and (ii) the
aggregate shortfalls in interest distributions
to the
S-7
<PAGE>
Certificateholders on prior Distribution Dates,
together with interest on such shortfalls at the
Certificate Rate from the preceding Distribution
Date through the current Distribution Date, to
the extent permitted by law, will be distributed
by the Trustee on a PRO RATA basis to the
Certificateholders of record on the last day of
the preceding calendar month (the "Record
Date"). See "The Certificates -- Distributions
on Certificates" herein.
Principal ......................A principal prepayment equal to (i) the amount,
if any, remaining on deposit in the Pre-Funding
Account upon termination of the Pre-Funding
Period or (ii) the Certificate Percentage of the
amount remaining in the Revolving Account upon
termination of the Revolving Period, in each
case LESS any undistributed investment earnings
on deposit therein, will be distributed to the
Holders of the Certificates, pro rata in
accordance with their respective Percentage
Interests, on the Distribution Date related to
the Reporting Date next succeeding such
termination of the Pre-Funding Period or the
Revolving Period, as applicable. In addition, a
principal prepayment equal to the Certificate
Percentage of the amount, if any, on deposit in
the Revolving Account in excess of $3,000,000 at
the close of business on the last day of any
calendar month during the Revolving Period will
be distributed to the Holders of the
Certificates, pro rata in accordance with their
respective Percentage Interests, on the next
Distribution Date. See "Risk Factors--Yield and
Prepayment Considerations" herein. Other than as
described in above, Certificateholders will not
be entitled to distributions of principal on any
Distribution Date occurring during the Revolving
Period.
Principal distributions will be made to the
Holders of the Certificates on each Distribution
Date following the calendar month in which the
Revolving Period terminates (other than the
Final Scheduled Distribution Date) in an amount
equal to the sum of (i) the Certificate
Percentage of the Principal Distributable Amount
for such Distribution Date and (ii) the
aggregate shortfalls in principal distributions
due and payable to the Certificateholders for
all prior Distribution Dates. The Principal
Distributable Amount for any Distribution Date
following termination of the Revolving Period
generally will equal the sum of the following,
without duplication: (i) that portion of all
collections on the Receivables (other than
Liquidated Receivables, Retransferred
Receivables and, to the extent included in
clause (iv) below, the outstanding principal
balance of Retransfer Default Receivables)
allocable to principal, including all full and
partial principal prepayments, received during
the calendar month preceding the calendar month
in which such Distribution Date occurs (the "Due
Period"), (ii) the outstanding principal balance
of all Receivables that became
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<PAGE>
Liquidated Receivables during the related Due
Period, (iii) the portion allocable to principal
of the acquisition price paid by the Seller in
respect of all Receivables that became
Retransferred Receivables on or prior to the
related Reporting Date and subsequent to the
preceding Reporting Date (such acquisition
price, the "Purchase Amount"), (iv) in the sole
discretion of the Certificate Insurer, the
outstanding principal balance as of the related
Reporting Date of all Retransfer Default
Receivables, (v) the aggregate amount of
Bankruptcy Losses that occurred during the
related Due Period, and (vi) with respect to the
Distribution Date related to the Reporting Date
next succeeding the termination of the Revolving
Period, the amount of funds remaining on deposit
in the Revolving Account, if any, on the last
day of the Revolving Period. To the extent not
previously paid, the remaining outstanding
principal amount of the Certificates will be
paid in full on the Final Scheduled Distribution
Date. See "The Certificates -- Distributions and
Payments " herein.
Subordination of the
Seller Interest.................The Seller Interest (the "Seller Interest") will
evidence an undivided ownership interest of 9%
(the "Seller Percentage") of the Trust
(initially representing approximately
$4,606,203.10) other than the Certificate
Policy, the Pre-Funding Account and the
Pre-Funding Period Reserve Account. The Seller
Interest represents the right of the Seller to
receive distributions of funds remaining in the
Certificate Account on each Distribution Date
after all other payments required to be made on
such Distribution Date that are described under
"The Certificates - Distributions and Payments"
have been made and the amount on deposit in the
Spread Account equals the amount required to be
on deposit therein pursuant to the Spread
Account Agreement. To the extent that the amount
on deposit in the Spread Account on any
Distribution Date is less than as required under
the Spread Account Agreement, amounts otherwise
distributable to the Seller will be deposited in
the Spread Account. Because the amount required
to be on deposit in the Spread Account or the
existence thereof may be modified or terminated
by the Certificate Insurer prior to the
occurrence and continuation of a Certificate
Insurer Default with the consent of NAFCO and
the Seller but without the consent of the
Trustee or the Certificateholders,
Certificateholders should not rely on the Spread
Account for payments of principal of, or
interest on, the Certificates. See "The
Certificates - Subordination of the Seller
Interest; Spread Account" herein.
Revolving.......................Account The Revolving Account will be
established by and maintained with the Trustee
for the benefit of the Certificateholders and
the Certificate Insurer. During the period (the
"Revolving Period") from and including the
Closing Date until the earlier of (i) the
S-9
<PAGE>
date on which an Amortization Event occurs and
(ii) the close of business on April 30, 1997,
all principal collections and other recoveries
of principal received on the Receivables,
together (without duplication) with an amount
equal to the outstanding principal balance of
all Receivables that become Liquidated
Receivables during the Revolving Period, will be
deposited in the Revolving Account and the
amounts on deposit in the Revolving Account will
be released to the Seller in connection with the
transfer of Additional Receivables to the Trust
in accordance with the Pooling and Servicing
Agreement. A principal prepayment equal to the
amount, if any, on deposit in the Revolving
Account upon termination of the Revolving Period
will be distributed to the Holders of the
Certificates and the holder of the Seller
Interest, pro rata in accordance with the
Certificate Percentage and Seller Percentage,
respectively, on the Distribution Date related
to the Reporting Date next succeeding such
termination of the Revolving Period. In
addition, a principal prepayment equal to the
amount, if any, on deposit in the Revolving
Account in excess of $3,000,000 at the close of
business on the last day of any calendar month
during the Revolving Period will be distributed
to Certificateholders and the holder of the
Seller Interest, pro rata in accordance with the
Certificate Percentage and the Seller
Percentage, respectively, on the next succeeding
Distribution Date. Amounts on deposit in the
Revolving Account will be applied to the
purchase of Additional Receivables not more
frequently than monthly during the Revolving
Period. See "The Pooling and Servicing
Agreement--Sale and Assignment of Receivables"
herein.
An "Amortization Event" will include (i) the
inaccuracy or incompleteness of any
representation or warranty of NAFCO or the
Seller in the Pooling and Servicing Agreement,
the Insurance Agreement or certain other
documents, subject to applicable grace periods,
(ii) NAFCO or the Seller's failure to perform or
to comply with any covenant or agreement in the
Pooling and Servicing Agreement, the Insurance
Agreement or certain other documents, subject to
applicable grace periods, (iii) a finding or a
ruling by a governmental authority or agency
that the Insurance Agreement, the Pooling and
Servicing Agreement or certain other documents
are not binding on NAFCO or the Seller or any of
the other parties thereto, (iv) failure by NAFCO
or the Seller to pay their respective debts in
general or the occurrence of certain events of
insolvency or bankruptcy with respect to NAFCO
or the Seller, (v) a Servicer Default, (vi) a
claim for payment under the Certificate Policy,
(vii) certain events of default under any other
insurance agreement entered into among the
Certificate Insurer, NAFCO and/or the Seller,
(viii) a denial by NAFCO or the Seller of any
liability or obligation under the Insurance
Agreement, the Pooling and Servicing Agreement
or certain other documents, (ix) failure by
NAFCO or the Seller to
S-10
<PAGE>
pay when due any amount owed under the Insurance
Agreement, the Pooling and Servicing Agreement
or certain other documents and (x) a draw on the
Spread Account. See "The Certificates---
Distributions and Payments". NO ADDITIONAL
RECEIVABLES MAY BE TRANSFERRED TO THE TRUST
AFTER THE OCCURRENCE OF SUCH AMORTIZATION EVENT.
Pre-Funding Account.............The Pre-Funding Account will be established by
and maintained with the Trustee. The Pre-Funding
Account will be funded on the Closing Date with
a portion of the proceeds of the offering of the
Certificates in the amount of $15,524,168.66
(the "Pre-Funded Amount"). During the period
(the "Pre-Funding Period") from and including
the Closing Date until the earlier of (i) the
date on which an Amortization Event occurs, (ii)
the date on which the balance of funds on
deposit in the Pre-Funding Account is reduced to
zero and (iii) the close of business on January
31, 1997, the Pre-Funded Amount will be reduced
by amounts released to the Seller in connection
with the transfer of Additional Receivables to
the Trust in accordance with the Pooling and
Servicing Agreement. The amount, if any,
remaining on deposit in the Pre-Funding Account
at the close of business on the last day of the
Pre-Funding Period less any undistributed
investment earnings therein will be distributed
to the Certificateholders, pro rata in
accordance with their respective Percentage
Interests, as a prepayment of principal on the
Distribution Date related to the Reporting Date
next succeeding termination of the Pre-Funding
Period. Earnings on reinvestment of amounts on
deposit in the Pre-Funding Account will be
deposited monthly into the Collection Account.
Amounts on deposit in the Pre-Funding Account
will be applied to the purchase of Additional
Receivables not more frequently than monthly
during the Pre-Funding Period. See "The Pooling
and Servicing Agreement--Sale and Assignment of
Receivables" herein.
Pre-Funding Period
Reserve Account.................On the Closing Date, the Trustee at the
direction of the Seller, will deposit
approximately $161,856.71 from the proceeds of
the sale of the Certificates into the
Pre-Funding Period Reserve Account. Amounts
deposited therein will be transferred to the
Certificate Account by the Trustee on each
Distribution Date occurring on or prior to the
Distribution Date next succeeding termination of
the Pre-Funding Period in an amount equal to the
excess of (i) interest accrued at the
Certificate Rate on the amount of funds on
deposit in the Pre-Funding Account for the
period from and including the preceding
Distribution Date (or, in the case of the first
Distribution Date, the Closing Date) to but not
including the current Distribution Date over
(ii) the actual amount of investment earnings on
amounts on deposit in the Pre-
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<PAGE>
Funding Account from and including the preceding
Distribution Date (or, in the case of the first
Distribution Date, the Closing Date) to the
current Distribution Date. If after making any
required transfers to the Certificate Account on
any Distribution Date the amount on deposit in
the Pre-Funding Period Reserve Account exceeds
the Required Reserve Amount (as defined herein),
the Trustee will distribute such excess to the
Seller. On the Distribution Date related to the
Reporting Date immediately following termination
of the Pre-Funding Period, any amounts remaining
in the Pre-Funding Period Reserve Account (after
application to interest payable on the
Certificates as described above) shall be paid
to the Seller pursuant to the Pooling and
Servicing Agreement. Thereafter, the Pre-Funding
Period Reserve Account shall be closed.
Spread Account..................The Spread Account will be established and
maintained by Harris Trust and Savings Bank, as
collateral agent (the "Collateral Agent") under
the Spread Account Agreement, dated as of
October 21, 1996, among the Seller, the
Certificate Insurer and the Trustee (the "Spread
Account Agreement"). The Spread Account will be
funded on the Closing Date with a portion of the
proceeds of the sale of the Certificates in the
amount of $682,395.60 and, on each Distribution
Date, from amounts otherwise distributable to
the Seller in respect of the Seller Interest.
Amounts on deposit in the Spread Account will be
available to make distributions of the
Certificate Distributable Amount on any
Distribution Date to the Certificateholders, to
pay the Servicing Fee, to make payments due to
the Certificate Insurer pursuant to the Pooling
and Servicing Agreement or the Insurance
Agreement pursuant to the Spread Account
Agreement. Because the amount required to be on
deposit in the Spread Account or the existence
thereof may be modified or terminated by the
Certificate Insurer prior to the occurrence and
continuation of a Certificate Insurer Default
with the consent of NAFCO and the Seller but
without the consent of the Trustee or the
Certificateholders, Certificateholders should
not rely on the Spread Account for payments of
principal of, or interest on, the Certificates.
See "The Certificates-- Subordination of the
Seller Interest; Spread Account" herein.
Certificate Policy..............On the Closing Date, the Certificate Insurer
will issue the Certificate Policy to the Trustee
for the benefit of the Certificateholders
pursuant to which the Certificate Insurer will
unconditionally and irrevocably guarantee to the
Certificateholders the payment of interest due
on the Certificates on each Distribution Date
and the ultimate payment in full of the
principal amount of the Certificates remaining
outstanding on the Final Scheduled Distribution
Date, in each case in accordance with the terms
and conditions of the Certificate Policy . See
"The Certificate Policy." The Certificate
Insurer will have the right to
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<PAGE>
terminate the Servicer upon the occurrence of a
Servicer Default. See "The Certificate Policy"
and "The Pooling and Servicing Agreement -
Servicer Default" herein.
Mandatory Retransfer of Certain
Receivables....................The Seller will make certain warranties in the
Pooling and Servicing Agreement with respect to
the related Receivables. If (i) the Seller
breaches any such warranty with respect to a
Receivable, (ii) such breach materially and
adversely affects the interests of the
Certificateholders or the Certificate Insurer in
such Receivable, and (iii) the Seller does not
correct or cure such breach by the Reporting
Date occurring during the second full calendar
month following discovery by the Seller or the
date the Trustee received notice of such breach
pursuant to the Pooling and Servicing Agreement,
the Seller will be required to purchase such
Receivable pursuant to the Pooling and Servicing
Agreement. NAFCO will generally be obligated to
repurchase such Receivable from the Seller
pursuant to the Purchase Agreement
contemporaneously with the Seller's repurchase
from the Trust. In addition, the repurchase
obligations of NAFCO under the Purchase
Agreements will be assigned to the Trust and may
be enforced by the Trustee in the event the
Seller defaults in its repurchase obligation. No
assurance can be given that the Seller or NAFCO
will at any time have sufficient funds to
satisfy any such retransfer requirement.
Mandatory retransfers to the Seller of the
Receivables will reduce the average life of the
Certificates and could result in the Holders of
the Certificates receiving unexpected principal
payments at a time when such Holders are unable
to reinvest such payments in investments having
a yield and rating comparable to the yield and
rating on the Certificates. See "Risk
Factors--Yield and Prepayment Considerations."
Retransfer Right................The Pooling and Servicing Agreement will provide
that the Seller will have the right to require
the retransfer to the Seller of all of the
Receivables on any Distribution Date on which
the aggregate of the outstanding principal
balances of the Receivables (the "Pool
Outstanding Principal Balance") is less than 10%
of the Original Pool Outstanding Principal
Balance of the Receivables. The "Original Pool
Outstanding Principal Balance" will equal the
aggregate outstanding principal balance of all
of the Receivables, including Additional
Receivables, as of their respective Cut-off
Dates. Such right may be exercised only with the
prior written consent of the Certificate Insurer
if such retransfer would result in a claim under
the Certificate Policy or would result in any
amount owing to the Certificate Insurer or the
Certificateholders remaining unpaid. In
connection with any such retransfer, the Seller
will deliver to the Trustee an amount equal the
sum of (i) 100% of the aggregate outstanding
principal balance of the Certificates on such
Distribution Date and (ii) all accrued and
S-13
<PAGE>
unpaid interest thereon at the Certificate Rate.
See "The Pooling and Servicing
Agreement--Termination of Pooling and Servicing
Agreement" herein.
Early Termination
of the Trust....................The Pooling and Servicing Agreement will provide
that within 15 days after the Trustee's receipt
of notice of the occurrence of certain
bankruptcy or insolvency events with respect to
the Seller, the Trustee will publish notice in
an authorized newspaper of the occurrence of
such event stating that the Trustee intends to
sell, dispose of or otherwise liquidate the
Receivables. If after 90 days from the day such
notice is published the Trustee has not received
written instructions of both the holder of a
majority of the Percentage Interests in the
Certificates and the Certificate Insurer
disapproving of such disposition, the Trustee
will proceed to liquidate the Receivables in a
commercially reasonable manner and on
commercially reasonable terms. The proceeds of
any such sale, disposition or liquidation of
Receivables will be deposited in the Collection
Account, treated as collections on the
Receivables and distributed to the
Certificateholders on the Distribution Date
following the calendar month in which such sale,
disposition or liquidation occurs. If the sum of
(a) the proceeds of such sale, disposition or
liquidation, (b) any collections on the
Receivables then in the Collection Account and
(c) the amount then on deposit in the Spread
Account is not sufficient to pay the outstanding
principal balance of the Certificates plus
accrued interest thereon and the Certificate
Insurer defaults on its obligation under the
Certificate Policy to pay any remaining unpaid
principal of the Certificates on the Final
Scheduled Distribution Date, the Holders of the
Certificates will incur a loss. See "The Pooling
and Servicing Agreement--Termination of the
Pooling and Servicing Agreement."
Tax Status .....................Subject to the discussion below (See "Certain
Federal Income Tax Consequences"), under the
Internal Revenue Code of 1986 (the "Code"), as
amended, and existing regulations,
administrative rules and judicial decisions,
counsel to the Seller is of the opinion that the
Certificates will be characterized as
indebtedness for federal income tax purposes.
Pursuant to the Pooling and Servicing Agreement,
NAFCO, the Seller and the Certificateholders
will agree to treat the Certificates as debt for
federal and state and local income tax purposes.
See "Certain Federal Income Tax Consequences"
herein and in the accompanying Prospectus.
ERISA...........................Considerations The Certificates may not be
acquired by a plan, as defined in section 4975
of the Code or an employee benefit plan as
defined in section 3(3) of the Employment
Retirement Income Security Act of 1974, as
amended ("Plan") or a person investing "plan
S-14
<PAGE>
assets" of a Plan (including without limitation,
for this purpose, any insurance company general
account (each, a "Plan Investor"). By its
acceptance of a Certificate, each
Certificateholder will be deemed to have
represented and warranted that it is not subject
to the foregoing limitation. See "ERISA
Considerations" herein and in the accompanying
Prospectus.
Rating .........................As a condition of issuance, the Certificates
will be rated "AAA" by Standard & Poor's Ratings
Services ("S&P") and "Aaa" by Moody's Investors
Service, Inc. ("Moody's" and, together with S&P,
the "Rating Agencies") on the basis of the
issuance of the Certificate Policy by the
Certificate Insurer. There is no assurance that
the ratings initially assigned to the
Certificates will not subsequently be lowered or
withdrawn by the Rating Agencies. Such ratings
will not constitute an assessment of the
likelihood that principal prepayments on the
Receivables underlying the Certificates will be
made by the Obligors thereon or of the degree to
which the rate of such prepayments might differ
from that originally anticipated. See "Risk
Factors-- Ratings on Certificates" herein.
S-15
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, in addition to the
factors described under "Risk Factors" in the Prospectus, the following factors
in connection with the purchase of the Certificates:
GEOGRAPHIC CONCENTRATION OF RECEIVABLES
As of the Initial Cut-off Date, Obligors with respect to approximately
39.17%, 15.04%, and 8.23% of the Receivables (based on Cut-off Date principal
balance and mailing addresses) were located in Georgia, North Carolina and South
Carolina, respectively. See "The Receivables Pool." Accordingly, adverse
economic conditions or other factors particularly affecting any of these states
could adversely affect the delinquency, loan loss or repossession experience of
the Trust with respect to the Receivables.
DELINQUENCY, LOAN LOSS AND REPOSSESSION EXPERIENCE
NAFCO commenced operations in October 1994 and ACCH commenced
operations in September 1995. Although NAFCO has calculated and presented herein
its net loss experience with respect to its servicing portfolio of NAFCO and
ACCH Receivables, there can be no assurance that the information presented will
reflect actual future experience with respect to the Receivables. In addition,
there can be no assurance that the future delinquency, loan loss or repossession
experience of the Trust with respect to the Receivables will be better or worse
than that set forth herein with respect to NAFCO's servicing portfolio. See "The
Receivables Pool -- Delinquency, Repossession and Loss Information" herein.
RATINGS ON CERTIFICATES
It is a condition to the issuance of the Certificates that they be
rated "AAA" by S&P and "Aaa" by Moody's on the basis of the issuance of the
Certificate Policy by the Certificate Insurer. A rating is not a recommendation
to purchase, hold or sell Certificates. There is no assurance that a rating will
remain in effect 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. In the event that the rating initially
assigned to the Certificates is subsequently lowered or withdrawn for any
reason, including by reason of a downgrading of the Certificate Insurer's
claims-paying ability, no person or entity will be obligated to provide any
additional credit enhancement with respect to the Certificates. Any reduction or
withdrawal of a rating may have an adverse effect on the liquidity and market
price of the Certificates.
YIELD AND PREPAYMENT CONSIDERATIONS
The Holders of Certificates could receive a principal prepayment on the
Distribution Date following the end of each of the Revolving Period and the
Pre-Funding Period if and to the extent that Additional Receivables are not
transferred to the Trust in amounts sufficient to fully utilize the amounts on
deposit in such accounts. In addition, if the amount on deposit in the Revolving
Account at the close of business on the last day of a calendar month during the
Revolving Period LESS undistributed investment earnings on deposit therein
exceeds $3,000,000, the Certificateholders will receive, on the next
Distribution Date, a prepayment of principal in an amount equal to the
Certificate Percentage of the amount of such excess.
On the Closing Date, $51,180,034.44 in aggregate outstanding principal
amount of Initial Receivables will be transferred and assigned to the Trust by
the Seller. In addition, during the Revolving Period, all principal collections
and other recoveries of principal received on the Receivables, together
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<PAGE>
(without duplication) with an amount equal to the outstanding principal amount
of all Receivables that become Liquidated Receivables during the Revolving
Period, will be deposited in the Revolving Account, and on the Closing Date, the
Pre-Funded Amount will be deposited by the Trustee in the Pre-Funding Account
from the proceeds of the sale of the Certificates. If the principal amount of
eligible motor vehicle retail installment sale contracts originated or purchased
by the Originators during the Revolving Period or the Pre-Funding Period is less
than the amount on deposit in the Revolving Account or the Pre-Funded Amount, as
the case may be, the Seller will have insufficient Receivables to transfer and
assign to the Trust on Subsequent Transfer Dates, thereby resulting in
prepayments of principal to the Certificateholders as described in the next
paragraph. In addition, any transfer and assignment of Additional Receivables to
the Trust will be subject to the satisfaction, on or before the related
Subsequent Transfer Date, of the following conditions, among others: (i) each
such Additional Receivable must satisfy the eligibility criteria with respect to
the Receivables specified in the Pooling and Servicing Agreement; (ii) as of
such Subsequent Transfer Date, the Receivables in the Trust, together with the
Additional Receivables to be transferred and assigned by the Seller to the Trust
on such Subsequent Transfer Date, must meet the following criteria (computed
based on the characteristics of the Initial Receivables on the Initial Cut-off
Date and any Additional Receivable as of the related Subsequent Cut-off Date):
(a) the weighted average APR of such Receivables must not be less than 18.0%,
(b) the weighted average remaining term of such Receivables must not be greater
than 55 months, (c) not more than 80% of the aggregate outstanding principal
balance of such Receivables may relate to loans for the purchase of used
Financed Vehicles, and (d) the final scheduled payment date on the Receivable
with the latest maturity will not be later than April 30, 2002; (iii) the Seller
shall have executed and delivered to the Trustee a written assignment (a
"Subsequent Transfer Agreement") conveying such Additional Receivables to the
Trust (including a schedule identifying such Additional Receivables); and (iv)
the Certificate Insurer shall, in its sole and absolute discretion, have
consented in writing to the transfer and assignment of such Additional
Receivables to the Trust.
If the amount on deposit in the Revolving Account at the close of
business on the last day of a calendar month during the Revolving Period LESS
undistributed investment earnings on deposit therein exceeds $3,000,000, the
Certificateholders will receive, on the next Distribution Date, a prepayment of
principal in an amount equal to the Certificate Percentage of the amount of such
excess. In addition, to the extent that amounts on deposit in the Revolving
Account or the Pre-Funding Account have not been fully paid to the Seller in
connection with the transfer and assignment of Additional Receivables to the
Trust during the Revolving Period or the Pre-Funding Period, as applicable, the
Certificateholders will receive, on the Distribution Date related to the
Reporting Date next succeeding termination of the Revolving Period or the
Pre-Funding Period, as applicable, a prepayment of principal in an amount equal
to (i) the amount remaining on deposit in the Pre-Funding Account, less
investment earnings, and (ii) the Certificate Percentage of the amount remaining
on deposit in the Revolving Account less investment earnings. It is anticipated
that the principal amount of Additional Receivables transferred and assigned to
the Trust will not be exactly equal to the amounts on deposit in the Revolving
Account and the Pre-Funding Account and, therefore, that there will be at least
a nominal amount of principal prepaid to the Certificateholders on the
Distribution Dates immediately following the end of each of the Revolving Period
and the Pre-Funding Period.
DEPENDENCE ON THE ORIGINATORS FOR THE TRANSFER OF ADDITIONAL RECEIVABLES
None of the Seller, NAFCO or any affiliate of either is generally
obligated to make any payments in respect of the Certificates or the
Receivables. However, the ability of the Seller to transfer and assign
Additional Receivables to the Trust on Subsequent Transfer Dates is completely
dependent upon the generation or acquisition of additional motor vehicle retail
installment sale contracts by the Originators. If, during the Revolving Period
or the Pre-Funding Period, the Originators are unable to generate or
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<PAGE>
acquire sufficient additional motor vehicle retail installment sale contracts to
the Seller, or if such contracts do not satisfy the eligibility criteria
described herein, the ability of the Seller to transfer and assign Additional
Receivables to the Trust will be adversely affected. There can be no assurance
that the Originators will continue to generate or acquire motor vehicle
installment sale contracts that satisfy the criteria set forth in the Pooling
and Servicing Agreement at the same rate that they have generated or acquired
such contracts in recent months or that the Certificate Insurer will consent to
the transfer of such contracts to the Trust.
THE TRUST
The following information supplements the information contained in the
accompanying Prospectus. Prospective Certificateholders should consider, in
addition to the information below, the information under "The Trusts" in the
accompanying Prospectus.
The Seller will establish the Trust pursuant to the Pooling and
Servicing Agreement, by selling and assigning the Receivables and the other
Trust Property (other than the Certificate Policy) to the Trustee in exchange
for the Certificates. Prior to such sale and assignment, the Trust will have no
assets or obligations. The Trust will not engage in any business activity other
than acquiring and holding the Trust Property, issuing the Certificates and
distributing payments thereon.
Each Certificate will represent a fractional undivided interest in the
Trust. The Certificates will be issued in an original principal amount of
$62,098,000.00. The Trust Property will include (i) the Receivables Pool, (ii)
all monies paid or payable thereunder on or after the applicable Cut-off Date,
(iii) an assignment of the security interests of the Originators in the Financed
Vehicles, (iv) the Receivable Files, (v) such assets as shall from time to time
be deposited in the collection account (the "Collection Account"), the
certificate account (the "Certificate Account"), the Revolving Account, the
Pre-Funding Account and the Pre-Funding Period Reserve Account (as defined
herein), each established pursuant to the Pooling and Servicing Agreement, (vi)
property that secured a Receivable and that has been acquired by repossession or
otherwise, (vii) all rights to insurance proceeds and liquidation proceeds with
respect to the Receivables and the Financed Vehicles, (viii) the Certificate
Policy issued to the Trustee for the benefit of the Certificateholders by the
Certificate Insurer, (ix) certain rights of the Originators under the Dealer
Agreements, (x) all right, title and interest of the Seller in and to the
Purchase Agreements, (xi) the income and proceeds of the foregoing and the
rights to enforce the foregoing, and (xii) certain other rights under the
Pooling and Servicing Agreement in respect of representations and warranties
made by the Seller regarding the Receivables. See "The Receivables" and
"Description of the Purchase Agreements and the Trust Documents - Collections"
in the accompanying Prospectus.
Initially, OFSA, as custodian on behalf of the Trust (the "Custodian"),
will hold the original installment sales contract as well as copies of documents
and instruments relating to each Receivable and evidencing the security interest
in the Financed Vehicle securing each Receivable (the "Receivable Files"). The
Trustee may in the future, with the prior written consent of the Certificate
Insurer (prior to a Certificate Insurer Default), appoint NAFCO as custodian. In
order to protect the Trust's ownership interest in the Receivables, the NAFCO
Transferors and the Seller will each file UCC-1 financing statements in Florida
and Delaware to give notice of the Trust's ownership of the Receivables and the
related Trust Property.
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<PAGE>
THE TRUSTEE
Harris Trust and Savings Bank (the "Trustee" or the "Collateral Agent")
is the Trustee under the Pooling and Servicing Agreement. Harris Trust and
Savings Bank is a national banking association the principal offices of which
are located at 311 West Monroe Street, Chicago, Illinois 60606 (telephone (312)
461-4662).
USE OF PROCEEDS
The net proceeds to be received by the Seller from the sale of the
Certificates will be applied (i) to the purchase of the Receivables from Funding
Trust II, (ii) to make the initial deposit to the Spread Account, (iii) to make
the deposit of the Pre-Funded Amount to the Pre-Funding Account and (iv) to make
the initial deposit to the Pre-Funding Period Reserve Account. Substantially all
of the proceeds of the sale of the Initial Receivables by Funding Trust II to
the Seller will be distributed to First Union National Bank of North Carolina as
holder of the most senior class of certificates issued by a trust with respect
to which Funding Trust II acts as depositor. First Union National Bank of North
Carolina is an affiliate of the Underwriter.
THE RECEIVABLES POOL
GENERAL
The Seller will acquire (i) the Initial Receivables from National
Financial Auto Funding Trust II ("Funding Trust II"), a Delaware business trust
wholly-owned by NAFCO and affiliates of NAFCO, on the Closing Date pursuant to
the Sale Agreement and (ii) the Additional Receivables from NAFCO pursuant to a
Purchase Agreement, dated as of October 21, 1996 (the "Purchase Agreement" and,
together with the Sale Agreement, the "Purchase Agreements") between the Seller
and NAFCO. NAFCO and Funding Trust II, in their capacities as transferors of the
Receivables to the Seller, are herein referred to collectively as the "NAFCO
Transferors." The Initial Receivables represent, as of the Initial Cut-off Date,
and the Subsequent Receivables will represent, as of the related Subsequent
Cut-off Date, a substantial portion of the Originators' retail motor vehicle
installment sale contracts which (a) are secured by a new or used automobile,
light-duty truck, van or minivan, (b) have a remaining maturity, original
maturity and an APR at origination within the ranges set forth in this
paragraph, (c) are dated on or after October 28, 1994, (d) were not more than 30
days delinquent as of the Initial Cut-off Date or the Subsequent Cut-off Date,
as the case may be, and (e) satisfy the representations and warranties required
to be made with respect thereto under the Pooling and Servicing Agreement.
Approximately 98.5% of the Receivables (by outstanding principal balance as of
the Initial Cut-off Date) were acquired by either NAFCO or ACCH from Dealers
pursuant to Dealer Agreements and the balance of the Receivables were acquired
by NAFCO from a motor vehicle finance company. As of the Initial Cut-off Date,
approximately 97.14% of the Receivables (by outstanding principal balance) were
fully amortizing with level payments over their terms. As of the Initial Cut-off
Date, Initial Receivables representing approximately 75.05% of the outstanding
principal balance of the Initial Receivables were secured by Financed Vehicles
that were used at the time of origination of the Initial Receivables and the
remainder were secured by Financed Vehicles that were new at such time. All
Initial Receivables have an APR at origination of at least 14.97% and not more
than 29.48% and the weighted average APR of the Initial Receivables is
approximately 18.88%. The Initial Receivables had remaining scheduled maturities
as of the Initial Cut-off Date of at least 12 months but not more than 60 months
and original maturities of at least 18 months but not more than 60 months. The
final scheduled payment date on the Initial Receivable with the latest maturity
is November 1, 2001. The weighted average remaining scheduled maturity of
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<PAGE>
the Initial Receivables as of the Initial Cut-off Date was approximately 50.27
months. The average outstanding principal balance per Initial Receivable as of
the Initial Cut-off Date was approximately $11,889. Initial Receivables
providing for payment according to the simple interest and the actuarial method
represent approximately 99.44% and .56%, respectively, of the aggregate original
balance of the Initial Receivables as of the Initial Cut-off Date. Based upon
the Servicer's billing records, the Obligors on the Initial Receivables were
domiciled in 28 states as of the Initial Cut-off Date.
<TABLE>
<CAPTION>
COMPOSITION OF INITIAL RECEIVABLES AS OF THE INITIAL CUT-OFF DATE
WEIGHTED AVERAGE
ANNUAL PERCENTAGE NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE
RATE OF RECEIVABLES ORIGINAL POOL RECEIVABLES IN AVERAGE ORIGINAL ORIGINAL TERM TO REMAINING TERM TO
(RANGE)(1) BALANCE POOL BALANCE MATURITY (RANGE)(1) MATURITY (RANGE)(1)
---------- ------- ---- ------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
18.88% $53,450,013 4,305 $12,415.80 53.68 Mo. 50.27 Mo.
(14.97 - 29.48%) (18 - 60 Mo.) (12 - 60 Mo.)
</TABLE>
- --------------------------------------------------------
(1) Based on outstanding principal balance of Initial Receivables as of the
Initial Cut-off Date.
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<PAGE>
The following table sets forth information, as of the Initial Cut-off Date,
regarding the number, outstanding principal balances and percentages of the Pool
Outstanding Principal Balance of the Initial Receivables in each of the states
listed below, determined on the basis of the related Obligors' domicile as
reflected in the records of the Servicer.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF OUTSTANDING PERCENTAGE OF POOL ORIGINAL TERM TO
STATE LOANS PRINCIPAL BALANCE OUTSTANDING PRINCIPAL BALANCE MATURITY IN MONTHS
- ----- ----- ----------------- ----------------------------- ------------------
<S> <C> <C> <C> <C>
Alabama 25 $ 306,147 0.60% 53.70
Arkansas 4 48,410 0.09 55.70
Arizona 2 22,264 0.04 52.22
California 162 1,695,086 3.31 49.65
Connecticut 2 10,278 0.02 24.00
Florida 279 3,315,069 6.48 53.57
Georgia 1643 20,045,150 39.17 54.10
Illinois 9 63,028 0.12 37.93
Indiana 20 218,224 0.43 48.79
Kansas 6 58,715 0.11 51.87
Kentucky 42 529,681 1.03 54.97
Louisiana 28 298,558 0.58 50.53
Massachusetts 69 457,613 0.89 39.11
Maryland 38 408,002 0.80 49.96
Maine 121 869,508 1.70 43.05
Mississippi 19 226,436 0.44 55.78
North Carolina 615 7,697,784 15.04 55.02
New Hampshire 31 167,220 0.33 33.99
New Jersey 3 29,929 0.06 39.21
Ohio 51 560,218 1.09 52.21
Oklahoma 36 380,543 0.74 51.53
Pennsylvania 45 445,402 0.87 49.38
South Carolina 347 4,213,139 8.23 54.07
Tennessee 111 1,452,060 2.84 55.31
Texas 281 3,759,565 7.35 54.68
Virginia 314 3,884,799 7.59 55.65
Vermont 1 10,833 0.02 60.00
Wisconsin 1 6,377 0.01 30.00
--- ---------- ------ -----
Total 4,305 $51,180,034 100.00% 53.68
</TABLE>
<TABLE>
<CAPTION>
AVERAGE FINAL SCHEDULED
WEIGHTED AVERAGE OUTSTANDING PAYMENT DATE OF
REMAINING MATURITY OF PRINCIPAL BALANCE WEIGHTED RECEIVABLE WITH
STATE RECEIVABLES IN MONTHS OF RECEIVABLES AVERAGE APR LATEST MATURITY
- ----- --------------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
Alabama 51.39 $ 12,246 19.26% 09/27/2001
Arkansas 51.04 12,102 17.95 03/21/2001
Arizona 46.22 11,132 18.00 03/16/2001
California 46.44 10,463 20.43 08/25/2001
Connecticut 21.45 5,139 19.00 07/23/1998
Florida 51.68 11,882 19.32 10/30/2001
Georgia 50.80 12,200 18.79 11/01/2001
Illinois 35.87 7,003 22.86 02/13/2001
Indiana 46.68 10,911 20.03 07/21/2001
Kansas 44.20 9,786 18.00 01/19/2001
Kentucky 53.16 12,611 18.40 10/11/2001
Louisiana 43.95 10,663 21.92 08/28/2001
Massachusetts 34.96 6,632 20.56 07/25/2001
Maryland 47.69 10,737 20.38 10/17/2001
Maine 38.02 7,186 18.00 06/04/2001
Mississippi 49.30 11,918 19.33 09/27/2001
North Carolina 50.75 12,517 18.46 10/14/2001
New Hampshire 30.45 5,394 21.00 04/11/2000
New Jersey 32.41 9,976 25.00 07/26/1999
Ohio 48.65 10,985 20.14 10/15/2001
Oklahoma 47.34 10,571 18.37 09/02/2001
Pennsylvania 43.60 9,898 18.94 10/16/2001
South Carolina 50.34 12,142 18.85 10/18/2001
Tennessee 51.53 13,082 18.35 10/19/2001
Texas 52.45 13,379 18.68 10/15/2001
Virginia 52.20 12,372 18.70 10/17/2001
Vermont 52.00 10,833 18.00 01/18/2001
Wisconsin 27.00 6,377 25.00 12/18/1998
----- ------- ----- ----------
Total 50.27 $11,889 18.88% 11/01/2001
</TABLE>
S-21
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF THE INITIAL RECEIVABLES BY APR AS OF THE INITIAL CUT-OFF DATE
WEIGHTED WEIGHTED
PERCENTAGE OF AVERAGE AVERAGE AVERAGE
POOL ORIGINAL REMAINING OUTSTANDING FINAL SCHEDULED
NUMBER OUTSTANDING OUTSTANDING TERM TO MATURITY OF PRINCIPAL PAYMENT DATE OF
OF PRINCIPAL PRINCIPAL MATURITY IN RECEIVABLES BALANCES OF RECEIVABLE WITH
APR RECEIVABLES BALANCE BALANCE MONTHS IN MONTHS RECEIVABLES LATEST MATURITY
--- ----------- ------- ------- ------ --------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
14.001 - 15.000 1 $ 17,554 0.03% 60.00 46.00 $17,554 07/25/2000
15.001 - 16.000 1 22,035 0.04 60.00 47.00 22,035 08/17/2000
16.001 - 17.000 784 12,065,010 23.57 59.86 56.48 15,389 10/30/2001
17.001 - 18.000 936 12,023,720 23.49 56.07 52.25 12,846 10/30/2001
18.001 - 19.000 1,278 15,754,978 30.78 54.35 51.14 12,328 11/01/2001
19.001 - 20.000 153 1,565,584 3.06 47.48 43.35 10,233 09/21/2001
20.001 - 21.000 295 2,587,742 5.06 45.45 42.13 8,772 09/19/2001
21.001 - 22.000 410 3,856,183 7.53 45.58 42.70 9,405 10/15/2001
22.001 - 23.000 6 52,217 0.10 42.09 39.39 8,703 10/11/2000
23.001 - 24.000 26 221,375 0.43 47.76 38.22 8,514 11/18/2000
24.001 - 25.000 344 2,613,355 5.11 38.03 35.38 7,597 10/14/2001
25.001 - 26.000 3 23,307 0.05 39.98 39.24 7,769 03/21/2000
26.001 - 27.000 3 25,923 0.05 37.72 35.16 8,641 03/31/2000
27.001 - 28.000 63 338,991 0.66 29.60 26.38 5,381 07/23/2001
28.001 - 29.000 1 6,993 0.01 30.00 24.00 6,993 09/20/1998
29.001 - 30.000 1 5,068 0.01% 30.00 27.00 5,068 02/09/1999
- --------------- ------ ---------- ------- ----- ----- ------- ----------
Total 4,305 $51,180,034 100.00% 53.68 50.27 $11,889 11/01/2001
</TABLE>
S-22
<PAGE>
DEALER CONCENTRATION
Two groups of affiliated Dealers (each, an "Affiliated Group")
originated approximately 3.60% and 3.32%, respectively, of the aggregate
original balance of the Initial Receivables as of the Initial Cut-off Date. No
other Dealer or its affiliates originated more than 2.93% of the Original Pool
Outstanding Principal Balance of the Initial Receivables. The failure of any one
or more of the Dealers in the Affiliated Groups to repurchase Receivables under
a Dealer Agreement with either of the Originators upon breaches of
representations or warranties made with respect thereto could materially and
adversely impact NAFCO's ability to honor any corresponding repurchase
obligation under the Trust Documents and consequently the Seller's ability to
honor any corresponding retransfer obligation under the Trust Documents.
Although the Originators historically have not had any material problems with
Dealers failing to honor their repurchase obligations under their Dealer
Agreements, no representations are made as to the financial condition of any
Dealer and no assurance can be given that any Dealer from whom an Originator
purchased Receivables will have the financial ability to perform its repurchase
obligations, if any, under its Dealer Agreement. In the event that full payment
of a Receivable required to be retransferred to the Seller is not received, the
Seller defaults in its obligation to accept a retransfer of such Receivable, the
obligor under such Receivable defaults thereon and the Certificate Insurer fails
to pay any claim under the Certificate Policy, Certificateholders may sustain a
loss of principal and interest on their Certificates.
AVERAGE LIFE OF THE RECEIVABLES
As of the Initial Cut-off Date, the weighted average remaining
scheduled maturity of the Initial Receivables was approximately 50.27 months,
based on the following assumptions: (i) the Initial Receivables have the
characteristics described herein, (ii) all scheduled payments on the Initial
Receivables will be made on the last day of each month, and (iii) no principal
prepayments in full (including prepayments resulting from defaults, from
repurchases of Initial Receivables by the Seller or the Servicer and from the
application of insurance proceeds) will be made on the Initial Receivables.
As described in the related Prospectus under the caption "The
Receivables--Types of Receivables--Simple Interest Receivables," additional
payments may be scheduled at the maturity dates of certain Receivables as a
result of late payments thereon, which could have the effect of extending the
weighted average remaining scheduled maturity of the Receivables at any given
time. In addition, the maturity dates of the Receivables may be extended under
the circumstances described in the accompanying Prospectus under the caption
"Description of the Purchase Agreements and the Trust Documents--Collection and
- -- Servicing Procedures."
Prepayments on automobile receivables can be measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
Absolute Prepayment Model ("ABS"), represents an assumed rate of prepayment each
month relative to the original number of receivables in a pool of receivables.
ABS further assumes that all the receivables are the same size and amortize at
the same rate and that each receivable in each month of its life will either be
paid as scheduled or be prepaid in full. For example, in a pool of receivables
originally containing 10,000 receivables, a 1% ABS rate means that 100
receivables prepay each month. ABS does not purport to be a historical
description of prepayment experience or a
S-23
<PAGE>
prediction of the anticipated rate of prepayment of any pool of receivables,
including the Receivables.
The table captioned "Percent of Initial Certificate Principal Balance
at Various ABS Percentages" (the "ABS Table") has been prepared on the basis of
the following assumptions: (i) the closing date for the Certificates occurs on
November 13, 1996, (ii) distributions on the Certificates are made on the 21st
day of each month regardless of the day on which the Distribution Date actually
occurs on, commencing on November 21, 1996, (iii) no delinquencies or defaults
in the payment of principal and interest on the Receivables are experienced,
(iv) no Receivable is repurchased for breach of representation and warranty or
otherwise, (v) the Cut-off Date for the Initial Receivables is October 21, 1996,
(vi) the Due Period related to each Distribution Date is the calendar month
preceding the month in which such Distribution Date occurs (or, in the case of
the initial Distribution Date, from the Initial Cut-off Date to October 31,
1996), (vii) during the Pre-Funding and Revolving Periods new Receivables are
transferred to the trust with a principal balance equal to the minimum of the
amounts on deposit in the PreFunding and Revolving Accounts, or the expected
origination volume for the given month, with a term of 50 months and an APR of
18.88% per annum, (viii) prepayments on the Receivables are received on the last
day of each month at the indicated ABS prepayment speed, (ix) no Amortization
Event occurs, (x) the Pass-Through Rate is 6.33% per annum, (xi) the Servicing
Fee is 2% per annum, (xii) the Trustee fee is $3,000 per annum, (xiii) the
Certificate Insurer receives a monthly fee base on the outstanding insured
Certificate balance, (xiv) the contract pool is comprised of 71 pools stratified
by the remaining term of the loans, and whether they are fully amortizing or
balloon loans (xv) scheduled payments on each of the contracts are timely
received (collectively, the "Modeling Assumptions").
The ABS Table indicates, based on the assumptions set forth above, the
percentages of the initial principal amount of Certificate Balance of the
Certificates that would be outstanding after each of the Distributions Dates
shown at various percentages of ABS and the corresponding weighted average lives
of such Certificates. The actual characteristics and performance of the
Receivables will differ from the assumptions used in constructing the ABS Table.
The assumptions used are hypothetical and have been provided only to give a
general sense of how the principal cash flows might behave under varying
prepayment scenarios. For example, it is very unlikely that the Receivables will
prepay at a constant level of ABS until maturity or that all of the Receivables
will prepay at the same level of ABS. Moreover, the diverse terms of the
Receivables could produce slower or faster principal distributions than
indicated in the ABS Table at the various constant percentages of ABS specified,
even if the original and remaining terms to maturity of the Receivables are as
assumed. Any difference between such assumptions and the actual characteristics
and performance of the Receivables, or actual prepayment experience, will affect
the percentages of initial balances outstanding over time and the weighted
average lives of the Certificates.
S-24
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE BALANCE AT VARIOUS ABS PERCENTAGES
DISTRIBUTION DATE 0.0% 1.0% 1.5% 1.7%
- ----------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Closing Date.................. 100.00% 100.00% 100.00% 100.00%
2/21/97....................... 100.00 100.00 100.00 99.97
5/21/97....................... 100.00 100.00 100.00 99.97
8/21/97....................... 94.93 91.84 90.11 89.35
11/21/97...................... 89.60 83.79 80.52 79.12
2/21/98....................... 84.03 75.85 71.26 69.30
5/21/98....................... 78.20 68.06 62.37 59.95
8/21/98....................... 72.14 60.46 53.90 51.12
11/21/98...................... 65.84 53.06 45.89 42.84
2/21/99....................... 59.30 45.89 38.36 35.17
5/21/99....................... 52.61 39.03 31.40 28.17
8/21/99....................... 45.77 32.50 25.04 21.88
11/21/99...................... 38.88 26.37 19.33 16.37
2/21/2000..................... 31.95 20.65 14.30 11.62
5/21/2000..................... 25.11 15.43 9.99 7.70
8/21/2000..................... 18.37 10.70 6.39 4.58
11/21/2000.................... 12.00 6.59 3.55 2.29
2/21/2001..................... 6.04 3.10 1.45 0.77
5/21/2001..................... 2.50 1.13 0.42 0.14
8/21/2001..................... 0.53 0.21 0.06 0.00
11/21/2001.................... 0.00 0.00 0.00 0.00
02/21/2002.................... 0.00 0.00 0.00 0.00
05/21/2002.................... 0.00 0.00 0.00 0.00
08/21/2002.................... 0.00 0.00 0.00 0.00
------- ------- ------- ------
Average Life 2.633 2.274 2.073 1.988
</TABLE>
(1) The weighted average life of a Certificate is determined by (i)
multiplying the amount of each principal payment on a Certificate by
the number of years from the date of the issuance of the Certificate to
the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the related initial principal amount of the
Certificate.
The Seller does not believe that the timing of principal payments on
the Receivables will have a material impact on the yield to the initial
purchasers of the Certificates, unless the Certificates initially are purchased
at a premium or a discount. No assurance can be given, and no prediction can be
made, as to the actual prepayment experience on the Receivables.
CHARACTERISTICS OF SUBSEQUENT RECEIVABLES
After the transfer of Subsequent Receivables to the Trust during the
Pre-Funding Period and Revolving Period, the weighted average APR of the
Receivables may be as low as 18.0%, the weighted average remaining term of the
Receivables may be as high as 55 months, the percentage of the aggregate
outstanding principal balance of the Receivables represented by Receivables
relating to loans for the purchase of used Financed Vehicles may be as high as
80% and the final scheduled payment date on the Receivable with the latest
maturity date may be as late as April 30, 2002.
S-25
<PAGE>
DELINQUENCY, REPOSSESSION AND LOSS INFORMATION
The following table sets forth delinquency, repossession and loss
information since the month following NAFCO's commencement of operations in
October 1994 to September 30, 1996, with respect to NAFCO's serviced portfolio
of motor vehicle retail installment sale contracts (including those previously
sold by the Originators to or held by the Seller or transferred to Funding Trust
II). The sum of the individual balances and percentage set forth on the
following table may not equal the total due to rounding.
<TABLE>
<CAPTION>
DELINQUENCY AND LOSS EXPERIENCE
12/31/94 03/31/95 06/30/95 09/30/95
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cumulative Principal Amount Outstanding $3,808,315 $13,112,200 $23,237,182 $35,001,257
Average Principal Amount Outstanding $1,904,158 $8,460,258 $18,174,691 $29,119,220
For the Quarter Ended
Cumulative Number of Loans Outstanding 300 1,081 1,957 2,877
Average Number of Loans Outstanding 150 691 1,519 2,417
Number of Repossessions For the Quarter
Ended 0 5 23 47
Principal Amount of Repossessions For the
Quarter Ended 0 $65,327 $278,563 $591,056
Number of Repossessions as a Percent of
Average Number of Loans Outstanding 0.00% 0.72% 1.51% 1.94%
Principal Amount of Repossessions as a
Percent of Average Principal Amount
Outstanding 0.00% 0.77% 1.53% 2.03%
Net Losses For the Quarter Ended (2) $0 $1,989 $29,735 $212,230
Net Losses as a Percent of Principal
Amount Outstanding (Annualized) (2) 0.00% 0.06% 0.51% 2.43%
Delinquencies (1)
31 to 60 days $0 $ 139,526 $ 352,101 $ 785,437
61 to 90 days 0 0 22,039 137,253
91 days or over 0 0 0 16,581
---------- ----------- ----------- -----------
Total Delinquencies over 30 days $ 0 $ 139,526 $ 374,140 $ 939,271
Delinquencies as a Percentage of the
Cumulative Principal Amount
Outstanding For the Quarter
Ended (1)
31 to 60 days 0.00% 1.06% 1.52% 2.24%
61 to 90 days 0.00% 0.00% 0.09% 0.39%
91 days or over 0.00% 0.00% 0.00% 0.05%
----- ----- ----- -----
Total 0.00% 1.06% 1.61% 2.68%
</TABLE>
- ---------------
(1) Delinquent figures reported exclude contracts as to which the cumulative
amount of payments over 30 days delinquent is less than or equal to $40.
(2) A "Gross Loss" with respect to a contract charged off during a period equals
the outstanding principal balance thereof, together with earned interest thereon
to the date of default.
<TABLE>
<CAPTION>
DELINQUENCY AND LOSS EXPERIENCE
12/31/95 03/31/96 6/30/96 09/30/96
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Cumulative Principal Amount Outstanding $43,144,670 $53,534,405 $66,397,276 $82,792,345
Average Principal Amount Outstanding $39,072,964 $48,339,538 $59,965,841 $74,594,811
For the Quarter Ended
Cumulative Number of Loans Outstanding 3,586 4,567 5,774 7,286
Average Number of Loans Outstanding 3,232 4,077 5,171 6,530
Number of Repossessions For the Quarter
Ended 96 113 117 196
Principal Amount of Repossessions For the
Quarter Ended $1,096,805 $1,297,552 $1,451,492 $2,180,275
Number of Repossessions as a Percent of
Average Number of Loans Outstanding 2.97% 2.77% 2.26% 3.00%
Principal Amount of Repossessions as a
Percent of Average Principal Amount
Outstanding 2.81% 2.68% 2.42% 2.92%
Net Losses For the Quarter Ended (2) $437,639 $664,977 $460,161 $762,973
Net Losses as a Percent of Principal
Amount Outstanding (Annualized) (2) 4.06% 4.97% 2.77% 3.69%
Delinquencies (1)
31 to 60 days $2,148,024 $ 2,057,086 $ 2,662,662 $ 4,480,632
61 to 90 days 157,169 211,852 587,005 1,150,977
91 days or over 45,999 163,739 64,255 294,582
---------- ----------- ----------- ------------
Total Delinquencies over 30 days $2,351,191 $ 2,432,677 $ 3,313,923 $5,926,191
Delinquencies as a Percentage of the
Cumulative Principal Amount
Outstanding For the Quarter
Ended (1)
31 to 60 days 4.98% 3.84% 4.01% 5.41%
61 to 90 days 0.36% 0.40% 0.88% 1.39%
91 days or over 0.11% 0.31% 0.10% 0.36%
----- ----- ----- -----
Total 5.45% 4.54% 4.99% 7.16%
</TABLE>
- ---------------
(1) Delinquent figures reported exclude contracts as to which the cumulative
amount of payments over 30 days delinquent is less than or equal to $40.
(2) A "Gross Loss" with respect to a contract charged off during a period equals
the outstanding principal balance thereof, together with earned interest thereon
to the date of default.
S-26
<PAGE>
NAFCO commenced operations in October of 1994 and ACCH commenced
operations in September 1995. Accordingly, their historical delinquency,
repossession and loss experience is limited. No assurance can be given that the
delinquency, repossession and loss experience on the Receivables will be as
favorable as the experience indicated in the foregoing tables, especially in
light of such limited historical experience. The delinquency and loan loss
experience described above should be considered in light of the average maturity
of the Receivables in each of the respective periods, which reflect the addition
of new Receivables in such periods. Following the end of the Revolving Period,
no new Receivables will be added to the Trust and therefore the average maturity
of the Receivables will increasingly differ from NAFCO's portfolio of motor
vehicle retail installment sales contracts. As a result, the rate of
delinquencies and losses may vary from those set forth in the preceding table.
In particular, there can be no assurance that the rate of delinquencies and loan
losses may not increase over time.
THE SELLER
National Financial Auto Funding Trust (the "Seller") is a Delaware
business trust 100% of the beneficial ownership of which is owned by NAFCO or
affiliates of NAFCO. The Seller is organized for the limited purposes of
purchasing motor vehicle retail installment sale contracts, transferring such
contracts to third parties, forming trusts and engaging in related activities.
The principal office of the Seller is located at One Park Place, 621 N.W. 53rd
Street, Boca Raton, Florida, 33487, and its telephone number at such office is
(407) 997-2747.
NATIONAL AUTO FINANCE COMPANY L.P.
NAFCO will act as servicer (in such capacity, the "Servicer") of the
Receivables in each Trust pursuant to the Pooling and Servicing Agreement. NAFCO
is a limited partnership organized under the laws of the State of Delaware in
November 1994. The principal business of NAFCO is to acquire from automobile
dealers and service motor vehicle retail installment sale and lease contracts
from Dealers. Over 98% of the Dealer Agreements entered into by NAFCO are with
manufacturer-franchised Dealers rather than independent Dealers. As of June 30,
1996, NAFCO had gross assets of $15,017,388 and total partners' capital of
$5,964,162. Receivables transferred by NAFCO to the Seller and Funding Trust II
in connection with securitization of such Receivables are deemed to have been
sold by NAFCO under generally accepted accounting principles and accordingly are
not included among NAFCO's assets (other than the ratable portion of such
Receivables represented by the Seller's and Funding Trust II's respective
retained interests in such securitizations). NAFCO's principal office is located
at One Park Place, 621 N.W. 53rd Street, Suite 200, Boca Raton, Florida 33487,
and its telephone number at such office is (407) 997-2747.
S-27
<PAGE>
OMNI FINANCIAL SERVICES OF AMERICA, INC. ("OFSA")
Omni Financial Services of America, Inc., a Delaware corporation
("OFSA"), will act as subservicer of the Receivables pursuant to a subservicing
agreement between OFSA and NAFCO. OFSA is a wholly-owned subsidiary of World
Omni Financial Corp., a Florida corporation ("World Omni").
OFSA was incorporated in July 1995 primarily to service subprime retail
motor vehicle contracts, including the Receivables. As of October 1, 1996, OFSA
has over 250 employees operating at a new service center in Memphis, Tennessee
and was servicing approximately 50,000 retail and lease contracts with an
aggregate outstanding principal balance of approximately $600 million. The
Servicer and OFSA will maintain files relating to the Receivables at the Memphis
service center and will coordinate servicing for the Receivables at such office.
The address of the Memphis service center is 1769 Paragon Avenue, Memphis,
Tennessee 38132, and its telephone number is (901) 344-7200.
THE CERTIFICATE INSURER
GENERAL
Financial Security is a monoline insurance company incorporated in 1984
under the laws of the State of New York. Financial Security is licensed to
engage in financial guaranty insurance business in all 50 states, the District
of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities--thereby enhancing the credit rating of those securities--in
consideration for the payment of a premium to the insurer. Financial Security
and its subsidiaries principally insure asset-backed, collateralized and
municipal securities. Asset-backed securities are generally supported by
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. Collateralized
securities include public utility first mortgage bonds and sale/leaseback
obligation bonds. Municipal securities consist largely of general obligation
bonds, special revenue bonds and other special obligations of state and local
governments. Financial Security insures both newly issued securities sold in the
primary market and outstanding securities sold in the secondary market that
satisfy Financial Security's underwriting criteria.
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings, Inc.,
U S WEST Capital Corporation and The Tokio Marine and Fire Insurance Co., Ltd.
No shareholder of Holdings is obligated to pay any debt of Financial Security or
any claim under any insurance policy issued by Financial Security or to make any
additional contribution to the capital of Financial Security.
S-28
<PAGE>
The principal executive offices of Financial Security are located at
350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by Financial Security
or any of its domestic operating insurance company subsidiaries are reinsured
among such companies on an agreed-upon percentage substantially proportional to
their respective capital, surplus and reserves, subject to applicable statutory
risk limitations. In addition, Financial Security reinsures a portion of its
liabilities under certain of its financial guaranty insurance policies with
other reinsurers under various quota share treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by Financial
Security as a risk management device and to comply with certain statutory and
rating agency requirements; it does not alter or limit Financial Security's
obligations under any financial guaranty insurance policy.
RATINGS OF CLAIMS-PAYING ABILITY
Financial Security's claims-paying ability is rated "Aaa" by Moody's
and "AAA" by S&P, Nippon Investors Service Inc. and Standard & Poor's
(Australia) Pty. Ltd. Such ratings reflect only the views of the respective
rating agencies, are not recommendations to buy, sell or hold securities and are
subject to revision or withdrawal at any time by such rating agencies. See "Risk
Factors - Ratings on Certificates" herein.
CAPITALIZATION
The following table sets forth the capitalization of Financial Security
and its wholly owned subsidiaries on the basis of generally accepted accounting
principles as of June 30, 1996 (in thousands):
JUNE 30, 1996
-------------
(UNAUDITED)
Deferred Premium Reserve (net of
prepaid reinsurance premiums) $351,180
Shareholder's Equity:
Common Stock 15,000
Additional Paid-In Capital 681,470
Unrealized Loss on Investments
(net of deferred income taxes) (5,685)
Accumulated Earnings 94,287
Total Shareholder's Equity 785,072
Total Deferred Premium Reserve
and Shareholder's Equity $1,136,252
For further information concerning Financial Security, see the
Consolidated Financial Statements of Financial Security and Subsidiaries, and
the notes thereto, incorporated by
S-29
<PAGE>
reference herein. Copies of the statutory quarterly and annual statements filed
with the State of New York Insurance Department by Financial Security are
available upon request to the State of New York Insurance Department.
INSURANCE REGULATION
Financial Security is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of New York, its
state of domicile. In addition, Financial Security and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial guaranty
insurance corporation licensed to do business in the State of New York,
Financial Security is subject to Article 69 of the New York Insurance Law which,
among other things, limits the business of each such insurer to financial
guaranty insurance and related lines, requires that each such insurer maintain a
minimum surplus to policyholders, establishes contingency, loss and unearned
premium reserve requirements for each such insurer, and limits the size of
individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as Financial Security, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
THE CERTIFICATES
The following information supplements the information contained in the
accompanying Prospectus. Prospective Certificateholders should consider, in
addition to the information below, the information in the accompanying
Prospectus under "The Certificates," "Certain Information Regarding the
Securities," and "Description of the Purchase Agreements and the Trust
Documents."
The Certificates offered hereby will be issued pursuant to the Pooling
and Servicing Agreement, a form of which has been filed as an exhibit in the
Registration Statement of which the accompanying Prospectus forms a part. The
following summary of the Certificates and the Pooling and Servicing Agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all of the provisions of the Certificates, the Pooling
and Servicing Agreement and the Prospectus. Where particular provisions of or
terms used in the Pooling and Servicing Agreement are referred to, the actual
provisions (including definitions of terms) are incorporated by reference as
part of such summary.
GENERAL
Each Certificate will represent a fractional undivided interest (the
"Percentage Interest") in the aggregate amounts distributable in respect of the
Certificates equal to the percentage obtained by dividing the denomination of
the Certificate by the initial aggregate principal amount of all Certificates.
The Certificates will evidence in the aggregate an undivided ownership interest
of 91% (the "Certificate Percentage") of the Trust initially
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representing approximately $62,098,000.00. The assets of the Trust (the "Trust
Property") will include (i) non-prime motor vehicle retail installment sale
contracts transferred to the Trust on the Closing Date (the "Initial
Receivables") and on subsequent transfer dates (the "Additional Receivables"
and, together with the Initial Receivables, the "Receivables"), (ii) all monies
paid or payable thereunder on or after the applicable Cut-off Date, (iii)
security interests in the new and used automobiles, light-duty trucks, vans and
minivans financed thereby (the "Financed Vehicles"), (iv) the Receivable Files,
(v) such assets as shall from time to time be deposited in the Collection
Account, the Certificate Account, the Revolving Account, the Pre-Funding Account
and the Pre-Funding Period Reserve Account, each established pursuant to the
Pooling and Servicing Agreement, (vi) property that secured a Receivable and
that has been acquired by repossession or otherwise, (vii) all rights to
insurance proceeds and liquidation proceeds with respect to the Receivables,
(viii) the Certificate Policy issued to the Trustee for the benefit of the
Certificateholders by the Certificate Insurer, (ix) certain rights of the
Originators against the Dealers under the Dealer Agreements, (x) all right,
title and interest of the Seller in and to the Purchase Agreements, and (xi) the
income and proceeds of the foregoing and the rights to enforce the foregoing.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
The Certificates will be issued, maintained and transferred on the
book-entry records of The Depository Trust Company ("DTC") and its Participants
(as defined in the Prospectus). The Certificates will be issued in minimum
denominations of $20,000 and integral multiples of $1,000 in excess thereof.
The Certificates will be represented by one or more certificates
registered in the name of the nominee of DTC (certificates so registered,
"Book-Entry Certificates"). The Seller has been informed by DTC that DTC's
nominee will be Cede & Co. ("Cede"). No person acquiring an interest in the
Certificates (a "Beneficial Owner") will be entitled to receive a certificate
representing such person's interest (a "Definitive Certificate"), except as set
forth herein. Unless and until Definitive Certificates are issued for the
Certificates under the limited circumstances described herein, all references to
actions by Certificateholders with respect to the Certificates shall refer to
actions taken by DTC upon instructions from its Participants, and all references
herein to distributions, notices, reports and statements to Certificateholders
with respect to the Certificates shall refer to distributions, notices, reports
and statements to DTC or Cede, as the registered holder of the Certificates, for
distribution to Beneficial Owners by DTC in accordance with DTC procedures.
Beneficial Owners that are not Participants or Indirect Participants
(as defined in the Prospectus) but desire to purchase, sell or otherwise
transfer ownership of, or other interests in, the related Certificates may do so
only through Participants and Indirect Participants. In addition, Beneficial
Owners will receive all distributions of principal of and interest on the
related Certificates from the Paying Agent (as defined in the Prospectus)
through DTC and Participants. Accordingly, Beneficial Owners may experience
delays in their receipt of payments. Unless and until Definitive Certificates
are issued for the related Certificates, it is anticipated that the only
registered Certificateholder of such Certificates will be Cede, as nominee of
DTC. Beneficial Owners will not be recognized by the Trustee or the Servicer as
Certificateholders, as such term is used in the Pooling and Servicing Agreement,
and
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Beneficial Owners will be permitted to receive information furnished to
Certificateholders and to exercise the rights of Certificateholders only
indirectly through DTC, its Participants and Indirect 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 Certificates among Participants and to receive and transmit distributions of
principal of, and interest on, such Certificates. Participants and Indirect
Participants with which Beneficial Owners have accounts with respect to such
Certificates similarly are required to make book-entry transfers and receive and
transmit such distributions on behalf of their respective Beneficial Owners.
Accordingly, although Beneficial Owners will not possess physical certificates
evidencing their interests in the Certificates, the Rules provide a mechanism by
which Beneficial Owners, through their Participants and Indirect Participants
will receive distributions and will be able to transfer their interests in the
Certificates.
None of the Seller, the Servicer or the Trustee will have any liability
for any actions taken by DTC or its nominee or CEDEL or Euroclear, including,
without limitation, actions for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Certificates
held by Cede, as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
DEFINITIVE CERTIFICATES. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"Certain Information Regarding the Securities -Book-Entry Registration" in the
accompanying Prospectus.
Upon the occurrence of an event described in the Prospectus in the
fifth paragraph under "Certain Information Regarding the Securities-Book-Entry
Registration," the Trustee is required to notify, through DTC, Participants who
have ownership of Certificates as indicated on the records of DTC of the
availability of Definitive Certificates for their Certificates. Upon surrender
by DTC of the definitive certificates representing the Certificates and upon
receipt of instructions from DTC for re-registration, the Trustee will reissue
the Certificates as Definitive Certificates issued in the respective principal
amounts owned by individual Beneficial Owners, and thereafter the Trustee and
the Servicer will recognize the holders of such Definitive Certificates as
Certificateholders under the Pooling and Servicing Agreement.
For additional information regarding DTC and the Certificates, see
"Certain Information Regarding The Securities - Book-Entry Registration" in the
Prospectus.
BOOK-ENTRY FACILITIES. Beneficial Owners may elect to hold their
interests in the Book-Entry Certificates through DTC in the United States or
through CEDEL or Euroclear in Europe, if they are participants of such systems,
or indirectly through organizations which are participants in such systems. The
Book-Entry Certificates of each class will be issued in one or more certificates
which equal the aggregate principal balance of such class and will initially be
registered in the name of Cede, the nominee of DTC. CEDEL and Euroclear
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will hold omnibus positions on behalf of their participants through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank
will act as depositary for CEDEL and Morgan will act as depositary for Euroclear
(in such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries").
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the Business Day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear Participants or CEDEL Participants (each as defined below) on such
Business Day. Cash received in CEDEL or Euroclear as a result of sales of
securities by or through a CEDEL Participant or Euroclear Participant to a
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. For information with respect to tax
documentation procedures relating to the Certificates, see Annex I hereto,
"Global Clearance, Settlement and Tax Documentation Procedures".
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective 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 by DTC in
accordance with the Rules on behalf of the relevant European international
clearing system by the Relevant 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 the
Relevant 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 European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the rules, regulations and procedures governing DTC and its
Participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and
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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
Euroclear ("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 32 currencies, including United
States dollars. Euroclear 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 the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear 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 Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear 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 or relationship with persons
holding through Euroclear Participants.
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Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable Participants in
accordance with DTC's normal procedures. Each Participant will be responsible
for disbursing such payments to the Beneficial Owners of the Book-Entry
Certificates that it represents and to each Indirect Participant for which it
acts as agent. Each such Indirect Participant will be responsible for disbursing
funds to the Beneficial Owners of the Book-Entry Certificates that it
represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Certificates held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Since transactions in the
Book-Entry Certificates will be effected only through DTC, CEDEL, Euroclear,
participating organizations, indirect participants and certain banks, the
ability of a Beneficial Owner to pledge Certificates to persons or entities that
do not participate in the DTC, CEDEL or Euroclear systems, or otherwise to take
actions in respect of such Certificates, may be limited due to lack of a
physical certificate representing such Certificates. In addition, issuance of
the Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
DTC has advised the Seller and the Trustee that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Certificates under the Pooling and
Servicing Agreement only at the direction of one or more Participants to whose
DTC accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Indirect Participants whose holdings include such
Book-Entry Certificates. CEDEL or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by a Certificateholder under
the Pooling and Servicing Agreement on behalf of a CEDEL Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to the ability of the Relevant Depositary to effect such actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Certificates which conflict with actions
taken with respect to other Certificates.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
DISTRIBUTIONS AND PAYMENTS
The Servicer will provide to the Trustee and the Certificate Insurer
not later than Reporting Date a certificate (the "Servicer Certificate") setting
forth, among other things, the Available Amount and the Certificate
Distributable Amount for the related Distribution Date
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and, based upon such determinations and the distributions to be made on such
Distribution Date, as described below, the amount of any withdrawal required to
be made from the Spread Account and/or any Policy Claim Amount, in each case
with respect to such Distribution Date. On the twenty first day of each month
(or, if such day is not a Business Day, the next succeeding Business Day (each a
"Distribution Date"), beginning on November 21, 1996, the Trustee will, to the
extent of the Available Amount together with funds withdrawn from the Spread
Account, if any, and the Policy Claim Amount, if any, make the following
payments (in the case of withdrawals from the Spread Account, for payments of
the Servicing Fee and the Certificate Distributable Amount only, and in the case
the Policy Claim Amount, for payment of Guaranteed Distributions only) from the
Certificate Account in the following order of priority:
(i) first, to the Servicer, the amount of the Servicing Fee payable in
respect of the related Due Period and any Servicing Fees from prior Due Periods
to the extent not previously paid;
(ii) second, accrued and unpaid fees owing to the Trustee, Collateral
Agent or the Custodian, to the extent not paid by the Servicer;
(iii) to the Certificateholders, to be applied first to the Certificate
Interest Distributable Amount and then to the Certificate Principal
Distributable Amount, the Certificate Distributable Amount;
(iv) fourth, to the Certificate Insurer (or any designee thereof), any
amounts then due to the Certificate Insurer under the Insurance Agreement or the
Pooling and Servicing Agreement;
(v) fifth, to the Collateral Agent for deposit in the Spread Account,
the amount, if any, required to be deposited therein pursuant to the Spread
Account Agreement;
(vi) sixth, to the Pre-Funding Period Reserve Account, the amount by
which the Required Reserve Amount exceeds the amount of funds on deposit therein
after giving effect to any withdrawals from the Pre-Funding Period Reserve
Account on such Distribution Date;
(vii) seventh, to the Trustee to reimburse the Trustee for any
unreimbursed expenses incurred by it under the Pooling and Servicing Agreement
and to pay any indemnities owed by the Seller to the Trustee under the Pooling
and Servicing Agreement;
(viii) eighth, to reimburse the Servicer any expense of an Opinion of
Counsel incurred in connection with an amendment to the Pooling and Servicing
Agreement, and any expenses incurred by the Servicer in connection with a
realization upon a Defaulted Receivable;
(ix) ninth, to reimburse the Backup Servicer for expenses incurred by
the Backup Servicer and to reimburse the Servicer for expenses incurred by and
reimbursable, or any indemnities payable by the Seller, to the Servicer pursuant
to the Pooling and Servicing Agreement;
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(x) tenth, to reimburse the Seller for expenses incurred by and
reimbursable to the Seller pursuant to the Pooling and Servicing Agreement; and
(xi) eleventh, to the holder of the Seller Interest, the balance of any
funds remaining in the Certificate Account after application pursuant to the
preceding clauses (i) through (x).
The following sets forth an example of the application of the foregoing
to a hypothetical monthly distribution:
February 1 -
February 28................DUE PERIOD. Scheduled payments and any prepayments
and other collections on the Receivables are received
and deposited into the Collection Account.
February 28 ...............RECORD DATE. Distributions on the Distribution Date
will be made to Certificateholders of record at the
close of business on this date.
March 15 ..................REPORTING DATE. On or before this date, the Servicer
will notify the Trustee of, among other things, the
amounts available in the Collection Account and the
amounts required to be distributed on the
Distribution Date, and NAFCO and the Servicer will
make required payments of Purchase Amounts to the
Collection Account.
March 15...................DRAW DATE. On this date, the Trustee will make any
required claims under the Certificate Policy if the
Available Amount in the Collection Account (plus any
amounts deposited therein by the Collateral Agent
from the Spread Account), after giving effect to all
of the other distributions having a higher priority
as set forth above, are insufficient to pay in full
the Guaranteed Distributions for the related
Distribution Date.
March 21...................DISTRIBUTION DATE. The Trustee will distribute the
Available Amount together with funds withdrawn from
the Spread Account, if any, and the Policy Claim
Amount, if any, in the manner and priority set forth
above under the caption " Distributions and
Payments".
The "Certificate Distributable Amount" for a Distribution Date will be
the sum of the Certificate Interest Distributable Amount and the Certificate
Principal Distributable Amount.
The "Certificate Interest Distributable Amount" for a Distribution Date
will be the sum of (i) thirty (30) days of interest (or, in the case of the
initial Distribution Date, the number of days from and including the Closing
Date to but not including such initial
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Distribution Date) at the Certificate Rate on the aggregate outstanding
principal balance of the Certificates on such Distribution Date (before
reduction by any principal distributions made on such Distribution Date) (the
"Monthly Interest"), and (ii) the aggregate shortfalls in interest distributions
to the Certificateholders on prior Distribution Dates, together with interest on
the such shortfalls at the Certificate Rate from the applicable preceding
Distribution Date through the current Distribution Date, to the extent permitted
by law.
The "Certificate Principal Distributable Amount" for any Distribution
Date prior to the Final Scheduled Distribution Date will be the sum of (i) the
Certificate Percentage of the Principal Distributable Amount for such
Distribution Date and (ii) with respect to the Distribution Date relating to the
Reporting Date next succeeding the termination of the PreFunding Period, the
amount of funds remaining on deposit in the Pre-Funding Account, if any, on the
last day of the Pre-Funding Period, and (iii) the aggregate shortfalls in
principal distributions to the Certificateholders on prior Distribution Dates.
The Certificate Principal Distributable Amount for the Final Scheduled
Distribution Date will be the aggregate outstanding principal balance of the
Certificates on such date (before giving effect to any distribution on the
Certificates on such Final Scheduled Distribution Date).
The "Principal Distributable Amount" for any Distribution Date
following the calendar month in which the Revolving Period terminates (other
than the Final Scheduled Distribution Date), will equal the sum of (i) that
portion of all collections on the Receivables (other than Liquidated
Receivables, Retransferred Receivables and, to the extent included in clause
(iv) below, the outstanding principal balance of Retransfer Default Receivables)
allocable to principal, including all full and partial principal prepayments,
deposited into the Collection Account during the related Due Period, (ii) the
outstanding principal balance of all Receivables that became Liquidated
Receivables during the related Due Period (other than Liquidated Receivables
that became Retransferred Receivables during such Due Period), (iii) the portion
of the Purchase Amount allocable to principal of all Receivables that became
Retransferred Receivables on or prior to the related Reporting Date and
subsequent to the preceding Reporting Date, (iv) in the sole discretion of the
Certificate Insurer, the outstanding principal balance as of the related
Reporting Date of all Retransfer Default Receivables, (v) the aggregate amount
of Bankruptcy Losses that occurred during the related Due Period, (vi) with
respect to the first Distribution Date next succeeding the termination of the
Revolving Period, the amount of funds remaining on deposit in the Revolving
Account, if any, on the last day of the Revolving Period; PROVIDED, HOWEVER,
that principal collections deposited to the Revolving Account during the related
Due Period and withdrawn from the Revolving Account and released to the Seller
in connection with the transfer of Additional Receivables will not be included
in the Principal Distributable Amount for the Distribution Date related to such
Due Period. The Principal Distributable Amount for any Distribution Date
occurring prior to or during the calendar month in which the Revolving Period
terminates will equal the amount by which the amount on deposit in the Revolving
Account at the close of business on the last day of the immediately preceding
Due Period, less any investment earnings on deposit therein, exceeds $3,000,000.
A "Liquidated Receivable" is any Receivable with respect to which any
of the following has occurred: (i) 90 days have elapsed since repossession of
the related Financed Vehicle, (ii) the Servicer (or a subservicer) has in good
faith determined that all amounts that
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it expects to recover under such Receivable have been received, or (iii) 90% of
any scheduled payment on such Receivable is 120 days or more (or, if the related
Obligor is a debtor under Chapter 13 of the U.S. Bankruptcy Code, 180 days or
more) delinquent as of the end of such Due Period.
A "Retransfer Default Receivable" is any Receivable with respect to
which the Seller has failed to deposit in the Collection Account the Retransfer
Amount for such Receivable following receipt of notice from the Trustee that
such Receivable is in breach of a representation or warranty made with respect
to such Receivable in the Pooling and Servicing Agreement.
A "Bankruptcy Loss" with respect to any Receivable is an amount equal
to the excess of the principal balance of such Receivable immediately prior to
issuance of an order in a bankruptcy or insolvency proceeding reducing the
amount owed on a Receivable or otherwise modifying or restructuring the
scheduled payments to be made on a Receivable over the principal balance of such
Receivable as so reduced by such order or the net present value (using as the
discount rate the higher of the APR on such Receivable or the rate of interest,
if any, specified by the court in such order) of the scheduled payments as so
modified or restructured. A "Bankruptcy Loss" will be deemed to have occurred on
the date of issuance of such order.
STATEMENTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Holders of the Certificates,
the Trustee will forward by mail to each registered holder of a Certificate and
the Certificate Insurer a statement setting forth: (i) the amount of the
distribution to the holders of the Certificates (detailed with respect to each
component of the Certificate Distributable Amount), (ii) if the distribution is
less than the amount required to be distributed under the Pooling and Servicing
Agreement, the amount of the shortfall and an allocation thereof to principal
and interest on the Certificates, (iii) the Pool Outstanding Principal Balance
and the amount, if any, in the Collection Account, Certificate Account,
Revolving Account, Pre-Funding Account and PreFunding Period Reserve Account at
the end of the calendar month preceding such Distribution Date, (iv) the number
and aggregate outstanding principal balances of Receivables delinquent one or
more months as of the end of the preceding calendar month, (v) the amount
withdrawn from the Spread Account and included in the amounts distributed to the
Certificateholders, (vi) the outstanding principal balance of all Receivables
that became Liquidated Receivables during the related Due Period (other than
Liquidated Receivables that became Retransferred Receivables during such Due
Period), (vii) the amount remaining in the Spread Account after giving effect to
any withdrawals therefrom or additions thereto on such Distribution Date and the
amount, if any, by which the amount required to be on deposit in the Spread
Account pursuant to the Spread Account Agreement exceeds the amount in such
Spread Account, (viii) the amount, if any, drawn under the Certificate Policy
included in amounts actually distributed to the Certificateholders; (ix) the
amount of any Purchase Amounts paid, or required to be paid, during the related
Due Period and (x) the Certificate Factor. In the case of information described
in clauses (i), (ii) and (viii) above, the amounts shall also be expressed as a
dollar amount per $1,000 denomination of Certificates.
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Unless and until Definitive Certificates are issued, such reports will
be sent on behalf of the Trust to the Trustee and Cede & Co., as registered
holder of the Certificates and the nominee of DTC. Certificate Owners may
receive copies of such reports upon written request, together with a
certification that they are Certificate Owners and payment of any expenses
associated with the distribution of such reports, from the Trustee. See "Certain
Information Regarding the Securities - Reports to Securityholders" in the
accompanying Prospectus.
Within the required period of time after the end of each calendar year,
the Trustee will furnish to each person who at any time during such calendar
year was a Certificateholder, a statement as to the aggregate amounts of
interest and principal paid to such Certificateholder, information regarding the
amount of servicing compensation received by the Servicer and such other
information as the Seller deems necessary to enable such Certificateholder to
prepare its tax returns. See "Certain Federal Income Tax Consequences" in the
accompanying Prospectus.
CLAIMS UNDER CERTIFICATE POLICY
If, as of the fourth Business Day prior to a Distribution Date (each, a
"Draw Date") the sum of (i) the Available Amount for the related Distribution
Date and (ii) the amount, if any, required to be withdrawn by the Trustee from
the Spread Account on or prior to such Distribution Date as provided below, is
not sufficient to pay the Guaranteed Distributions for such Distribution Date,
the Trustee will deliver to the Certificate Insurer, no later than noon, New
York City time, on such Draw Date, a completed notice of claim under the
Certificate Policy in the amount of the shortfall (the amount of any such
shortfall being hereinafter referred to as the "Policy Claim Amount"). Amounts
paid by the Certificate Insurer pursuant to a claim submitted by the Trustee as
described above will be deposited by the Trustee into the Certificate Account
for payment to Certificateholders on the related Distribution Date. Any payment
made by the Certificate Insurer under the Certificate Policy will be applied
solely to the payment of the Certificates, and for no other purpose.
INSURANCE AGREEMENT
The Seller, NAFCO and the Certificate Insurer will enter into an
Insurance and Indemnity Agreement (the "Insurance Agreement") pursuant to which
the Seller will agree to reimburse, with interest, Financial Security for
amounts paid pursuant to claims under the Certificate Policy. The Seller will
further agree (i) to pay Financial Security (or its designee) all reasonable
charges and expenses which Financial Security may pay or incur relative to any
amounts paid under the Certificate Policy or otherwise in connection with the
transaction, (ii) to indemnify Financial Security against certain liabilities,
and (iii) to pay Financial Security the amount of any unpaid premium owing in
respect of the Certificate Policy.
SUBORDINATION OF THE SELLER INTEREST; SPREAD ACCOUNT
The rights of the holder of the Seller Interest to receive
distributions with respect to the Receivables will be subordinated to the rights
of the Certificateholders to the extent
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provided in the Pooling and Servicing Agreement. This subordination is intended
to enhance the likelihood of timely receipt by Certificateholders of the full
amount of interest and principal required to be distributed to them, and to
afford such Certificateholders limited protection against losses in respect of
the Receivables. Neither the Seller nor the Servicer will be required to refund
any amounts properly paid to them, whether or not there are sufficient funds on
any subsequent Distribution Date to make full payments to the
Certificateholders.
The Collateral Agent will establish and maintain the Spread Account
pursuant to the Spread Account Agreement as an Eligible Account. The Spread
Account Agreement will authorize the Collateral Agent, pursuant to written
instructions from the Seller, to invest all funds in the Spread Account in
Eligible Investments generally maturing not later than the Business Day
preceding the Distribution Date next following the date of investment. The
Spread Account will be created with an initial deposit by the Seller in the
amount of $682,395.60 (the "Spread Account Initial Amount"). The Spread Account
will thereafter be funded by the deposit therein of amounts otherwise
distributable in respect of the Seller Interest until the monies in the Spread
Account reach the amount required to be maintained on deposit therein accordance
with the Spread Account Agreement. Thereafter, amounts otherwise distributable
in respect of the Seller Interest will be deposited in the Spread Account to the
extent necessary to maintain the amount in the Spread Account at such required
amount.
If on any Distribution Date the Available Amount is not sufficient to
pay to the Certificateholders the Certificate Distributable Amount and to pay to
the Servicer the Servicing Fee, the Trustee will notify the Collateral Agent and
the Certificate Insurer of such deficiency and will direct the Collateral Agent
to withdraw from the Spread Account (to the extent of funds on deposit therein)
and transfer to the Trustee for deposit in the Certificate Account the amount of
such deficiency. The Trustee will deposit the amounts so transferred from the
Spread Account to the Certificate Account for distribution to the
Certificateholders on the immediately succeeding Distribution Date.
So long as a Certificate Insurer Default shall not have occurred and be
continuing, the Certificate Insurer will be entitled to exercise in its sole
discretion all rights under the Spread Account Agreement with respect to the
Spread Account and any amounts on deposit therein and will have no liability to
the Trustee or the Certificateholders for the exercise of such rights. The
Certificate Insurer may (so long as a Certificate Insurer Default shall not have
occurred and be continuing) amend or modify any term of the Spread Account
Agreement (including terminating such agreement and releasing all funds on
deposit in the Spread Account) with the written consent of NAFCO and the Seller
and will not be required to obtain the consent of the Trustee or any
Certificateholder to such amendment or modification. Accordingly, there can be
no assurance that funds deposited to the Spread Account will be available in the
event collections on the Receivables and other amounts available under the
Pooling and Servicing Agreement are insufficient to make distributions of the
Certificate Distributable Amount on any Distribution Date.
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THE POOLING AND SERVICING AGREEMENT
The following summary describes certain terms of the Pooling and
Servicing Agreement. A form of the Pooling and Servicing Agreement has been
filed as an exhibit to the Registration Statement. A copy of the Pooling and
Servicing Agreement will be filed with the Commission following the issuance of
the Certificates. The summary does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all the provisions of the Pooling
and Servicing Agreement. The following summary supplements the description of
the general terms and provisions of the Pooling and Servicing Agreement set
forth in the accompanying Prospectus, to which description reference is hereby
made.
SALE AND ASSIGNMENT OF RECEIVABLES
The Seller will acquire (i) the Initial Receivables from Funding Trust
II, a Delaware business trust wholly-owned by NAFCO and affiliates of NAFCO,
pursuant to the Sale Agreement and (ii) the Additional Receivables from NAFCO
pursuant to a Purchase Agreement. NAFCO and Funding Trust II, in their
capacities as transferors of the Receivables to the Seller, are herein referred
to collectively as the "NAFCO Transferors." The Initial Receivables constitute,
as of the Initial Cut-off Date, and the Additional Receivables will constitute,
as of the applicable Subsequent Cut-off Date, a substantial portion of the
non-prime motor vehicle retail installment sale contracts originated by NAFCO
and ACCH satisfying the selection criteria described herein. See "The
Receivables Pool--General" herein.
Pursuant to the Pooling and Servicing Agreement, the Seller may, during
the Revolving Period and the Pre-Funding Period, transfer and assign Additional
Receivables to the Trust to the extent that (i) funds are available in the
Revolving Account or the Pre-Funding Account, as the case may be, and (ii)
Additional Receivables are available for purchase from NAFCO. With respect to
both the Pre-Funding Period and the Revolving Period, transfer of Additional
Receivables will be subject to the satisfaction of certain conditions, including
the prior written consent of the Certificate Insurer to the transfer of such
Additional Receivables.
During the Revolving Period, upon the Seller's written direction to the
Trustee and the Servicer from time to time (but not more often than once during
each such period or as more frequently consented to in writing by the
Certificate Insurer), the Trust will release funds in the Revolving Account or
the Pre-Funding Account, as applicable, to the Seller in an amount equal to the
product of (i) the Additional Receivable Transfer Percentage and (ii) the
aggregate outstanding principal balance of the Additional Receivables so
transferred as of the related Subsequent Cut-Off Date, and the Seller will
transfer and assign to the Trust, without recourse, the Seller's entire right,
title and interest in and to such Additional Receivables. The "Additional
Receivable Transfer Percentage" will equal (x) 91%, in the case of Additional
Receivables with respect to which funds were released therefor from the
Pre-Funding Account, and (y) 100%, in the case of Additional Receivables with
respect to which funds were released therefor from the Revolving Account. Upon
the transfer and assignment of Additional Receivables to the Trust on a
Subsequent Transfer Date, the Pool Outstanding Principal Balance will increase
in an amount equal to the aggregate Outstanding Principal Balance of the
Additional Receivables so transferred as of the applicable Subsequent Cut-off
Date.
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Any transfer and assignment of Additional Receivables to the Trust will
be subject to the satisfaction, on or before the related Subsequent Transfer
Date, of the following conditions, among others: (i) each such Additional
Receivable must satisfy the eligibility criteria with respect to the Receivables
specified in the Pooling and Servicing Agreement; (ii) as of such Subsequent
Transfer Date, the Receivables in the Trust, together with the Additional
Receivables to be transferred and assigned by the Seller to the Trust on such
Subsequent Transfer Date, must meet the following criteria (computed based on
the characteristics of the Initial Receivables on the Initial Cut-off Date and
any Additional Receivables on the related Subsequent Cut-off Date): (a) the
weighted average APR of such Receivables will not be less than 18.0%, (b) the
weighted average remaining term of such Receivables will not be greater than 55
months, (c) not more than 80% of the aggregate outstanding principal balance of
such Receivables will be attributable to loans for the purchase of used Financed
Vehicles and (d) the final scheduled payment date on the Receivable with the
latest maturity will not be later than April 30, 2002; (iii) the Seller shall
have executed and delivered to the Trustee a Subsequent Transfer Agreement
conveying such Additional Receivables to the Trust; and (iv) the Certificate
Insurer shall, in its sole and absolute discretion, have consented in writing to
the transfer and assignment of such Additional Receivables to the Trust. The
representations and warranties with respect to the Initial Receivables made by
the Seller in the Pooling and Servicing Agreement, and the representations and
warranties with respect to the Initial Receivables made by NAFCO and assigned to
the Trust, will be deemed to have been made with respect to the Additional
Receivables as of the respective dates of their transfer to the Trust.
RETRANSFER OF RECEIVABLES
The Pooling and Servicing Agreement will provide that the Seller will
have the right to require the retransfer to the Seller of all of the Receivables
included in the Trust on or after any Distribution Date on which the aggregate
of the outstanding principal balances of the Receivables (the "Pool Outstanding
Principal Balance") is less than 10% of the Original Pool Outstanding Principal
Balance (as hereinafter defined) of such Receivables. The "Original Pool
Outstanding Principal Balance" will equal the aggregate outstanding principal
balance of all of the Receivables, including Additional Receivables, as of their
respective Cut-off Dates. In connection with any such retransfer, the Seller
will deliver to the Trustee an amount equal to the sum of (i) 100% of the
aggregate outstanding principal balance of the Certificates on such Distribution
Date and (ii) accrued and unpaid interest at the Certificate Rate on the
aggregate outstanding principal balance of the Certificates on such Distribution
Date. Such right may be exercised only with the consent of the Certificate
Insurer, if such retransfer would result in a claim under the Certificate Policy
or would result in any amount owing to the Certificateholders or the Certificate
Insurer remaining unpaid. See "The Pooling and Servicing Agreement--Termination
of Pooling and Servicing Agreement" herein.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will service and administer the Receivables in the Trust
on behalf of the Trustee and will have full power and authority, acting alone
and/or through subservicers, to do any and all things which it may deem
necessary or desirable in connection with such servicing and administration and
which are consistent with the Pooling and Servicing Agreement. In the Pooling
and Servicing Agreement, the Servicer will acknowledge that it is holding any
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Receivable documents in its possession and any other property constituting part
of the Trust Property held by it in trust for the benefit of the
Certificateholders and the Certificate Insurer.
Servicing activities required to be performed pursuant to the Pooling
and Servicing Agreement will include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Receivable.
The Servicer will be required to take all actions that are necessary or
desirable to maintain continuous perfection and first priority of security
interests granted by the Obligors in the Financed Vehicles. These actions
include, but are not limited to, using reasonable efforts to obtain the
execution by the Obligors and the recording, registering, filing, re-recording,
re-registering and refiling of all title documents, security agreements,
financing statements, continuation statements or other instruments as are
necessary to maintain the security interests granted by the respective Obligors
under the Receivables. Neither the Servicer nor any subservicer will be
required, however, to expend its own funds to remove any security interest, lien
or other encumbrance on a Financed Vehicle.
If a Receivable becomes and continues to be a Defaulted Receivable, the
Servicer will be required to take all reasonable and lawful steps necessary for
repossession. However, neither the Servicer nor any subservicer will be
obligated to institute any action for repossession through judicial proceedings
unless it determines in its good faith judgment that the liquidation proceeds
that would be realized in connection therewith would be sufficient for the
reimbursement in full of its out-of-pocket expenses in connection therewith. A
Receivable will become a "Defaulted Receivable" in the calendar month in which
any of the following has occurred with respect to such Receivable: (i) all or
part of any scheduled payment is 90 days or more delinquent, (ii) the Servicer
(or a subservicer) has in good faith determined that all amounts that it expects
to recover under such Receivable have been received or (iii) the Financed
Vehicle that secures the Receivable has been repossessed without reinstatement
of the Receivable on or before the last day of such calendar month and any
applicable redemption period has expired.
SERVICER DEFAULT
A "Servicer Default" under the Pooling and Servicing Agreement will
occur if:
(a) the Servicer shall fail, or fail to cause any subservicer, to
deliver to the Trustee for distribution to Certificateholders any proceeds or
payments required to be so delivered by the Servicer or subservicer under the
terms of the Certificates or the Pooling and Servicing Agreement and such
failure shall continue unremedied for two Business Days after written notice is
received by the Servicer from the Trustee or (unless a Certificate Insurer
Default (as defined below) shall have occurred and be continuing) the
Certificate Insurer or after discovery of such failure by the Servicer; or
(b) the Servicer shall fail to observe or perform any other of the
covenants or agreements on the part of the Servicer in the Pooling and Servicing
Agreement, which failure (i) materially and adversely affects the rights of
Certificateholders (determined without regard to the availability of funds under
the Certificate Policy) or of the Certificate Insurer (unless a
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Certificate Insurer Default shall have occurred and be continuing), and (ii)
continues unremedied for a period of thirty days after the date on which written
notice of such failure, requiring the same to be remedied, shall have been given
to the Servicer by the Trustee, or to the Servicer and the Trustee by the
Certificate Insurer (or, if a Certificate Insurer Default has occurred and is
continuing, Certificateholders evidencing in the aggregate not less than 25% of
the Percentage Interest); or
(c) there shall have occurred certain events of bankruptcy or
insolvency with respect to the Servicer; or
(d) the Servicer shall have breached any of the representations and
warranties set forth in the Pooling and Servicing Agreement which breach
materially and adversely affects the interests of the Certificateholders in any
Receivable (determined without regard to the availability of funds under the
Certificate Policy) or the Certificate Insurer and the Servicer shall have
failed to cure such breach in all material respects within thirty days of its
receipt of a notice of such breach; or
(e) there shall have occurred an Insurance Agreement Event of Default
(as defined below) or an event of default under any other insurance agreement to
which the Certificate Insurer and NAFCO and/or the Seller are party; or
(f) a claim is made under the Certificate Policy; or
(g) the Servicer fails to deliver the Servicer Certificate and such
failure remains unremedied for five days.
An "Insurance Agreement Event of Default" will include (i) the
inaccuracy or incompleteness of any representation or warranty of NAFCO or the
Seller in the Pooling and Servicing Agreement, the Insurance Agreement or
certain other documents, subject to applicable grace periods, (ii) NAFCO or the
Seller's failure to perform or to comply with any covenant or agreement in the
Pooling and Servicing Agreement, the Insurance Agreement or certain other
documents, subject to applicable grace periods, (iii) a finding or a ruling by a
governmental authority or agency that the Insurance Agreement, the Pooling and
Servicing Agreement or certain other documents are not binding on the NAFCO or
the Seller or any of the other parties thereto, (iv) failure by NAFCO or the
Seller to pay their respective debts in general or the occurrence of certain
events of insolvency or bankruptcy with respect to NAFCO or the Seller, (v) a
Servicer Default, (vi) a claim for payment under the Certificate Policy, (vii)
certain events of default under any other insurance agreement entered into among
the Certificate Insurer, NAFCO and/or the Seller, (viii) a denial by NAFCO or
the Seller of any liability or obligation under the Insurance Agreement, the
Pooling and Servicing Agreement or certain other documents, (ix) failure by
NAFCO or the Seller to pay when due any amount owed under the Insurance
Agreement, the Pooling and Servicing Agreement or certain other documents, (x)
failure of the Receivables to comply, in the aggregate, with certain limitations
on the levels of delinquent Receivables, Defaulted Receivables and net losses in
respect of Liquidated Receivables set forth in the Insurance Agreement.
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RIGHTS UPON A SERVICER DEFAULT; APPOINTMENT OF SUCCESSOR. If a Servicer
Default occurs under the Pooling and Servicing Agreement, then, so long as such
Servicer Default has not been remedied, the Trustee may, with the consent of the
Certificate Insurer (unless a Certificate Insurer Default has occurred and is
continuing) and will, at the direction of the Certificate Insurer (or, if a
Certificate Insurer Default has occurred and is continuing, the Holders of
Certificates evidencing in the aggregate not less than 51% of the Percentage
Interests), by notice in writing to the Servicer, the Backup Servicer and the
Seller, terminate all of the rights and obligations of the Servicer under the
Pooling and Servicing Agreement and in and to the related Receivables and the
proceeds thereof and appoint the Backup Servicer or (so long as no Certificate
Insurer Default shall have occurred and be continuing) such other Person or
entity as the Certificate Insurer shall direct as the successor Servicer. Any
such termination will be subject to compensation, rights of reimbursement,
indemnity and limitation on liability to which the Servicer is then entitled.
Pursuant to a Back-up Servicing Agreement among the Seller, the Servicer, the
Backup Servicer, and the Trustee, the Backup Servicer will agree to act as
successor Servicer under the Pooling and Servicing Agreement in the event that
the rights and obligations of the Servicer are terminated under the Pooling and
Servicing Agreement. On or after the receipt by the Servicer of written notice
of its termination and upon the effective date of the transfer specified in such
notice, all authority and power of the Servicer under the Pooling and Servicing
Agreement, whether with respect to the related Certificates or the related
Receivables or otherwise, will pass to and be vested in the Backup Servicer or
another successor Servicer. In the Pooling and Servicing Agreement, the Servicer
will agree to cooperate with the Backup Servicer or other successor Servicer in
effecting a termination of the Servicer's responsibilities and rights
thereunder.
A "Certificate Insurer Default" means the occurrence and continuance of
any of the following events: (a) the Certificate Insurer shall fail to make a
payment required under the Certificate Policy in accordance with its terms; (b)
the Certificate Insurer (i) files a petition or commences any case or proceeding
under any provision or chapter of the United States Bankruptcy Code or any other
similar federal or state law relating to insolvency, bankruptcy, rehabilitation,
liquidation or reorganization, (ii) makes a general assignment for the benefit
of its creditors, or (iii) has an order for relief entered against it under the
United States Bankruptcy Code or any other similar federal or state law relating
to insolvency, bankruptcy, rehabilitation, liquidation or reorganization which
is final and nonappealable; or (c) a court of competent jurisdiction, the New
York Department of Insurance or other competent regulatory authority enters a
final and nonappealable order, judgment or decree (1) appointing a custodian,
trustee, agent or receiver for the Certificate Insurer or for all or any
material portion of its property or (2) authorizing the taking of possession by
a custodian, trustee, agent or receiver of the Certificate Insurer (or the
taking of possession of all or any material portion of the property of the
Certificate Insurer).
On and after the time the Servicer receives a notice of termination,
the Backup Servicer or other successor Servicer, as the case may be, will be the
successor in all respects to the Servicer in its capacity as Servicer under the
Pooling and Servicing Agreement. In the event that the Backup Servicer refuses
or is unable to take over and assume the responsibilities of the Servicer, all
authority and power of the Servicer under the Pooling and Servicing Agreement
will pass to and be vested in the Trustee. The Trustee under the Pooling and
Servicing Agreement may, if it is unwilling to act as new Servicer, or will, if
it is unable to so act,
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appoint, or petition a court of competent jurisdiction to appoint, any
experienced servicer of motor vehicle installment sale contracts and notes
having a net worth of not less than $10,000,000 as the successor to the Servicer
under the Pooling and Servicing Agreement. The Trustee under the Pooling and
Servicing Agreement will consult with the Seller and the Certificate Insurer
before appointing a successor Servicer other than the Backup Servicer under the
Pooling and Servicing Agreement, and any successor Servicer other than the
Backup Servicer must be satisfactory to the Certificate Insurer (unless a
Certificate Insurer Default has occurred and is continuing). Pending appointment
of a successor to the Servicer under the Pooling and Servicing Agreement, the
Trustee shall act in such capacity. In connection with such appointment and
assumption, the Trustee may make such arrangements for the compensation of such
successor out of payments on related Receivables as it and such successor agree.
However, no such compensation to the Trustee will be in excess of that permitted
the Servicer under the Pooling and Servicing Agreement unless (i) the Trustee
and Certificate Insurer (or, if a Certificate Insurer Default has occurred and
is continuing, the Holders of a majority in percentage interests of the
Certificates) agree in writing to a larger Servicing Fee and (ii) each of S&P
and Moody's delivers a letter to the Trustee to the effect that such larger
Servicing Fee will not result in a reduction or withdrawal of the rating
assigned by it to the Certificates. The monthly Servicing Fee for any successor
Servicer may not, however, exceed one-twelfth of two percent of the Pool
Outstanding Principal Balance of the related Receivables as of the last day of
such month. The Seller, the Trustee, any subservicer and the successor Servicer
will take such action, consistent with the Pooling and Servicing Agreement, as
shall be necessary to effectuate any such succession.
THE ACCOUNTS
The Trustee will establish and maintain, for the benefit of the
Certificateholders and the Certificate Insurer, the Collection Account, the
Certificate Account, the Pre-Funding Account, the Revolving Account and the
Pre-Funding Period Reserve Account. The Collateral Agent will establish and
maintain, for the benefit of the Certificate Insurer and the Trustee, on behalf
of the Certificateholders, the Spread Account.
COLLECTION ACCOUNT. The Trustee will establish and maintain the
Collection Account which will be an Eligible Account (as hereinafter defined).
The Pooling and Servicing Agreement will authorize the Trustee to invest all
funds in the Collection Account in Eligible Investments (as hereinafter defined)
maturing not later than the Distribution Date next following the date of
investment. "Eligible Investments" will include United States government
securities and certain other high-quality investments acceptable to the
Certificate Insurer. An "Eligible Account" is (i) a segregated trust account
maintained with the corporate trust department of a depository institution or
trust company (A) during such time as a Certificate Insurer Default has not
occurred and is not continuing, acceptable to the Certificate Insurer or (B) at
any other time, subject to regulations on fiduciary funds on deposit
substantially similar to 12 CFR 9.10(b); or (ii) a segregated demand deposit
account maintained with a depository institution or trust company organized
under the laws of the United States of America, or any of the states thereof, or
the District of Columbia, that has a certificate of deposit, short-term deposit
or commercial paper rating of at least A-1+ by S&P and P-1 by Moody's and
(unless a Certificate Insurer Default has occurred and is continuing) acceptable
to the Certificate Insurer.
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On or prior to each Distribution Date, the Trustee, at the direction of
the Servicer, will withdraw from the Collection Account and deposit into the
Certificate Account any funds on deposit therein constituting part of the
Available Amount for such Distribution Date, which funds, together with funds
deposited by the Trustee directly to the Certificate Account in connection with
such Distribution Date will be available to make distributions to the
Certificateholders on such Distribution Date. The "Available Amount" for any
Distribution Date will equal the sum of (i) the amount on deposit in the
Certificate Account on the preceding Distribution Date after withdrawals
therefrom on such preceding Distribution Date, (ii) the amount on deposit in the
Collection Account as of the close of business on the last day of the related
Due Period (the "Determination Date"), which generally will include collections
and other recoveries in respect of the Receivables deposited to the Collection
Account during the related Due Period, (iii) Purchase Amounts deposited to the
Collection Account on or prior to the related Reporting Date, (iv) the amounts,
if any, required to be transferred from the Revolving Account, the Pre-Funding
Account and/or the Pre-Funding Period Reserve Account, if any, to the
Certificate Account on such Distribution Date as described below, (v) any
collections or recoveries in respect of the Receivables received by the Servicer
or Seller remitted to the Trustee for deposit to the Certificate Account, and
(vi) any amounts delivered by the Certificate Insurer, at its sole option, to
the Trustee for deposit into the Collection Account and not constituting
Guaranteed Distributions (the "Certificate Insurer Optional Deposit"), if any,
LESS the sum of (a) collections on Receivables previously retransferred to the
Seller that are payable to the Seller, (b) income and gain on investments of
funds in the Collection Account, and (c) late payment fees, extension fees and
certain other fees and charges on the Receivables on deposit in the Collection
Account not representing principal or interest collections. The "Reporting Date"
with respect to any Distribution Date will be the earlier of (i) the 15th day of
the calendar month in which such Distribution Date occurs and (ii) the fourth
Business Day preceding such Distribution Date. Income and gain on investments of
funds in the Collection Account and late payments and extension fees on deposit
in the Collection Account will be paid to the Servicer on each Distribution Date
as provided in the Pooling and Servicing Agreement and will not be available to
make payments to Certificateholders.
During the Revolving Period, the Trustee will, at the direction of the
Servicer, periodically withdraw amounts on deposit in the Collection Account
representing principal collections and other recoveries of principal received on
the Receivables, together (without duplication) with an amount equal to the
outstanding principal balance of all Receivables that become Liquidated
Receivables during the Revolving Period and will deposit such amounts in the
Revolving Account.
THE CERTIFICATE ACCOUNT. The Trustee will establish and maintain a
certificate account (the "Certificate Account") which will be an Eligible
Account. The Pooling and Servicing Agreement will authorize the Trustee to
invest all funds in the Certificate Account in Eligible Investments maturing not
later than the Distribution Date next following the date of investment. Income
earned from the investment of funds in the Certificate Account will be paid to
the Seller on each Distribution Date and will not be available to make payments
to Certificateholders.
In addition to amounts withdrawn from the Collection Account and
deposited to the Certificate Account, the Trustee also will deposit into the
Certificate Account (i) amounts received by it from the Seller for deposit into
the Certificate Account, (ii) amounts withdrawn
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from the Spread Account as described below, (iii) proceeds from the retransfer
of related Receivables to the Seller, (iv) all income and gain from investments
of funds in the Certificate Account, (v) all amounts required to be transferred
from the Revolving Account, the Pre-Funding Account and the Pre-Funding Period
Reserve Account, to the Certificate Account as described below and (vi) amounts
received by it from the Certificate Insurer in payment of claims under the
Certificate Policy or in respect of any Certificate Insurer Optional Deposit, as
described below. Funds on deposit in the Certificate Account on a Distribution
Date will be used to make distributions to Certificateholders and certain other
payments as more fully described under "The Certificates - Distributions and
Payments" herein.
THE REVOLVING ACCOUNT. The Trustee will establish and maintain a
Revolving Account for the benefit of the Certificateholders and the Certificate
Insurer which will be an Eligible Account. The Pooling and Servicing Agreement
will authorize the Trustee pursuant to written instructions from the Seller to
invest all funds in the Revolving Account in Eligible Investments maturing not
later than the earlier of the Distribution Date next following the date of
investment and the date on which funds on deposit therein are expected to be
needed. Income earned from the investment of funds in the Revolving Account will
be deposited monthly into the Collection Account.
Periodically during the revolving period (the "Revolving Period") from
and including the Closing Date until the earlier of (i) the date on which an
Amortization Event occurs and (ii) the close of business on April 30, 1997, the
Trustee will deposit in the Revolving Account the principal collections and
other recoveries of principal in respect of the Receivables (including the
principal portion of any Retransfer Amounts) and an amount equal to the
outstanding principal balance of each Receivable that becomes a Liquidated
Receivable during the Revolving Period. Funds on deposit in a Revolving Account
will be withdrawn from time to time during the Revolving Period for delivery to
the Seller in exchange for the transfer and assignment of Additional Receivables
to the Trust. In addition, on the Distribution Date related to the Reporting
Date next succeeding the end of the Revolving Period, the Trustee will transfer
the amount, if any, on deposit in the Revolving Account upon termination of the
Revolving Period, less any investment earnings on deposit therein, to the
Certificate Account for distribution to the Certificateholders and the holder of
the Seller Interest, pro rata in accordance with the Certificate Percentage and
the Seller Percentage, respectively, on such Distribution Date. In addition, on
each Distribution Date during the related Revolving Period, the Trustee will
transfer to the Certificate Account for distribution to the Certificateholders
and the holder of the Seller Interest, pro rata in accordance with the
Certificate Percentage and the Seller Percentage, respectively, the amount, if
any, by which the amount on deposit in the Revolving Account at the close of
business on the last day of the preceding calendar month LESS any investment
earnings on deposit therein, exceeds $3,000,000.
THE PRE-FUNDING ACCOUNT. The Trustee will establish and maintain the
Pre-Funding Account which will be an Eligible Account. The Pooling and Servicing
Agreement will authorize the Trustee to invest all funds in the Pre-Funding
Account in Eligible Investments maturing not later than the earlier of the
Distribution Date next following the date of investment and the date on which
funds on deposit therein are expected to be needed. Income earned from the
investment of funds in the Pre-Funding Account will be deposited monthly into
the Collection Account.
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On the date of the initial issuance of the Certificates, the Trustee
will deposit approximately $15,524,168.66 in the Pre-Funding Account (the
"Initial Pre-Funded Amount"). Funds on deposit in the Pre-Funding Account will
be withdrawn from time to time during the Pre-Funding Period for delivery to the
Seller in exchange for the transfer and assignment of Additional Receivables to
the Trust. In addition, on the Distribution Date related to the Reporting Date
next succeeding the end of the Pre-Funding Period, the Trustee will transfer the
amount, if any, on deposit in the Pre-Funding Account upon termination of the
Pre-Funding Period, less any investment earnings on deposit therein, to the
Certificate Account for distribution to the Certificateholders pro rata in
accordance with their respective Percentage Interests on such Distribution Date.
Amounts on deposit in the Pre-Funding Account will be withdrawn and applied to
the purchase of Additional Receivables not more frequently than monthly during
the Pre-Funding Period unless the Certificate Insurer consents to more frequent
transfers.
THE PRE-FUNDING PERIOD RESERVE ACCOUNT. The Trustee will establish and
maintain the Pre-Funding Period Reserve Account which will be an Eligible
Account. The Pooling and Servicing Agreement will authorize the Trustee pursuant
to written instructions from the Seller to invest all funds in the Pre-Funding
Account in Eligible Investments maturing not later than the earlier of the
Distribution Date next following the date of investment and the date on which
funds on deposit therein are expected to be needed. Income earned from the
investment of funds in the Pre-Funding Account will be deposited monthly into
the Collection Account.
On the Closing Date, the Trustee will deposit in the Pre-Funding Period
Reserve Account from the proceeds of the sale of the Certificates an amount
equal to $161,856.71. On each Distribution Date occurring on or prior to the
Distribution Date next succeeding termination of the Pre-Funding Period, the
Trustee will transfer from the Pre-Funding Period Reserve Account to the
Certificate Account an amount equal to the excess of (i) interest accrued at the
Certificate Rate on the amount of funds on deposit in the Pre-Funding Account
for the period from and including the preceding Distribution Date (or, in the
case of the first Distribution Date, the Closing Date) to but not including the
current Distribution Date over (ii) the actual amount of investment earnings on
amounts on deposit in the Pre-Funding Account from and including the preceding
Distribution Date (or, in the case of the first Distribution Date, the Closing
Date) to the current Distribution Date. On the Distribution Date related to the
Reporting Date immediately following the end of the Pre-Funding Period, any
amounts remaining in the PreFunding Period Reserve Account (after application to
interest payable on the Certificates as described above) shall be paid to the
Seller pursuant to the Pooling and Servicing Agreement. Thereafter, the
Pre-Funding Period Reserve Account shall be closed.
The "Required Reserve Amount" as of any Distribution Date during the
Pre-Funding Period will equal the product of (i) the Certificate Rate LESS 2.5%,
(ii) the balance of funds on deposit in the Pre-Funding Account as of such
Distribution Date and (iii) a fraction, the numerator of which is the number of
days remaining until the Distribution Date immediately following the Pre-Funding
Period and the denominator of which is 360.
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SERVICING FEE
The Servicer will receive a monthly fee (the "Servicing Fee") as
compensation for its activities under the Pooling and Servicing Agreement. As to
any calendar month, the Servicing Fee under the Pooling and Servicing Agreement
will equal 1/12 of the product of (a) two percent and (b) the Pool Outstanding
Principal Balance as of the last day of such month. The Servicer will be
required to pay the fees of, and certain expenses of, the Trustee, the
Collateral Agent, any subservicer and the Backup Servicer.
TERMINATION OF THE POOLING AND SERVICING AGREEMENT
The Pooling and Servicing Agreement will terminate (following payment
of all amounts due the applicable Certificateholders and the payment of any
amounts due to the Certificate Insurer (or its designee) under the Insurance
Agreement which are to be paid out of the proceeds of the Receivables) upon (i)
the retransfer to the Seller of all related Receivables and all property
acquired in respect of any related Receivable remaining in the Trust in the
manner described below, (ii) upon the sale, liquidation or disposition of the
related Receivables following the occurrence of certain bankruptcy or insolvency
events relating to the Seller as described below or (iii) five months after the
later of the final payment or other liquidation of the last Receivable remaining
in the Trust or the disposition of all property in such Trust acquired upon
repossession of any Financed Vehicle. In no event, however, will the Pooling and
Servicing Agreement continue beyond the expiration of 21 years from the death of
certain persons specified in the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement will provide that within 15 days
after the Trustee's receipt of notice of the occurrence of certain bankruptcy or
insolvency events with respect to the Seller, the Trustee will publish notice in
an authorized newspaper of the occurrence of such event stating that the Trustee
intends to sell, dispose of or otherwise liquidate the Receivables in a
commercially reasonable manner and on commercially reasonable terms, unless the
terms of the Pooling and Servicing Agreement would require otherwise. If after
90 days from the day such notice is published the Trustee has not received
written instructions of both the Holders of a majority of the Percentage
Interests in the Certificates and the Certificate Insurer disapproving of such
disposition, the Trustee will proceed to liquidate the Receivables in a
commercially reasonable manner and on commercially reasonable terms. The
proceeds of any such sale, disposition or liquidation of the Receivables will be
deposited in the Collection Account, treated as collections on the Receivables
and distributed to Certificateholders on the Distribution Date following the
calendar month in which such sale, disposition or liquidation occurs. If the sum
of (a) the proceeds of such sale, disposition or liquidation, and (b) any
collections on the Receivables then in the Collection Account is not sufficient
to pay the outstanding principal balance of the Certificates plus accrued
interest thereon and the Certificate Insurer fails to pay a claim under the
Certificate Policy on the Final Scheduled Distribution Date, the holders of the
Certificates will incur a loss.
AMENDMENT
The Pooling and Servicing Agreement may be amended from time to time
by the Servicer, the Seller and the Trustee, without the consent of any of the
Certificateholders but with
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the prior written consent of the Certificate Insurer (unless a Certificate
Insurer Default has occurred and is continuing), to cure any ambiguity, to
correct or supplement any provisions therein which may be inconsistent with any
other provisions therein, or to make any other provisions with respect to
matters or questions arising under the Pooling and Servicing Agreement which
shall not be materially inconsistent with the provisions of the Pooling and
Servicing Agreement; provided that such action shall not, as evidenced by an
opinion of counsel, adversely affect in any material respect the interests of
any Certificateholder or the Certificate Insurer.
The Pooling and Servicing Agreement may also be amended from time to
time by the Servicer, the Seller and the Trustee, with the prior written consent
of the Certificate Insurer (unless a Certificate Insurer Default has occurred
and is continuing) and the Holders of the Certificates evidencing in the
aggregate not less than 66-2/3% of the Percentage Interests, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Pooling and Servicing Agreement or of modifying in any manner
the rights of such Certificateholders. However, no such amendment may (i) reduce
in any manner the amount of, or delay the timing of, payments received on the
Receivables which are required to be distributed on any Certificate without the
consent of the Holder of such Certificate or (ii) reduce the Percentage
Interests required to consent to any such amendment without the consent of the
Holders of all Certificates then outstanding.
THE PURCHASE AGREEMENTS
The Receivables in the Trust will be acquired by the Seller from the
NAFCO Transferors pursuant to the Purchase Agreements. The following summary
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, the provisions of the Purchase Agreements. Where
particular provisions or terms used in the Purchase Agreements are referenced
to, the actual provisions (including definitions of terms) are incorporated by
reference as part of such summary.
TRANSFER AND CONVEYANCE OF RECEIVABLE ASSETS
Pursuant to the Purchase Agreements, the NAFCO Transferors will sell,
transfer and convey to the Seller, without recourse except as specifically
provided in the Purchase Agreements, all of their respective right, title and
interest in and to the following assets: (i) the Receivables and all monies
payable thereunder on and after the applicable Cut-Off Date; (ii) the related
Receivable Files; (iii) the security interests in the Financed Vehicles securing
the Receivables and the property which secured any such Receivable and which has
been acquired by repossession or otherwise; (iv) all rights to the insurance
proceeds and liquidation proceeds with respect to such Receivables; (v) certain
rights under the related Dealer Agreements; and (vi) the proceeds of the
foregoing and the rights to enforce the foregoing. Each such sale, transfer and
conveyance of Receivables will be consummated on the Closing Date other than
Additional Receivables that may be sold, transferred and conveyed by NAFCO or
Funding Trust II to the Seller on Subsequent Transfer Dates.
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On or prior to the Closing Date, the NAFCO Transferors will file
Uniform Commercial Code financing statements, appropriate under applicable law,
to reflect the transfer and conveyance of the Receivables to the Seller.
REPRESENTATIONS AND WARRANTIES
In the Purchase Agreements, NAFCO will make representations and
warranties with respect to each Receivable in the Trust (including Receivables
acquired by the Seller from Funding Trust II and ACCH) as of the date of
transfer of such Receivable to the Trust as to, among other things, the
characteristics of such Receivable, NAFCO's or Funding Trust II's interest in
such Receivable and the Financed Vehicle securing such Receivable, the nature of
the interest acquired by the Seller in such Receivable and the related Financed
Vehicle, compliance of such Receivable with consumer finance and other laws and
regulations and certain other matters.
If there has been a breach of any of the foregoing representations or
warranties with respect to a Receivable and such Receivable is retransferred or
required to be retransferred to the Seller pursuant to the Pooling and Servicing
Agreement, NAFCO will be required under the applicable Purchase Agreement, upon
demand, to repurchase such Receivable from the Seller at the retransfer amount
required by the Pooling and Servicing Agreement.
THE CERTIFICATE POLICY
The following summary of the terms of the Certificate Policy does not
purport to be complete and is qualified in its entirety by reference to the
provisions of the Certificate Policy.
Simultaneously with the issuance the Certificates, Financial Security
will deliver the Certificate Policy to the Trustee for the benefit of each
Holder of a Certificate. Under the Certificate Policy, Financial Security
unconditionally and irrevocably guarantees to the Trustee for the benefit of
each Holder of a Certificate the full and complete payment of (i) Guaranteed
Distributions (as defined below) with respect to the Certificates and (ii) the
amount of any Guaranteed Distribution which subsequently is avoided in whole or
in part as a preference payment under applicable law.
"Guaranteed Distributions" means, with respect to (i) each
Distribution Date, the Monthly Interest payable on such Distribution Date, and
(ii) the Final Scheduled Distribution Date, any principal of the Certificates
remaining unpaid on such Final Scheduled Distribution Date, in each case in
accordance with the original terms of the Certificates when issued and without
regard to any amendment or modification of the Certificates or the Pooling and
Servicing Agreement which has not been consented to by the Certificate Insurer;
payments of principal of the Certificates which become due prior to the Final
Scheduled Distribution Date as a result of any cause do not constitute
"Guaranteed Distributions" unless the Certificate Insurer elects, in its sole
discretion, to make such payments of principal of the Certificates prior to the
Final Scheduled Distribution Date. Guaranteed Distributions shall not include,
nor shall coverage be provided under the Certificate Policy in respect of any
interest on overdue interest on the Certificates payable on any Distribution
Date, or any taxes, withholding or other charge
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imposed by any governmental authority due in connection with the payment of any
Guaranteed Distribution to a Holder of a Certificate.
Payment of claims on the Certificate Policy made in respect of
Guaranteed Distributions will be made by Financial Security following Receipt
(as defined below) by Financial Security of the appropriate notice for payment
on the later to occur of (a) 12:00 noon, New York City time, on the third
Business Day (as defined below) following Receipt of such notice for payment,
and (b) 12:00 noon, New York City time, on the Distribution Date such payment
was due on the Certificates.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the Certificate Policy, Financial Security shall cause such payment to be made
on the later of (a) the date when due to be paid pursuant to the Order referred
to below or (b) the first to occur of (i) the fourth Business Day following
Receipt by Financial Security from the Trustee of (A) a certified copy of the
order (the "Order") of the court or other governmental body which exercised
jurisdiction to the effect that the Holder is required to return the amount of
any Guaranteed Distributions distributed with respect to the Certificates during
the term of the Certificate Policy because such distributions were avoidable as
preference payments under applicable bankruptcy law, (B) a certificate of the
Holder of the Certificate that the Order has been entered and is not subject to
any stay, and (C) an assignment duly executed and delivered by the Holder of the
Certificate, in such form as is reasonably required by Financial Security and
provided to the Holder of the Certificate by Financial Security, irrevocably
assigning to Financial Security all rights and claims of the Holder of the
Certificate relating to or arising under the Certificates against the debtor
which made such preference payment or otherwise with respect to such preference
payment, or (ii) the date of Receipt by Financial Security from the Trustee of
the items referred to in clauses (A), (B) and (C) above if, at least four
Business Days prior to such date of Receipt, Financial Security shall have
Received (as defined below) written notice from the Trustee that such items were
to be delivered on such date and such date was specified in such notice. Such
payment shall be disbursed to the receiver, conservator, debtor-in-possession or
trustee in bankruptcy named in the Order and not to the Trustee or any Holder of
a Certificate directly (unless a Holder has previously paid such amount to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order, in which case such payment will be disbursed to the Trustee for
distribution to such Holder upon proof of such payment reasonably satisfactory
to Financial Security).
The terms "Receipt" and "Received," with respect to the Certificate
Policy, shall mean actual delivery to Financial Security and to the fiscal
agent, if any, prior to 12:00 noon, New York City time, on a Business Day;
delivery either on a day that is not a Business Day or after 12:00 noon, New
York City time, shall be deemed to be Receipt on the next succeeding Business
Day. If any notice or certificate given under the Certificate Policy by the
Trustee is not in proper form or is not properly completed, executed or
delivered, it shall be deemed not to have been Received, and Financial Security
or its fiscal agent, if any, shall promptly so advise the Trustee and the
Trustee may submit an amended notice.
Under the Certificate Policy, "Business Day" means any day other than
(i) a Saturday or Sunday or (ii) a day on which banking institutions in the City
of New York or Chicago,
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Illinois, or any other location of any successor Trustee or successor Collateral
Agent are authorized or obligated by law or executive order to be closed.
Financial Security's obligations under the Certificate Policy in
respect of Guaranteed Distributions shall be discharged to the extent funds are
transferred to the Trustee as provided in the Certificate Policy whether or not
such funds are properly applied by the Trustee.
Financial Security shall be subrogated to the rights of each Holder
of a Certificate to receive payments of principal and interest under the
Certificates to the extent of any payment by Financial Security under the
Certificate Policy. For a discussion of the rights and powers of Financial
Security upon an event of default under the Pooling and Servicing Agreement, see
"The Pooling and Servicing Agreement-Servicer Default."
Claims under the Certificate Policy constitute direct, unsecured and
unsubordinated obligations of Financial Security ranking not less than pari
passu with other unsecured and unsubordinated indebtedness of Financial Security
for borrowed money. Claims against Financial Security under the Certificate
Policy and claims against Financial Security under each other financial guaranty
insurance policy issued thereby constitute pari passu claims against the general
assets of Financial Security. The terms of the Certificate Policy cannot be
modified or altered by any other agreement or instrument, or by the merger,
consolidation or dissolution of the Seller or the Trust. The Certificate Policy
may not be canceled or revoked prior to payment in full of all Guaranteed
Distributions with respect to the Certificates. The Certificate Policy is not
covered by the Property/Casualty Insurance Security Fund specified in Article 76
of the New York Insurance Law. The Certificate Policy is governed by the laws of
the State of New York.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary is a general discussion of certain federal
income tax consequences under the Code of the purchase, ownership and
disposition of the Certificates offered hereunder. It is based upon the
provisions of the Code, the Treasury regulations thereunder, and published
rulings and court decisions in effect as of the date hereof, all of which
authorities are subject to change or differing interpretations, which could
apply retroactively. The discussion below does not purport to deal with federal
income tax consequences applicable to all categories of investors, and is
directed solely to Certificateholders that hold the Certificates as capital
assets within the meaning of section 1221 of the Code, and acquire such
Certificates for investment and not as a Dealer or for resale. Further, this
discussion does not address every aspect of the federal income tax laws that may
be relevant to Certificateholders in light of their particular investment
circumstances or to certain types of Certificateholders subject to special
treatment under the federal income tax laws (for example, banks, insurance
companies and foreign investors), and it assumes that the Certificates are being
offered only to institutional investors.
For purposes of this tax discussion, references to a
"Certificateholder" or a "Holder" are to the beneficial owner of a Certificate.
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Certificateholders and preparers of tax returns should be aware that
under applicable Treasury regulations a provider of advice on specific issues of
law is not considered an income tax return preparer unless the advice is (i)
given with respect to events that have occurred at the time the advice is
rendered and is not given with respect to the consequences of contemplated
actions, and (ii) is directly relevant to the determination of an entry on a tax
return. Accordingly, Certificateholders should consult their own tax advisors
and tax return preparers regarding the preparation of any item on a tax return,
even where the anticipated tax treatment has been discussed herein.
The Underwriter, NAFCO and the Seller, make no representations
regarding the tax consequences of purchase, ownership or disposition of the
Certificates under the tax laws of any state, locality or foreign jurisdiction.
Investors considering an investment in the Certificates should consult their own
tax advisors regarding such tax consequences. All investors also should consult
their own tax advisors in determining the federal, state, local and foreign and
any other tax consequences to them of an investment in the Certificates and the
purchase, ownership and disposition thereof.
CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
Thacher Proffitt & Wood, counsel to the Seller ("Tax Counsel"), has
advised the Seller that in its opinion, although this conclusion is not entirely
free from doubt, assuming compliance with the provisions of the Pooling and
Servicing Agreement in all material respects, and based on the application of
existing law, the provisions of the Pooling and Servicing Agreement, the
Purchase Agreement and other relevant documents, the facts set forth above in
this Prospectus Supplement, and additional information (including financial
calculations relating to the Receivables) provided by NAFCO, the Certificates
will be characterized as indebtedness for federal income tax purposes. However,
there is no specific authority with respect to the characterization for federal
income tax purposes of securities issued under the same circumstances as the
Certificates.
NAFCO, the Seller and the Certificateholders express in the Pooling
and Servicing Agreement their intent that, for applicable tax purposes, the
Certificates will be indebtedness secured by the Financed Vehicles and the
Receivables. NAFCO, the Seller, the Servicer and the Certificateholders, by
accepting the Certificates, have agreed to treat the Certificates as
indebtedness for federal income tax purposes. However, because different
criteria are used to determine the non-tax accounting characterization of the
transaction, NAFCO and the Seller intend to treat this transaction as a sale of
an interest in the Receivables for financial accounting purposes.
In general, whether for federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
the property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service (the "IRS") and the
courts have set forth several factors to be taken into account in determining
whether the substance of a transaction is a sale of property or a secured
indebtedness, the primary factor in making this determination is whether the
transferee has assumed the risk of loss or other economic burdens relating to
the property and has obtained the benefits of ownership thereof.
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Tax Counsel is of the opinion that the weight of the benefits and burdens of
ownership of the Receivables has been retained by the Seller and has not been
transferred to the Certificateholders.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel is of the opinion that
the rationale of those cases will not apply to this transaction, because the
form of the transaction as reflected in the operative provisions of the
documents either accords with the characterization of the Certificates as debt
or otherwise makes the rationale of those cases inapplicable to this situation.
POSSIBLE CLASSIFICATION OF THE TRANSACTION AS A PARTNERSHIP OR ASSOCIATION
TAXABLE AS A CORPORATION
The conclusion of Tax Counsel is not binding on the courts or the
IRS. It is possible that the IRS could assert and that a court might hold that,
for purposes of the Code, the transaction contemplated by the Pooling and
Servicing Agreement and described in this Prospectus Supplement constitutes a
sale of the Receivables (or an interest therein) to the Certificateholders and
that the proper classification of the legal relationship between NAFCO, the
Seller and Certificateholders resulting from this transaction is that of a
partnership, an association taxable as a corporation, or a "publicly traded
partnership" taxable as a corporation. Since, as described above, Tax Counsel is
of the opinion that the Certificates will be treated as indebtedness in the
hands of the Certificateholders for federal income tax purposes, the Seller, the
Servicer and the Trustee will not attempt to comply with the federal income tax
reporting requirements applicable to partnerships or corporations.
If the transaction were treated as creating a partnership between the
Certificateholders and the Seller, the partnership itself would not be subject
to federal income tax (unless it were treated as a publicly-traded partnership
taxable as a corporation); rather, each Certificateholder and the other partners
would be taxed individually on their respective distributive shares of the
partnership's income, gain, loss, deductions and credits. Furthermore, see
"Foreign Investors," below, for the effect of such recharacterization on foreign
investors. In addition, the amount and timing of items of income and deductions
of the Certificateholder could differ if the Certificates were held to
constitute partnership interests, rather than indebtedness.
If it were determined that this transaction created an entity
classified as a corporation (including a publicly traded partnership taxable as
a corporation), the Trust formed pursuant to the Pooling and Servicing Agreement
would be subject to federal income tax at corporate income tax rates on the
income it derives from the Receivables, which would reduce the amounts available
for distribution to the Certificateholders. Cash distributions to the
Certificateholders generally would be treated as dividends for tax purposes to
the extent of such corporation's earnings and profits. See "Foreign Investors,"
below, for the effect of such recharacterization on foreign investors.
Generally, section 7704(b) of the Code provides that a partnership is
a "publicly traded partnership" if interests in the partnership are traded on an
established securities market, or are
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readily tradeable on a secondary market or a substantial equivalent. Securities
are readily tradeable on a secondary market or the substantial equivalent of a
secondary market if the buyer or seller of such securities may buy, sell, or
exchange them in a manner economically comparable to trading on an established
securities market (I.E., whenever interests are subject to firmquote trading).
Because there will be no restrictions imposed on the free transferability of the
Certificates, there is a risk that if a partnership is deemed to be created, it
will be classified as a publicly traded partnership. Regulations issued under
section 7704 of the Code significantly narrow the circumstances under which a
partnership may be excepted from classification as a publicly traded
partnership. The Proposed Regulations are subject to change before being adopted
in final form. There can be no assurance, therefore, that any Certificate
recharacterized as equity by the IRS would qualify as nonpublicly traded or
would be otherwise excepted from such classification pursuant to any safe
harbors provided by such regulations. Investors are urged to consult their own
tax advisors with respect to issues relating to publicly traded partnerships.
TAXATION OF INTEREST INCOME OF CERTIFICATEHOLDERS
Assuming that the opinion of Tax Counsel that the Certificates will
constitute indebtedness for federal income tax purposes is correct, interest
thereon will be includible as ordinary income when received by
Certificateholders which use the cash method of accounting and when accrued by
Certificateholders which use the accrual method of accounting.
ORIGINAL ISSUE DISCOUNT. While it is not anticipated that the
Certificates will be issued with original issue discount within the meaning of
section 1273 of the Code ("OID"), if the Certificates are in fact issued at a
discount, the following rules will apply. The excess of the principal amount of
the Certificates over their initial issue price (in this case, with respect to
the Certificates, the price at which such Certificates initially are sold) will
constitute OID. A Certificateholder must include OID (unless the amount of such
OID is treated as DE MINIMIS) in income as interest over the term of the
Certificate under a constant yield method. In general, OID must be included in
income in advance of the receipt of cash representing that income. Any DE
MINIMIS OID on the Certificates will be required to be allocated among the
principal payments to be made on such Certificates, and the portion of such
discount allocated to each principal payment will be required to be reported as
income as each principal payment is made.
In the case of a debt instrument as to which the repayment of
principal may be accelerated as a result of the prepayment of other obligations
securing the debt instrument, under section 1272(a)(6) of the Code the periodic
accrual of OID is determined by taking into account (i) a reasonable prepayment
assumption in accruing OID (generally, the assumption used to price the debt
offering) and (ii) adjustments in the accrual of OID when prepayments do not
conform to the prepayment assumption, and regulations could be adopted applying
those provisions to the Certificates. It is unclear whether those provisions
would be applicable to the Certificates in the absence of such regulations or
whether use of a reasonable prepayment assumption may be required or permitted
without reliance on these rules. If this provision applies to the Certificates,
the amount of OID that will accrue in any given "accrual period" may either
increase or decrease depending upon the actual prepayment rate. In the absence
of such regulations the Servicer currently intends that any information reports
or returns to the IRS and the Certificateholders regarding OID, if any, will be
based on the assumption that there will be
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no prepayments on the Receivables. However, none of the Seller, the Servicer,
the Underwriter, NAFCO nor the Trustee will make any representation regarding
the prepayment rate of the Receivables. See "Prepayment and Yield
Considerations." Accordingly, Certificateholders are advised to consult their
own tax advisors regarding the impact of any prepayments under the Receivables
(and the OID rules) if the Certificates are issued with OID.
The foregoing discussion is based in part on the OID Regulations,
which do not address certain issues relevant to, or are not applicable to,
prepayable securities such as the Certificates in the event that the OID rules
apply to the Certificates. Certificateholders should consult their own tax
advisors regarding the proper method of reporting taxable income from the
Certificates. Furthermore, if the Certificates are issued with OID the Servicer
will calculate the yield of each Certificate based on the initial issue price of
such Certificate and will report such amount annually to the IRS and each
Certificateholder. The amount of OID, if any, reported to the Certificateholders
by the Servicer or the Trustee for a calendar year may not be the proper amount
of OID required to be reported by any Certificateholder who did not purchase its
Certificate at such initial issue price, or by any Certificateholders who are
not original purchasers. Accordingly, Certificateholders should consult their
own tax advisors to determine the amount of OID includible in income during a
calendar year. See "Information Reporting" below.
MARKET DISCOUNT. A subsequent holder who purchases a Certificate at a
discount may be subject to the "market discount" rules of the Code. These rules
provide, in part, for the treatment of gain attributable to accrued market
discount as ordinary income upon the receipt of partial principal payments or on
the sale or other disposition of the Certificate, and for the deferral of
interest deductions with respect to debt incurred to acquire or carry the market
discount Certificate. In particular, under section 1276 of the Code, a holder,
who purchases a Certificate at a discount that exceeds DE MINIMIS market
discount, generally will be required to allocate a portion of each such partial
principal payment or proceeds of disposition to accrued market discount not
previously included in income, and to recognize ordinary income to that extent.
If the provisions of section 1272(a)(6) apply to the Certificates, as described
above with respect to the use of a reasonable prepayment assumption (and
adjustments resulting from actual prepayments), such provisions also would
affect accrual of any market discount. Accordingly, Certificateholders are
advised to consult their own tax advisors regarding the impact of such
requirement if the Certificates are purchased at a discount.
A Certificateholder may elect to include such market discount in
income currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all
market-discount bonds acquired by such Certificateholder on or after the first
day of the first taxable year to which such election applied. If such election
is made, the interest deferral rule described above will not apply. In addition,
the OID regulations permit a Certificateholder to elect to accrue all interest,
discount (including DE MINIMIS market or original issue discount) and premium in
income as interest, based on a constant yield method. If such an election were
made with respect to a Certificate with market discount, the Certificateholder
would be deemed to have made an election to include market discount currently in
income with respect to all other debt instruments having market discount that
such Certificateholder acquires during the taxable year of the election or
thereafter, and possibly previously acquired instruments. Similarly, a
Certificateholder that made this election for a
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Certificate that is acquired at a premium would be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
"Taxation of Interest Income of Certificates--Premium" below. Each of these
elections to accrue interest, discount and premium with respect to a Certificate
on a constant yield method or as interest would be irrevocable. If a Certificate
is purchased at a DE MINIMIS market discount, the actual discount will be
required to be allocated among the principal payments to be made on such
Certificate, and the portion of such discount allocated to each principal
payment will be required to be reported as income as each principal payment is
made, in the same manner as discussed above regarding DE MINIMIS OID, unless the
above described election is made.
PREMIUM. In the event that a Certificate is purchased at a premium
(i.e., generally, the purchase price exceeds the sum of principal payments to be
made thereon), such premium will be amortizable by a Certificateholder as an
offset to interest income (with a corresponding reduction in the
Certificateholder's basis) under a constant yield method over the term of the
Certificate if the Certificateholder makes (or has in effect) an election under
section 171 of the Code. If made, such an election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. The OID Regulations also permit Certificateholders to elect to include
all interest, discount and premium in income based on a constant yield method,
further treating the Certificateholder as having made the election to amortize
premium generally. See "Taxation of Interest Income of Certificates--Market
Discount" above. The legislative history to the OID rules states that the same
rules that apply to the accrual of market discount (which rules will require the
use of a prepayment assumption in accruing market discount with respect to debt
instruments without regard to whether such debt instruments have OID) will also
apply in amortizing bond premium under section 171 of the Code.
SALES OF CERTIFICATES
Except as described above with respect to the market discount rules
and as provided under section 582(c) of the Code in the case of banks and other
financial institutions, any gain or loss, equal to the difference between the
amount realized on the sale and the adjusted basis of such Certificate,
recognized on the sale or exchange of a Certificate by an investor who holds
such Certificate as a capital asset will be capital gain or loss. However, a
portion of any gain from the sale of a Certificate that might otherwise be
capital gain may be treated as ordinary income to the extent such Certificate is
held as part of a "conversion transaction" within the meaning of section 1258 of
the Code. A conversion transaction generally is one in which the taxpayer has
taken two or more positions in Certificates or similar property that reduce or
eliminate market risk, if substantially all of the taxpayer's return is
attributable to the time value of the taxpayer's net investment in such
conversion transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income will in general not
exceed the amount of interest that would have accrued on the taxpayer's net
investment in such conversion transaction at 120% of the appropriate "applicable
Federal rate" (which rate is computed and published monthly by the IRS) at the
time the taxpayer enters into the conversion transaction, subject to appropriate
reduction (to the extent provided in regulations to be issued) to reflect prior
inclusion of interest or other ordinary income items from the transaction.
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The adjusted basis of a Certificate generally will equal its cost,
increased by any income previously reported (including any OID and market
discount income) by the selling Certificateholder and reduced (but not below
zero) by any deduction previously allowed for losses and any amortized premium
and by any payments previously received with respect to such Certificate.
Principal payments on the Certificate will be treated as amounts received upon a
sale or exchange of the Certificate under the foregoing rules.
INFORMATION REPORTING
The Servicer is required to furnish or cause to be furnished to each
Certificateholder with each payment a statement setting forth the amount of such
payment allocable to principal on the Certificate and to interest thereon at the
Certificate Rate. In addition, the Servicer is required to furnish or cause to
be furnished, within a reasonable time after the end of each calendar year, to
each Certificateholder who was such a holder at any time during such year, a
report indicating such other customary factual information as the Servicer deems
necessary to enable holders of Certificates to prepare their tax returns. If the
Certificates are issued with OID, the Servicer will provide or cause to be
provided to the IRS and Certificateholders information statements with respect
to OID as required by the Code or as Certificateholders may reasonably request
from time to time. For the reasons described under "Taxation of Interest Income
of Certificateholders -- Original Issue Discount," above, if the Certificates
are issued with OID, the amount of OID reported for a calendar year may not be
the proper amount of OID required to be reported by any Certificateholder who
did not purchase its Certificate for the initial issue price at which the
Certificates were first sold, or by Certificateholders who are not original
purchasers. Accordingly, Certificateholders should consult their own tax
advisors to determine the amount of any OID and market discount includible in
income during a calendar year.
As applicable, the Certificate information reports will include a
statement of the adjusted issue price of the Certificates at the beginning of
each accrual period. In addition, the reports will include information required
by regulations with respect to computing the accrual of any market discount.
Because exact computation of the accrual of market discount on a constant yield
method would require information relating to the holder's purchase price that
the Trust may not have, such regulations only require that information
pertaining to the appropriate proportionate method of accruing market discount
be provided. See "Taxation of Interest Income of Certificates--Market Discount"
above.
FOREIGN INVESTORS
A Certificateholder that is not a "United States person" (as defined
below) and is not subject to federal income tax as a result of any direct or
indirect connection to the United States in addition to its ownership of a
Certificate generally will not be subject to United States federal income or
withholding tax in respect of interest (including accrued OID) paid on a
Certificate, provided that the Certificateholder complies to the extent
necessary with certain identification requirements (including delivery of a
statement (IRS Form W-8), signed by the Certificateholder under penalties of
perjury, certifying that such Certificateholder is not a United States person
and providing the name and address of such Certificateholder). The foregoing
exemption does not apply to payments of interest (including payments in respect
of accrued OID, if any),
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received by a Certificateholder that either (i) owns directly or indirectly a
10% or greater interest in the entity treated as issuing the Certificates, (ii)
is a bank that purchased its Certificate in the ordinary course of its trade or
business, (iii) is a person within a foreign country which the IRS has included
in a list of countries that do not provide adequate exchange of information with
the United States to prevent tax evasion by United States persons, or (iv) is a
"controlled foreign corporation" (within the meaning of section 957 of the Code)
with respect to which such issuer of the Certificates is a "related person"
(within the meaning of section 881(c)(3)(C) of the Code). If the
Certificateholder does not qualify for the foregoing exemption from withholding,
payments of interest, including payments in respect of any accrued OID, to such
Certificateholder may be subject to withholding tax at a tax rate of 30%,
subject to reduction (including exemption) under any applicable tax treaty,
provided the Certificateholder supplies (at the time of its initial purchase,
and at such subsequent times as are required under the Treasury regulations) a
completed IRS Form 1001 to report its eligibility for such reduced rate or
exemption.
Amounts allocable to interest (including OID, if any), received by a
Certificateholder that is not a United States person, which constitute income
that is effectively connected with a United States trade or business carried on
by the Certificateholder will not be subject to withholding tax, but rather will
be subject to United States income tax at the graduated rates applicable to
United States persons, provided the Certificateholder supplies (at the time of
its initial purchase, and at such subsequent times as are required under the
Treasury regulations) a completed IRS Form 4224 to report its exemption from
withholding.
For these purposes, "United States 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 or an estate whose income is subject to United
States federal income tax regardless of its source, or a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust.
If the interests of the Certificateholders were deemed to be
partnership interests, the partnership would be required, on a quarterly basis,
to pay withholding tax equal to the product, for each foreign partner, of such
foreign partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to the branch
profits tax on such income (unless an applicable tax treaty exemption from such
tax applied). Each non-foreign partner would be required to certify to the
partnership that it is not a foreign person. Any tax withheld from each foreign
partner would be credited against such foreign partner's United States federal
income tax liability.
If the Certificates were treated as equity interests in an entity
classified as an association taxable as a corporation, including a partnership
classified as a publicly traded partnership, distributions to foreign persons,
to the extent treated as dividends, generally would be subject to withholding
tax at the rate of 30%, unless such rate were reduced by an applicable tax
treaty.
Certificateholders who are not United States persons should consult
their own tax advisors regarding the tax consequences of purchasing, owning or
disposing of a Certificate.
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Because of the possible characterization of the Certificates as interests in a
partnership, an association taxable as a corporation, or a publicly traded
partnership taxable as a corporation, purchase of the Certificates may not be a
suitable investment for a person who is not a United States person.
BACKUP WITHHOLDING
Payments of interest and principal, as well as payments of proceeds
from the sale of Certificates, may be subject to the "backup withholding tax"
under section 3406 of the Code at a rate of 31% if recipients of such payments
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 liability.
Furthermore, certain penalties may be imposed by the IRS on a recipient of
payments that is required to supply information but that does not do so in the
proper manner. Information returns will be sent annually to the IRS and each
Certificateholder setting forth the amount of interest paid on the Certificates
and the amount of any tax withheld thereon.
STATE AND LOCAL TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences", potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the Certificates offered hereunder. Additionally, investors in
the Certificates should consult their own tax advisors regarding whether the
purchase of such Certificates, either alone or in conjunction with an investor's
other activities, may subject an investor to any state or local taxes based on
the assertion that the investor is either "doing business" in, or deriving
income from a source located in, any state or local jurisdiction. State tax law
may differ substantially from the corresponding federal tax law, and the
discussion above does not purport to describe any aspect of the tax laws of any
state or other jurisdiction. Therefore, prospective investors should consult
their own tax advisors with respect to the various tax consequences of
investments in the Certificates offered hereunder.
State tax consequences to each Certificateholder will depend upon the
provisions of the state tax laws to which the Certificateholder 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 stake tax on 100% of such state-modified income, while
corporations and other taxpayers generally pay state tax only on that portion of
state-modified income assigned to the taxing state under the states's own
apportionment and allocation rules. Because each state's tax law varies, it is
impossible to predict the tax consequences to the Certificateholders in all of
the state taxing jurisdictions in which they are already subject to tax.
Certificateholders are urged to consult their own tax advisors with respect to
state taxes.
FLORIDA. Some of the activities to be undertaken by the Servicer in
servicing and collecting payments on the Receivables will take place in Florida.
Florida imposes a franchise tax on corporations, banks and financial
institutions doing business in the State of Florida measured by their net income
allocated and apportioned to Florida. This discussion is based upon present
provisions of Florida law and regulations, and applicable judicial or ruling
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authority, all of which are subject to change, which change may be retroactive.
No ruling on any of the issues discussed below will be sought from the Florida
Department of Revenue.
Assuming the Certificates are treated as indebtedness for Federal
income tax purposes, this treatment will also apply for Florida tax purposes.
The Florida Administrative Code includes a rule (the "Loan Rule"), promulgated
under the Florida Income Tax Code, which provides that a financial organization
earning or receiving interest from loans secured by tangible property located in
Florida will be deemed to be conducting business or earning or receiving income
in Florida, and will be subject to Florida corporate income tax irrespective of
the place of receipt of such interest. A "financial organization" is defined to
include any bank, trust company, savings bank, industrial bank, land bank, safe
deposit company, private banker, savings and loan association, credit union,
cooperative bank, small loan company, sales finance company or investment
company. To the extent Certificates are secured by tangible personal property
located in Florida, a "financial organization" may be subject to the Florida
corporate income tax at a maximum rate of 5.5%, on a pro rata portion of the
interest on the Certificates and may be required to file an income tax return in
Florida, even if it has no other Florida contacts. Consequently, prospective
investors are urged to consult their own tax advisors as to the applicability of
Florida taxation to their investments in the Certificates and to their ability
to offset any such Florida tax against any other state tax liabilities that such
investors might have.
In the alternative, if the Certificates are treated as interests in a
partnership (not taxable as a corporation) for Federal income tax purposes, the
same treatment should also apply for Florida tax purposes. In such case, Florida
could view the partnership as doing business in Florida, and a Certificateholder
not otherwise subject to taxation in Florida could become subject to Florida
income, franchise or withholding taxes as a result of its mere ownership of
Certificates.
If the Certificates are instead treated as ownership interests in an
association taxable as a corporation or a "publicly traded partnership" taxable
as a corporation, then the entity could be subject to Florida franchise or
income tax. Such taxes could result in reduced distributions to
Certificateholders. A Certificateholder not otherwise subject to tax in Florida
would not become subject to Florida taxes as a result of its mere ownership of
such an interest.
Finally, even if the Certificates are properly classified as debt
obligations for Federal income tax purposes, they might be treated as debt
obligations of an entity characterized as an association taxable as a
corporation or a "publicly traded partnership" taxable as a corporation, which
could be subject to Florida franchise or income taxes. Any such taxes could
result in reduced distributions to Certificateholders. Certificateholders not
otherwise subject to tax in Florida would not become subject to Florida taxes as
a result of their mere ownership of such an interest. In addition, if the
Certificates were treated as debt obligations of an entity characterized as a
partnership for Federal income tax purposes, such treatment would also apply for
Florida tax purposes.
TENNESSEE. Certain servicing and collection activities with respect
to the Receivables will take place in Tennessee. Tennessee imposes an excise tax
on corporations and business trusts doing business in the state of Tennessee
measured by their net income allocated and
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apportioned to Tennessee. Tennessee also imposes a franchise tax on corporations
and business trusts doing business in Tennessee measured by the greater of
stockholder equity or real and tangible personal property used or owned ("Tax
Base") in Tennessee, such Tax Base being allocated and apportioned to Tennessee
in the same manner as their net income is allocated under the excise tax. Under
recent legislation, a different apportionment formula applies to financial
institutions doing business in Tennessee. This discussion is based upon recent
provisions of Tennessee law and regulations, and applicable judicial or ruling
authority, all of which are subject to change, which may be retroactive. No
ruling on any of the issues discussed below will be sought from the Tennessee
Department of Revenue.
Assuming the Certificates are treated as indebtedness for income tax
purposes, this treatment should also apply for Tennessee tax purposes. Pursuant
to this treatment, Certificateholders not otherwise subject to Tennessee tax
would not become subject to such tax solely because of their ownership of the
Certificates. Certificateholders already subject to taxation in Tennessee,
however, could be required to pay additional excise tax on the income generated
from ownership of the Certificates and additional franchise tax on any increases
in capital employed in Tennessee attributable to their ownership of the
Certificates.
In the alternative, if the Certificates are treated as interests in a
partnership (not taxable as a corporation) for federal income tax purposes, the
same treatment should also apply for Tennessee tax purposes. In such case,
Tennessee could view the partnership as doing business in Tennessee, and a
Certificateholder not otherwise subject to taxation in Tennessee could become
subject to Tennessee excise taxes as a result of its ownership of Certificates.
If the Certificates are instead treated as ownership interests in an
association taxable as a corporation, a "publicly traded partnership" taxable as
a corporation or a "business trust" doing business doing business in Tennessee,
then that entity itself would be subject to Tennessee excise and franchise tax.
Such taxes could result in reduced distributions to Certificateholders. A
Certificateholder not otherwise subject to tax in Tennessee would not be subject
to Tennessee taxes as a result of its ownership of such an interest.
Finally, even if the Certificates are properly classified as debt
obligations for Federal income tax purposes, they might be treated as debt
obligations of an entity characterized as an association taxable as a
corporation or a "publicly traded partnership" taxable as a corporation or
business trust which could be subject to Tennessee excise and franchise taxes.
Any such taxes could result in reduced distributions to Certificateholders.
Certificateholders not otherwise subject to tax in Tennessee would not become
subject to tax in Tennessee as a result of their ownership of such an interest.
In addition, if the Certificates were treated as debt obligations of an entity
characterized as a partnership for Federal income tax purposes, such treatment
would also apply for Tennessee tax purposes.
ERISA CONSIDERATIONS
The Certificates may not be acquired by a Plan or a person investing
"plan assets" of a Plan (including without limitation, for this purpose, any
insurance company general account) (each, a "Plan Investor"). By its acceptance
of a Certificate, each Certificateholder
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will be deemed to have represented and warranted that it is not subject to the
foregoing limitation. For additional information regarding treatment of the
Certificates under ERISA, see "ERISA Considerations" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Seller and First Union Capital Markets Corp. (the
"Underwriter"), the Certificates will be purchased from the Seller by the
Underwriter upon issuance.
The Underwriting Agreement provides that the Underwriter is obligated
to purchase all of the Certificates offered hereby, if any of such Certificates
are purchased.
The Seller has been advised by First Union Capital Markets Corp. that
it proposes initially to offer the Certificates to the public at the public
offering price set forth on the cover page of this Prospectus Supplement and to
certain dealers at such price less a concession not in excess of 0.20% of the
principal amount of the Certificates, and that the Underwriter and such dealers
may re-allow a discount of not in excess of 0.125% of the principal amount of
the Certificates to other dealers. The public offering price and the concession
and discount to dealers may be changed by the Underwriter after the initial
public offering of the Certificates offered hereby. In addition, certain fees
and expenses of the Underwriter, including fees and expenses of its counsel,
will be paid by the Seller.
NAFCO and the Seller have agreed to indemnify the Underwriter against
certain liabilities, including certain losses, claims, damages or liabilities
arising under the Securities Act of 1933, as amended, in connection with certain
untrue statements of material fact or material omissions contained in the
Preliminary Prospectus Supplement, the Prospectus or the Registration Statement.
The Seller does not intend to apply for listing of the Certificates
on a national securities exchange, but has been advised by the Underwriter that
the Underwriter currently intends to make a market in the Certificates, as
permitted by applicable laws and regulations. The Underwriter is not obligated,
however, to make a market in the Certificates and any such market may be
discontinued at any time at the sole discretion of the Underwriters.
Accordingly, no assurance can be given as to the liquidity of, or trading
markets for, the Certificates.
In the ordinary course of their respective businesses, First Union
Capital Markets Corp. and its affiliates have engaged and may engage in
investment banking and/or commercial banking transactions with NAFCO and its
affiliates. See "Use of Proceeds" herein and "Plan of Distribution" in the
accompanying Prospectus. In connection with the offering contemplated by this
Prospectus Supplement, First Union Corporation has received a fee from the
Seller in respect of certain advisory services relating to the structuring of
the transaction.
This Prospectus Supplement and the accompanying Prospectus may be
used by the Underwriter, affiliates of which have an ownership interest in, or
participate in banking
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transactions with, NAFCO, in connection with offers and sales related to market
making transactions in the Certificates. The Underwriter may act as principal or
agent in such transactions. Such sales will be made at prices related to
prevailing market prices at the time of the sale or otherwise.
LEGAL MATTERS
Certain matters with respect to the legality of the Certificates and
with respect to the federal income tax matters discussed under "Certain Federal
Income Tax Consequences" will be passed upon for the Seller by Thacher Proffitt
& Wood, New York, New York. Certain matters with respect to the Certificates
will be passed upon for the Underwriter by Dewey Ballantine, New York, New York.
Certain Florida tax matters will be passed upon for the Seller by Gunster,
Yoakley, Valdes-Fauli & Stewart, P.A. Certain Tennessee tax matters will be
passed upon for the Seller by Bass, Berry & Sims. Certain legal matters relating
to the Certificate Policy will be passed upon for the Certificate Insurer by
Steven D. Thomas, Esq., Associate General Counsel of the Certificate Insurer.
The Certificate Insurer is represented by Mayer, Brown & Platt, New York, New
York.
RATINGS
As a condition of issuance, the Certificates will be rated "AAA" by
S&P and "Aaa" by Moody's primarily on the basis of the issuance of the
Certificate Policy by the Certificate Insurer. There is no assurance that the
ratings initially assigned to the Certificates will not subsequently be lowered
or withdrawn by the Rating Agencies. Such ratings will not constitute an
assessment of the likelihood that principal prepayments on the Receivables
underlying the Certificates will be made by the Obligors thereon or of the
degree to which the rate of such prepayments might differ from that originally
anticipated. See "Risk Factors -- Ratings on Certificates" herein.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc.
and Subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of income, changes in shareholder's equity and cash flows for each of
the three years in the period ended December 31, 1995, incorporated by reference
in this Prospectus Supplement, have been incorporated herein in reliance on the
report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
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INDEX OF DEFINED TERMS
ABS .....................................................S-23
ABS Table .....................................................S-24
ACCH ...........................................S-4, S-6, S-19
Additional Receivable Transfer Percentage................................S-42
Additional Receivables..............................................S-5, S-31
Affiliated Group .....................................................S-23
Aggregate risks .....................................................S-30
Agreement ......................................................S-4
Amortization Event .....................................................S-10
APR ......................................................S-7
Available Amount .....................................................S-48
Backup Servicer ......................................................S-4
Bankruptcy Loss .....................................................S-39
Beneficial Owner .....................................................S-31
Book-Entry Certificates..................................................S-31
Business Day ................................................S-7, S-54
Cede .....................................................S-31
CEDEL Participants .....................................................S-33
Certificate Account ..........................................S-5, S-18, S-48
Certificate Distributable Amount.........................................S-37
Certificate Insurer ......................................................S-5
Certificate Insurer Default..............................................S-46
Certificate Insurer Optional Deposit.....................................S-48
Certificate Interest Distributable Amount................................S-37
Certificate Percentage..............................................S-5, S-30
Certificate Policy ........................................................1
Certificate Principal Distributable Amount...............................S-38
Certificate Rate ........................................................1
Certificateholder ..................................................1, S-55
Certificates ........................................................1
Closing Date ......................................................S-4
Code .....................................................S-14
Collateral Agent ..........................................S-4, S-12, S-19
Collection Account ..........................................S-5, S-18, S-47
Cooperative .....................................................S-34
Custodian .....................................................S-18
Cut-off Dates ......................................................S-6
Defaulted Receivable.....................................................S-44
Definitive Certificate...................................................S-31
Determination Date .....................................................S-48
Distribution Date .............................................1, S-7, S-36
Draw Date .....................................................S-40
DTC ..................................................1, S-31
Due Period ......................................................S-8
Eligible Account .....................................................S-47
Eligible Investments.....................................................S-47
Euroclear Operator .....................................................S-34
Euroclear Participants...................................................S-34
European Depositaries....................................................S-33
Exchange Act ......................................................S-2
Final Scheduled Distribution Date......................................1, S-7
Financed Vehicles ..........................................S-5, S-18, S-31
Financial organization...................................................S-64
Financial Security .................................................S-3, S-5
Funding Trust II ................................................S-6, S-19
Guaranteed Distributions.................................................S-53
Holder ..................................................1, S-55
Holdings ................................................S-3, S-28
Initial Cut-off Date......................................................S-5
Initial Pre-Funded Amount................................................S-50
Initial Receivables ................................................S-5, S-31
Insurance Agreement .....................................................S-40
Insurance Agreement Event of Default.....................................S-45
IRS .....................................................S-56
Liquidated Receivable....................................................S-38
Loan Rule .....................................................S-64
Modeling Assumptions.....................................................S-24
Monthly Interest .....................................................S-28
Moody's .....................................................S-15
NAFCO ........................................................1
NAFCO Transferors ..........................................S-6, S-19, S-42
OFSA .....................................................S-28
OID .....................................................S-58
Order .....................................................S-54
Original Pool Outstanding Principal
Balance..............................................S-13
Originators ......................................................S-4
Pass-Through Rate ......................................................S-7
Percentage Interest .....................................................S-30
Plan .....................................................S-14
Plan Investor ...............................................S-15, S-65
Policy Claim Amount .....................................................S-40
Pool Outstanding Principal Balance.................................S-13, S-43
Pooling and Servicing Agreement.............................................1
Pre-Funded Amount .....................................................S-11
Pre-Funding Account ........................................................1
Pre-Funding Period ..................................................1, S-11
Principal Distributable Amount...........................................S-38
Purchase Agreement ................................................S-6, S-19
Purchase Agreements ................................................S-6, S-19
Purchase Amount ......................................................S-9
Rating Agencies .....................................................S-15
Receipt .....................................................S-54
Receivable Files .....................................................S-18
Receivables .............................................1, S-5, S-31
Received .....................................................S-54
Record Date ......................................................S-8
Relevant Depositary .....................................................S-33
Reporting Date .....................................................S-48
Required Reserve Amount..................................................S-50
Retransfer Default Receivable............................................S-39
Revolving Account ........................................................1
Revolving Period .............................................1, S-9, S-49
Rules .....................................................S-32
S&P ...............................................S-15, S-67
Sale Agreement ......................................................S-6
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Seller .............................................1, S-4, S-27
Seller Interest ...................................................1, S-9
Seller Percentage ......................................................S-9
Servicer .............................................1, S-4, S-27
Servicer Certificate.....................................................S-35
Servicer Default .....................................................S-44
Servicing Fee .....................................................S-51
Single risks .....................................................S-30
Spread Account Agreement.................................................S-12
Spread Account Initial Amount............................................S-41
Subsequent Cut-off Date...................................................S-6
Subsequent Transfer Agreement............................................S-17
Subsequent Transfer Date..................................................S-6
Tax Base .....................................................S-65
Tax Counsel .....................................................S-56
Terms and Conditions.....................................................S-34
Trust ...................................................1, S-4
Trust Property .............................................1, S-5, S-31
Trustee .............................................1, S-4, S-19
Underwriter .....................................................S-66
United States person...............................................S-61, S-62
World Omni .....................................................S-28
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
National Auto Finance 1996-1 Trust Certificates (the "Global Certificates") will
be available only in book-entry form. Investors in the Global Certificates may
hold such Global Certificates through any of DTC, CEDEL or Euroclear. The Global
Certificates will be tradeable as home market instruments in both the European
and U.S. domestic markets.
Initial settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors through CEDEL and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of CEDEL and Euroclear and in accordance with
conventional eurobond practice (i.e., seven-calendar-day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Certificates will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Certificates will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Certificates will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
Relevant Depository which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Certificates through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Certificates through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Certificates will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between
DTC Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
A-1
<PAGE>
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
TRADING BETWEEN DTC, SELLER AND CEDEL OR EUROCLEAR PARTICIPANTS. When
Global Certificates are to be transferred from the account of a DTC Participant
to the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depository, as the case may be, to receive
the Global Certificates against payment. Payment will include interest accrued
on the Global Certificates from and including the last coupon payment date to
and excluding the settlement date, on the basis of the actual number of days in
such accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
Relevant Depository to the DTC Participant's account against delivery of the
Global Certificates. After settlement has been completed, the Global
Certificates will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the CEDEL
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Certificates will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (I.E., the trade fails),
the CEDEL or Euroclear cash debt will be valued instead as of the actual
settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlements. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Certificates are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of
credit to them, CEDEL Participants or Euroclear Participants can elect not to
pre-position funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Certificates would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Certificates were credited
to their accounts. However, interest on the Global Certificates would accrue
from the value date. Therefore, in many cases the investment income on the
Global Certificates earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although the result will depend
on each CEDEL Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Certificates to the respective European Depository for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to
time-zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Certificates are to be transferred by the respective clearing system,
through the respective Depository, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depository, as appropriate, to credit
the Global Certificates to the DTC Participant's account against payment.
Payment will include interest accrued on the Global Certificates from and
including the last coupon payment to and excluding the settlement date on the
basis of the actual number of days in such accrual period and a year assumed to
consist to 360 days. For transactions settling on the 31st of the month, payment
will include interest accrued to and excluding the first day of the following
month. The payment will then be reflected in the account of CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). In the event that the CEDEL Participant or Euroclear Participant has
a line of credit with its respective clearing system and elects to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended
A-2
<PAGE>
value date (I.E., the trade fails), receipt of the cash proceeds in the CEDEL
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Certificates from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Certificates in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give the
Global Certificates sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Certificates holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial Owners of
Global Certificates that are Non-U.S. Persons (as defined below) can obtain a
complete exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status). If the information shown on Form W-8 changes, a
new Form W-8 must be filed within 30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME
(FORM 4224). A Non-U.S. Person (as defined below), including a non-U.S.
corporation or bank with a U.S. branch, for which the interest income is
effectively connected with its conduct of a trade or business in the United
States, can obtain an exemption from the withholding tax by filing Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Owners or their agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency).
A-3
<PAGE>
Form W-8 and Form 1001 are effective for three calendar years and Form 4224 is
effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Global
Certificates. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Certificates.
A-4
<PAGE>
PROSPECTUS
NATIONAL AUTO AUTOMOBILE RECEIVABLES TRUSTS
AUTOMOBILE RECEIVABLES-BACKED CERTIFICATES
AUTOMOBILE RECEIVABLES-BACKED NOTES
-----------------
NATIONAL FINANCIAL AUTO FUNDING TRUST
(Seller)
-----------------
The Automobile Receivables-Backed Certificates (the "Certificates") and
the Automobile Receivable-Backed Notes (the "Notes" and, collectively with the
Certificates, the "Securities") described herein may be sold from time to time
in one or more series, in amounts, at prices and on the terms to be determined
at the time of sale and to be set forth in a supplement to this Prospectus (a
"Prospectus Supplement"). Each series of Securities will include either one or
more classes of Certificates or, if Notes are issued as part of a series, one or
more classes of Notes and one or more classes of Certificates, as set forth in
the related Prospectus Supplement.
The Certificates and the Notes, if any, of any series of Securities
will be issued by a trust (a "Trust") to be formed with respect to such series
by National Financial Auto Funding Trust (the "Seller"), a wholly owned
subsidiary of National Auto Finance Company L.P. ("NAFCO"). The assets of each
Trust (the "Trust Property") will include a pool of retail installment sale
contracts (the "Receivables") purchased by NAFCO or Auto Credit Clearinghouse
L.P., a subsidiary of NAFCO (together with NAFCO, the "Originators"),
principally from motor vehicle dealers and secured by new and used automobiles,
light trucks, vans or minivans, certain monies paid or payable thereunder on or
after the Cutoff Date set forth in the related Prospectus Supplement (the
"Cutoff Date"), an assignment of the security interests of the Originators in
the vehicles financed thereby, rights to receive proceeds from claims on certain
insurance policies covering the vehicles or the obligors on the Receivables,
rights to enforce certain remedies against the Originators in the event of a
breach of a representation or warranty made by the Originators regarding the
Receivables, and certain other property, as more fully described herein and in
the related Prospectus Supplement. In addition, if so specified in the related
Prospectus Supplement, the Trust Property will include monies on deposit in one
or more trust accounts to be established with the Trustee or the Indenture
Trustee, which may include a Pre-Funding Account and/or a Revolving Account,
each of which would be used to purchase additional Receivables (the "Subsequent
Receivables") from the Seller from time to time during the Pre-Funding Period or
Revolving Period specified in the related Prospectus Supplement.
Each Trust will be formed pursuant to either (i) a Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement") to be entered into
among the Seller, NAFCO, in its individual capacity and as Servicer, and the
Trustee specified in the related Prospectus Supplement (the "Trustee") or (ii) a
Trust Agreement (the "Trust Agreement") to be entered into among the Seller, the
Trustee and certain other parties as specified in the related Prospectus
Supplement. If the Trust is formed pursuant to a Trust Agreement, a Sale and
Servicing Agreement (the "Sale and Servicing Agreement") will be entered into
among the Seller, NAFCO, in its individual capacity and as Servicer, the Trust
and the Backup Servicer (as defined herein). In either case, the Pooling and
Servicing Agreement or the Trust Agreement and the Sale and Servicing Agreement
are collectively referred to herein as the "Trust Documents." The Notes, if any,
of a series will be issued and secured pursuant to an Indenture (the
"Indenture") between the Trust and the Indenture Trustee specified in the
related Prospectus Supplement (the "Indenture Trustee").
(CONTINUED ON FOLLOWING PAGE)
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED
BY PROSPECTIVE PURCHASERS OF THE SECURITIES, SEE "RISK
FACTORS" AT PAGE 20 HEREIN AND AS MAY BE SET FORTH IN THE RELATED
PROSPECTUS SUPPLEMENT.
------------
THE CERTIFICATES REPRESENT INTERESTS IN AND THE NOTES REPRESENT OBLIGATIONS OF
THE RELATED TRUST AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF NAFCO,
THE SELLER OR ANY AFFILIATE OF EITHER.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
THE DATE OF THIS PROSPECTUS IS OCTOBER 31, 1996.
<PAGE>
Each class of Securities of any series will represent the right to
receive a specified amount of payments of principal and/or interest on the
related Receivables in the manner described herein and in the related Prospectus
Supplement. The right of each class of Securities to receive payments may be
senior or subordinate to the rights of one or more of the other classes of such
series. A series may include two or more classes of Certificates or Notes which
differ as to the timing and priority of payment, interest rate or amount of
distributions in respect of principal or interest or both. A series may include
one or more classes of Certificates or Notes entitled to distributions in
respect of principal, with disproportionate, nominal or no interest
distributions, or to interest distributions, with disproportionate, nominal or
no distributions in respect of principal. Distributions on Certificates of any
series will be subordinated in priority to payments due on the related Notes, if
any, to the extent described herein and in the related Prospectus Supplement.
The Certificates will represent fractional undivided interests in the related
Trust.
Each class of Securities will represent the right to receive
distributions or payments in the amounts, at the rates, and on the dates set
forth in the related Prospectus Supplement. The rate of distributions in respect
of principal on Certificates and payment in respect of principal on Notes, if
any, of any class will depend on the priority of payment of such class and the
rate and timing of payments (including prepayments, liquidations and repurchases
of Receivables) on the related Receivables.
Unless the related Prospectus Supplement provides for physical delivery
of the Securities, the Certificates and the Notes, if any, of any series
initially will be represented by certificates and notes registered in the name
of Cede & Co., the nominee of The Depository Trust Company ("DTC"). The
interests of beneficial owners of the Securities will be represented by book
entries on the records of the participating members of DTC. Definitive
Securities will be available only under limited circumstances.
Certain capitalized terms used in this Prospectus are defined elsewhere
herein. A listing of the pages on which such terms are defined is found in the
"Index of Defined Terms" herein on page 89.
There currently is no secondary market for the Securities. There can be
no assurance that any such market will develop or, if it does develop, that it
will continue. The Securities will not be listed on any securities exchange.
<PAGE>
AVAILABLE INFORMATION
The Seller, as originator of each Trust, 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, with
respect to the Securities offered pursuant to this Prospectus. For further
information, reference is made to the Registration Statement which is available
for inspection without charge at the office of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission at Seven World Trade Center, Suite 1300, New York, New York 10048 and
at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511, and copies of which may be obtained from the Commission at
prescribed rates.
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Certificates or Definitive Notes are
issued, unaudited monthly and annual reports, containing information concerning
each Trust and prepared by the Servicer, will be sent on behalf of the Trust to
the Trustee for the Certificateholders, the Indenture Trustee for the
Noteholders and Cede & Co., as registered holder of the Certificates and the
Notes and the nominee of DTC. See "Certain Information Regarding the Securities
- -- Statements to Securityholders" and "--Book-Entry Registration."
Certificateholders and Noteholders are collectively referred to herein as the
"Securityholders." Certificate Owners or Note Owners may receive such reports,
upon written request, together with a certification that they are Certificate
Owners or Note Owners and payment of any expenses associated with the
distribution of such reports, from the Trustee, with respect to Certificate
Owners, or the Indenture Trustee, with respect to Note Owners, at the addresses
specified in the related Prospectus Supplement. Such reports will not constitute
financial statements prepared in accordance with generally accepted accounting
principles. Neither the Seller or NAFCO intends to send any of its financial
reports to Securityholders. The Servicer, on behalf of each Trust, will file
with the Commission periodic reports concerning each Trust to the extent
required under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations of the Commission thereunder. The Servicer,
on behalf of each Trust, will discontinue the filing of such periodic reports
with the Commission upon completion of the reporting period required by Rule
15d-1 of the Exchange Act.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Servicer on behalf of each Trust pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of the offering of the related
Securities shall be deemed to be incorporated by reference into this Prospectus
and the related Prospectus Supplement and to be a part hereof and thereof from
the respective dates of filing of such documents. Any statement contained in a
document all or any portion of which is deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus and the related Prospectus Supplement to the extent that a statement
contained herein or in any other subsequently filed document which also is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus or the
related Prospectus Supplement.
The Servicer will provide without charge to any person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the foregoing documents incorporated herein by reference (other
than certain exhibits to such documents). Requests for such copies should be
directed to Chief Financial Officer, National Auto Finance Company L.P., One
Park Place, Suite 200, 621 N.W. 53rd Street, Boca Raton, Florida 33487
(telephone (407) 997-2747).
- 3 -
<PAGE>
PROSPECTUS 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 CONTAINED IN THE RELATED
PROSPECTUS SUPPLEMENT TO BE PREPARED AND DELIVERED IN CONNECTION WITH THE
OFFERING OF EACH SERIES OF SECURITIES. CERTAIN CAPITALIZED TERMS IN THIS
PROSPECTUS SUMMARY ARE DEFINED ELSEWHERE IN THIS PROSPECTUS AND IN THE RELATED
PROSPECTUS SUPPLEMENT. A LISTING OF THE PAGES ON WHICH SOME OF SUCH TERMS ARE
DEFINED IS FOUND IN THE "INDEX OF DEFINED TERMS."
Issuer............................. With respect to each series of Securities,
a trust (the "Trust") will be formed by
National Financial Auto Funding Trust (the
"Seller") pursuant to either a Pooling and
Servicing Agreement among the Seller,
National Auto Finance Company L.P.
("NAFCO"), in its individual capacity and
as Servicer (in such capacity referred to
herein as the "Servicer"), and the Trustee
specified in the related Prospectus
Supplement, or a Trust Agreement between
the Seller, the Trustee specified in the
related Prospectus Supplement and certain
other parties as specified in the related
Prospectus Supplement.
Seller............................. National Financial Auto Funding Trust, a
wholly owned subsidiary of NAFCO. See "The
Seller."
Originators........................ NAFCO and Auto Credit Clearinghouse L.P.,
a subsidiary of NAFCO.
Servicer........................... National Auto Finance Company L.P. See
"NAFCO."
Trustee............................ The Trustee specified in the related
Prospectus Supplement (the "Trustee"). See
"Description of the Purchase Agreements
and the Trust Documents--The Trustee."
Backup Servicer.................... NAFCO may be terminated as Servicer under
certain circumstances, at which time the
Backup Servicer specified in the related
Prospectus Supplement (the "Backup
Servicer") will automatically become the
Servicer. See "Description of the Purchase
Agreements and the Trust Documents--
- 4 -
<PAGE>
Servicer Termination Events" and "--The
Backup Servicer."
Indenture Trustee.................. With respect to any series of Securities
including one or more classes of Notes,
the Indenture Trustee specified in the
related Prospectus Supplement (the
"Indenture Trustee").
The Certificates................... Each series of Securities will include one
or more classes of Certificates which will
be issued pursuant to the related Trust
Documents.
Certificates will be available for
purchase in the denominations specified in
the related Prospectus Supplement and will
be available in book-entry form only
unless otherwise provided in the related
Prospectus Supplement. Holders of
Certificates ("Certificateholders") will
be able to receive Definitive Certificates
only in the limited circumstances
described herein or in the related
Prospectus Supplement. See "Certain
Information Regarding the Securities--
Book-Entry Registration."
Other than as provided below with respect
to Strip Certificates, each class of
Certificates will have a stated
Certificate Balance (as defined in the
related Prospectus Supplement) and will
accrue interest on such Certificate
Balance at a specified rate (with respect
to each class of Certificates, the
"Pass-Through Rate"). Each class of
Certificates may have a different Pass-
Through Rate, which may be a fixed,
variable or adjustable Pass-Through Rate,
or any combination of the foregoing. The
related Prospectus Supplement will specify
the Pass-Through Rate for each class of
Certificates, or the initial Pass-Through
Rate and the method for determining
subsequent changes to the Pass-Through
Rate. In addition, a series may include
one or more classes of Certificates
("Strip Certificates") entitled to (i)
distributions in respect of principal with
disproportionate, nominal or
- 5 -
<PAGE>
no interest distributions, or (ii)
interest distributions, with
disproportionate, nominal or no
distributions in respect of principal.
A series may include two or more classes
of Certificates which differ as to timing
of distributions, sequential order,
priority of payment, seniority, allocation
of loss, Pass- Through Rate or amount of
distributions in respect of principal or
interest, or as to which distributions in
respect of principal or interest on any
class may or may not be made upon the
occurrence of specified events or on the
basis of collections from designated
portions of the Receivables Pool.
With respect to any series of Securities
including one or more classes of Notes,
distributions in respect of the
Certificates may be subordinated in
priority of payment to payments on the
Notes, to the extent specified in the
related Prospectus Supplement.
If the Seller or Servicer exercises its
option to purchase the Receivables of a
Trust on the terms and conditions
described below under "Description of the
Purchase Agreements and the Trust
Documents--Termination,"
Certificateholders will receive an amount
in respect of the Certificates as
specified in the related Prospectus
Supplement. In addition, if the related
Prospectus Supplement provides that the
property of a Trust will include a
Pre-Funding Account or Revolving Account,
Certificateholders may receive a
distribution in respect of principal on or
immediately following the end of the Pre-
Funding Period or Revolving Period, as
applicable, specified in the related
Prospectus Supplement in an amount and
manner specified in the related Prospectus
Supplement.
The Notes.......................... With respect to any series of Securities
including one or more classes of Notes,
such Notes will be issued pursuant to an
Indenture.
- 6 -
<PAGE>
Notes will be available for purchase in
the denominations specified in the related
Prospectus Supplement and will be
available in book-entry form or, if
specified in the related Prospectus
Supplement, in definitive form. If Notes
are issued in book-entry form, holders of
Notes ("Noteholders") will be able to
receive Definitive Notes only in the
limited circumstances described herein or
in the related Prospectus Supplement. See
"Certain Information Regarding the
Securities-- Book-Entry Registration."
Other than as provided below with respect
to Strip Notes, each class of Notes will
have a stated principal amount and will
bear interest at a specified rate or rates
(with respect to each class of Notes, the
"Interest Rate"). Each class of Notes may
have a different Interest Rate, which may
be a fixed, variable or adjustable
Interest Rate, or any combination of the
foregoing. The related Prospectus
Supplement will specify the Interest Rate
and the method for determining subsequent
changes to the Interest Rate. In addition,
a series may include one or more classes
of Notes ("Strip Notes") entitled to (i)
principal payments with disproportionate,
nominal or no interest payments or (ii)
interest payments with disproportionate,
nominal or no principal payments.
A series may include two or more classes
of Notes which differ as to the timing and
priority of payment, seniority,
allocations of loss, Interest Rate or
amount of payments of principal or
interest, or as to which payments of
principal or interest may or may not be
made upon the occurrence of specified
events or on the basis of collections from
designated portions of the Receivables
Pool. If the Seller or the Servicer
exercises its option to purchase the
Receivables of a Trust on the terms and
conditions described below under
"Description of the Purchase Agreements
and the Trust Documents--Termination," the
outstanding Notes, if any, of such series
will be redeemed as set forth in the
related
- 7 -
<PAGE>
Prospectus Supplement. In addition, if the
related Prospectus Supplement provides
that the property of a Trust will include
a PreFunding Account or Revolving Account,
the outstanding Notes, if any, of such
series will be subject to partial
redemption on or immediately following the
end of the PreFunding Period or Revolving
Period, as applicable, in an amount and
manner specified in the related Prospectus
Supplement. In the event of such partial
redemption, the Noteholders may be
entitled to receive a prepayment premium
from the Trust, in the amount and to the
extent provided in the related Prospectus
Supplement.
Trust Property..................... Each Certificate will represent a
fractional undivided interest in, and each
Note, if any, will represent an obligation
of, the related Trust. The assets of each
Trust (the "Trust Property") will include
a pool (the "Receivables Pool") of retail
installment sale contracts (the
"Receivables") purchased or to be
purchased primarily from motor vehicle
dealers ("Dealers") by the Originators and
secured by new and used automobiles, light
trucks, vans or minivans (the "Financed
Vehicles"), certain monies paid or payable
thereunder on or after the Cutoff Date (as
specified in the related Prospectus
Supplement), an assignment of the security
interests of the Originators in the
Financed Vehicles and of the right to
receive proceeds from claims on certain
insurance policies covering the Financed
Vehicles or the Obligors, the assignment
of certain rights of the Originators
against the Dealers originating such
Receivables, the Collection Account and
certain other trust accounts as may be
established to provide credit support or
liquidity with respect to the related
Trust assets or Securities, including in
the case of each such account all
investments therein, all income from the
investment of funds therein and all
proceeds thereof, and certain other rights
under the Trust Documents. In addition, if
so specified in the related
- 8 -
<PAGE>
Prospectus Supplement, the Trust Property
will include monies on deposit in a Pre-
Funding Account and/or Revolving Account
to be established with the Indenture
Trustee or the Trustee, which will be used
to purchase Subsequent Receivables (as
defined below) from the Seller from time
to time during the Pre-Funding Period
and/or Revolving Period specified in the
related Prospectus Supplement, as well as
any Subsequent Receivables so purchased.
See "The Trusts."
The Receivables of each Trust will be
purchased by the Seller from either or
both of the Originators and/or one or more
special-purpose finance subsidiaries of
NAFCO (each of the Originators and any
such subsidiary, in its capacity as
transferor of Receivables to the Seller, a
"NAFCO Transferor") pursuant to a purchase
agreement (the "Purchase Agreement")
between the Seller and the applicable
NAFCO Transferor on or prior to the date
of issuance of the Securities. If and to
the extent provided in the related
Prospectus Supplement, the Seller will be
obligated (subject only to the
availability thereof) to purchase from one
or more NAFCO Transferors and to sell to
the related Trust, and the related Trust
will be obligated to purchase from the
Seller (subject to the satisfaction of
certain conditions described in the
applicable Purchase Agreement), additional
Receivables (the "Subsequent Receivables")
from time to time (as frequently as daily)
during the Pre-Funding Period specified in
the related Prospectus Supplement having
an aggregate principal balance
approximately equal to the amount on
deposit in the Pre-Funding Account (the
"Pre-Funded Amount") on such Closing Date.
The Trust Property of each Trust will also
include an assignment of the Seller's
rights under the related Purchase
Agreement, including rights against the
applicable
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<PAGE>
Originator upon the occurrence of certain
breaches of representations and warranties
thereunder (a "Repurchase Event"). See
"Description of the Purchase Agreements
and Trust Documents--Sale and Assignment
of the Receivables" and "--Servicing
Procedures."
Pre-Funding Account................ If and to the extent specified in the
related Prospectus Supplement, a portion
of the net proceeds from the offering of
the Securities of a series (such amount,
the "Pre-Funded Amount") may be deposited
in a segregated account (the "Pre-Funding
Account") with the Trustee or Indenture
Trustee, as the case may be, for the
benefit of the Securityholders. During the
period specified in the related Prospectus
Supplement (the "Pre-Funding Period") the
Pre-Funded Amount will be reduced as it is
used to purchase Subsequent Receivables
subject to the satisfaction of certain
conditions specified under the related
Trust Documents. The maximum length of the
Pre-Funding Period will be specified in
the related Prospectus Supplement and will
not exceed one year. The Pre-Funded Amount
will be specified in the related
Prospectus Supplement and will not exceed
the lesser of (i) 25% of the gross
proceeds of the offering of the related
series of Securities and (ii) the
aggregate principal balance of Subsequent
Receivables that the Seller anticipates it
will be able to acquire and convey to the
Trust during the Pre- Funding Period.
Funds on deposit in the Pre-Funding
Account will be invested in Eligible
Investments pending release of such funds
to the Seller in connection with the
purchase of Subsequent Receivables.
Prior to the conveyance of any Subsequent
Receivables to the Trust, the Seller will
be required to give notice of the
Subsequent Receivables to be conveyed to
the Trust to the Trustee(s), the Rating
Agencies and any third-party credit
enhancement provider. Upon the
satisfaction of the conditions set forth
in the Trust Documents, including the
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receipt by the Trustee and/or Indenture
Trustee, as applicable, of an executed
assignment, the Trustee and/or Indenture
Trustee, as applicable, will release from
the Pre-Funding Account the necessary
funds to purchase the Subsequent
Receivables to be conveyed to the Trust on
such date. In no event will funds be
released from the PreFunding Account to
purchase Subsequent Receivables unless the
Rating Agencies rating the Securities of
such series confirm that the ratings on
the Securities of such series have not
been withdrawn or reduced as a result of
the conveyance of the Subsequent
Receivables to the Trustee. Subsequent
Receivables purchased with funds released
from the Pre-Funding Account will have
been originated in accordance with the
Originators' general underwriting
guidelines as in effect from time to time
and will not be selected on the basis of
any adverse selection criteria.
If any Pre-Funded Amount remains on
deposit in the Pre-Funding Account at the
end of the Pre-Funding Period, such
amount, in the amounts and in the manner
specified in the related Prospectus
Supplement, will be used to prepay some or
all classes of the Securities. In the
event of such prepayment, the
Securityholders may be entitled to receive
a prepayment premium in the amount and to
the extent provided in the related
Prospectus Supplement. Such a prepayment
could result in the Securityholders
receiving principal payments at a time
when the Securityholders are unable to
reinvest such payments in investments
having a yield and rating comparable to
the yield and rating on the Securities.
See "Risk Factors--Yield and Prepayment
Considerations."
Revolving Account.................. If the related Prospectus Supplement so
provides, there may be a period commencing
on the date of issuance of a class or
classes of Notes or Certificates of a
series and ending on the date set forth in
the related Prospectus Supplement (the
"Revolving
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<PAGE>
Period") during which no principal
payments will be made to one or more
classes of Notes or Certificates of the
related series as are identified in such
Prospectus Supplement. All collections of
principal otherwise allocated to such
classes of Notes or Certificates may be
(i) utilized by the Trust during the
Revolving Period to acquire additional
Receivables that satisfy the standards
described under "Description of the
Purchase Agreements and the Trust
Documents -- Sale and Assignment of the
Receivables" herein and the criteria set
forth in the related Prospectus
Supplement, (ii) held in an account and
invested in Eligible Investments for later
distribution to Securityholders, (iii)
applied to those Notes or Certificates, if
any, specified in the related Prospectus
Supplement as then are in amortization, or
(iv) otherwise applied as specified in the
related Prospectus Supplement.
An "Amortization Period" is the period
during which an amount of principal is
payable to holders of a series of
Securities that, during the Revolving
Period, were not entitled to such
payments. If so specified in the related
Prospectus Supplement, during an
Amortization Period all or a portion of
principal collections on the Receivables
may be applied as specified above for a
Revolving Period and, to the extent not so
applied, will be distributed to the
classes of Notes or Certificates specified
in the related Prospectus Supplement as
then being entitled to payments of
principal. In addition, if so specified in
the related Prospectus Supplement, amounts
deposited in certain accounts for the
benefit of one or more classes of Notes or
Certificates may be released from time to
time or on a specified date and applied as
a payment of principal on such classes of
Notes or Certificates. The related
Prospectus Supplement will set forth the
circumstances which will result in the
commencement of an Amortization Period.
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Each Trust that has a Revolving Period may
also issue to the Seller a certificate
evidencing an undivided beneficial
interest (the "Retained Interest") in the
Trust not represented by the other
Securities issued by such Trust. As
further described in the related
Prospectus Supplement, the value of such
Retained Interest will fluctuate as the
amount of Trust Property fluctuates and
the amount of Notes and Certificates of
the related series of Securities
outstanding is reduced.
Credit Enhancement................. If and to the extent specified in the
related Prospectus Supplement, credit
enhancement with respect to a Trust 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 "Security
Insurer"), subordination of one or more
other classes of Securities, a reserve
account, overcollateralization, letters of
credit, credit or liquidity facilities,
repurchase obligations, third party
payments or other support, cash deposits
or other arrangements. A form of credit
enhancement may have certain limitations
and exclusions from coverage thereunder,
which will be described in the related
Prospectus Supplement. "Description of the
Purchase Agreements and the Trust
Documents--Credit Enhancement."
Servicer and OFSA.................. The Servicer will be directly obligated to
the Trustee for the servicing and
administering of the Receivables pursuant
to the Trust Documents. With respect to
each series of Securities, compensation to
the Servicer will include a monthly fee
(the "Servicing Fee") that will be payable
from the related Trust to the Servicer on
each Distribution Date in an amount equal
to the product of one-twelfth of the per
annum rate specified in the related
Prospectus Supplement multiplied by the
aggregate principal balance of the
Receivables (the "Aggregate Principal
Balance") as of the first day of the prior
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calendar month, plus any late fees and
other administrative fees and expenses or
similar charges collected with respect to
the Receivables during such Monthly
Period. The Servicer may, to the extent
provided in the Trust Documents and with
the prior written consent of the Security
Insurer, if any, delegate any of its
servicing duties to one or more
subservicers; PROVIDED, HOWEVER, that
notwithstanding the delegation of its
duties pursuant to a subservicer
arrangement, the Servicer will not be
relieved of its obligations with respect
to the servicing of the Receivables. On or
before the Closing Date specified in the
related Prospectus Supplement, the
Servicer will enter into a Subservicing
Agreement (the "Subservicing Agreement")
with Omni Financial Services of America,
Inc., a wholly owned subsidiary of World
Omni Financial Corp. ("OFSA"), pursuant to
which OFSA will subservice the Receivables
and maintain possession of the Receivable
Files in a custodial capacity on behalf of
the Trustee. It is intended that OFSA will
directly service the Receivables and will
collect payments received on the
Receivables, engage in collection efforts
in respect of past due Receivables and,
where appropriate, repossess and liquidate
Financed Vehicles securing defaulted
Receivables. Unless otherwise specified in
the related Prospectus Supplement, none of
the Servicer, the Security Insurer or OFSA
will have any obligation to make advances
of delinquent payments of principal and
interest on the Receivables. None of the
Trustee, the Trust, the Indenture Trustee,
the Security Insurer or the
Securityholders will be party to the
Subservicing Agreement and none of them
will have any rights to enforce the
Subservicing Agreement other than as such
rights may be assigned to the Trustee in
the event it acts as Back-Up Servicer or
successor Servicer; PROVIDED, HOWEVER, the
Security Insurer, if any, will have the
right to terminate any subservicing
arrangement in
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<PAGE>
connection with a termination of the
Servicer.
Receivables........................ The Receivables forming part of the Trust
Property of each Trust were or will have
been originated by Dealers in the ordinary
course of business. The Receivables will
generally be prepayable at any time
without penalty to the purchaser or
co-purchasers of the Financed Vehicle or
other person or persons who are obligated
to make payments thereunder (each, an
"Obligor"). See "The Receivables."
Information with respect to each
Receivables Pool, including the weighted
average annual percentage rate and the
weighted average remaining maturity, will
be set forth in the related Prospectus
Supplement.
Collection Account and
Lockbox Account.................... With respect to each series of Securities,
the Servicer will establish and maintain
one or more separate accounts (the
"Collection Account") in the name of the
Trustee or, in the case of any series
including one or more classes of Notes, in
the name of the Indenture Trustee for the
benefit of the Certificateholders and the
Noteholders, if any. All payments from
Obligors that are received by the Servicer
or any subservicer on behalf of each Trust
will be deposited in the related
Collection Account not later than two
Business Days after receipt thereof or, if
acceptable to the applicable Rating
Agencies, such other time period as may be
specified in the related Prospectus
Supplement. OFSA has established and
maintains a lockbox account (the "Lockbox
Account") currently with Mellon Financial
Services, a subsidiary of Mellon Bank (the
"Lockbox Bank") to which payments in
respect of motor vehicle installment debt
obligations and lease obligations serviced
by OFSA are remitted. Obligors will be
notified to remit payments in respect of
the Receivables directly to the Lockbox
Account or, if acceptable to the
applicable Rating Agencies, such other
account or accounts as may be specified in
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<PAGE>
the related Prospectus Supplement. The
Lockbox Account will not be segregated nor
assigned or pledged to the Trustee or the
Indenture Trustee and payments in respect
of the Receivables deposited to the
Lockbox Account will be commingled with
collections in respect of motor vehicle
installment debt obligations and lease
obligations serviced by OFSA. Neither the
Trustee nor the Servicer will have any
rights to withdraw or otherwise direct
disposition of funds on deposit in the
Lockbox Account. The Servicer will be
permitted to use any alternative
remittance schedule acceptable to the
Rating Agencies (as defined below) and to
the Security Insurer, if any (unless the
Security Insurer shall be in continuing
default on its obligations under the
Policy or certain bankruptcy events shall
have occurred with respect to the Security
Insurer (an "Insurer Default")). See
"Description of the Purchase Agreements
and the Trust Documents--Collections."
Mandatory Purchases of Certain
Receivables...................... With respect to each series of Securities,
the Originator or Originators will make
certain representations and warranties to
the Seller regarding the Receivables
conveyed to the Seller in the related
Purchase Agreement. The Seller will in
turn make representations and warranties
to the Trustee corresponding to those made
by the Originator pursuant to the related
Purchase Agreement and will assign to the
Trustee the right to enforce the
representations and warranties made by the
Originator for the benefit of the related
Trust and the Security Insurer, if any,
and if such series of Securities includes
one or more classes of Notes, the Trustee
will assign its right to enforce such
representations and warranties to the
related Indenture Trustee as collateral
for the Notes. The Trustee and the
Indenture Trustee, if any, as assignees of
the obligations of the Originator to the
Seller under the Purchase Agreement will
be entitled to require that the Originator
repurchase any Receivable if the interests
of
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the Certificateholders, the Noteholders,
if any, the Security Insurer, if any, or
the related Trust therein are materially
and adversely affected by a breach of any
such representation or warranty and such
breach is not cured within the period
specified in the related Prospectus
Supplement, if any such period is so
specified (a "Repurchase Event"). See
"Description of the Purchase Agreements
and the Trust Documents--Sale and
Assignment of the Receivables." No
assurance can be given that the Seller or
the applicable Originator will at any time
have sufficient funds to satisfy any such
repurchase requirement. Mandatory
repurchase by the Seller or the Originator
of the Receivables will reduce the average
life of the Securities and could result in
the Securityholders receiving unexpected
principal payments at a time when such
Securityholders are unable to reinvest
such payments in investments having a
yield and rating comparable to the yield
and rating on the Securities. See "Risk
Factors--Yield and Prepayment
Considerations."
Optional Purchase of Receivables... With respect to each series of Securities,
the Seller or the Servicer may purchase
all the Receivables held by the related
Trust on any Distribution Date following
the first Monthly Period as of which the
Aggregate Principal Balance has declined
to 10% or less (or such other percentage
as may be specified in the related
Prospectus Supplement) of the Cutoff Date
Principal Balance, subject to certain
provisions in the related Trust Documents.
Such right may be exercised only with the
prior written consent of the Security
Insurer, if any, if such retransfer would
result in a claim under any Policy or
would result in any amount owing to the
Security Insurer, if any, or the
Securityholders remaining unpaid. See
"Description of the Purchase Agreements
and the Trust Documents--Termination."
Tax Status......................... The anticipated federal income tax
consequences of the purchase, ownership
and
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<PAGE>
disposition of Securities issued by a
Trust will be discussed in the related
Prospectus Supplement. See "Certain
Federal Income Tax Consequences" herein
and in the related Prospectus Supplement.
ERISA Considerations............... Subject to the considerations discussed
under "ERISA Considerations" herein and in
the related Prospectus Supplement, the
Notes may be eligible for purchase by
employee benefit plans. The related
Prospectus Supplement will provide further
information with respect to the
eligibility of a class of Certificates for
purchase by employee benefit plans. See
"ERISA Considerations" herein and in the
related Prospectus Supplement.
Rating............................. As a condition of issuance, the Securities
of each series will be rated in one of the
four highest rating categories by at least
one nationally recognized rating agency (a
"Rating Agency"). A security rating is not
a recommendation to buy, sell or hold
securities and there is no assurance that
the ratings initially assigned to such
Securities will not be subsequently
lowered or withdrawn by the Rating
Agencies. In the event the rating
initially assigned to any Securities is
subsequently lowered for any reason, no
person or entity will be obligated to
provide any credit enhancement in addition
to the credit enhancement, if any,
specified in the related Prospectus
Supplement. Any rating assigned to the
Securities by a Rating Agency will reflect
its assessment solely of the likelihood
that holders of the Securities will
receive payment of the principal thereof
and interest thereon. Such rating will not
constitute an assessment of the likelihood
that principal prepayments on the
Receivables underlying the Securities will
be made by the obligors thereon or of the
degree to which the rate of such
prepayments might differ from that
originally anticipated.
Registration of Certificates....... Unless the related Prospectus Supplement
provides for physical delivery of the
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<PAGE>
Securities, the Certificates and the
Notes, if any, of each series will be
registered in the name of Cede & Co., as
the nominee of DTC, and will be available
for purchase only in book-entry form on
the records of DTC and participating
members thereof. Certificates and Notes
will be issued in definitive form only
under the limited circumstances described
herein. All references herein to "Holders"
or "Certificateholders" or "Noteholders"
shall reflect the rights of beneficial
owners of Certificates (the "Certificate
Owners") or of Notes ("Note Owners"), as
the case may be, as they may indirectly
exercise such rights through DTC and
participating members thereof, except as
otherwise specified herein or in the
related Prospectus Supplement. See
"Description of the Purchase Agreements
and the Trust Documents--Book-Entry
Registration."
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RISK FACTORS
CERTAIN LEGAL ASPECTS
With respect to each series of Securities, the transfer of the
Receivables to the related Trust will be subject to the requirements of the
Uniform Commercial Code (the "UCC") as in effect in the states of Florida and
Delaware. The Seller will take or cause to be taken such action as is required
to perfect the Trust's rights in the Receivables. OFSA or such other subservicer
as is specified in the related Prospectus Supplement will hold the Receivable
Files on behalf of each Trust under a custodial agreement entered into with
NAFCO and assigned to the Trust or entered into directly with the Trust. If,
however, through inadvertence or otherwise, any of the Receivables were sold to
another party (or a security interest therein were granted to another party)
that purchased (or took such security interest in) any of such Receivables in
the ordinary course of its business and took possession of such Receivables, the
purchaser (or secured party) would acquire an interest in the Receivables
superior to the interest of the related Trust if the purchaser (or secured
party) acquired (or took a security interest in) the Receivables for new value
and without actual knowledge of such Trust's interest.
Due to the administrative burden and expense, the certificates of title
for the Financed Vehicles will not be amended to reflect the assignment of the
security interests in the Financed Vehicles by the Originator to the Seller, or
by the Seller to the Trustee. In the absence of such an amendment, the Trustee
may not have a perfected security interest in the Financed Vehicles. Moreover,
statutory liens for repairs or unpaid taxes may have priority even over
perfected security interests in the Financed Vehicles. See "Description of the
Purchase Agreements and the Trust Documents -- Sale and Assignment of the
Receivables" and "Certain Legal Aspects of the Receivables."
INSOLVENCY RISKS
Each NAFCO Transferor intends that any transfer of Receivables to the
Seller will constitute a sale, rather than a pledge of the Receivables to secure
indebtedness of the NAFCO Transferor. However, if the NAFCO Transferor were to
become a debtor under the federal bankruptcy code or similar applicable state
laws (collectively, "Insolvency Laws"), a creditor or trustee in bankruptcy of
the NAFCO Transferor or the NAFCO Transferor as debtor-inpossession might argue
that such sale of Receivables by the NAFCO Transferor was a pledge of the
Receivables rather than a sale. This position, if presented to or accepted by a
court, could cause, among other things, the related Trust to experience a delay
in or reduction of collections on the Receivables.
In addition, if NAFCO were to become a debtor under any Insolvency Law,
a creditor or trustee in bankruptcy of NAFCO or NAFCO as debtor-in-possession
might argue that the assets and liabilities of the Seller should be consolidated
with the assets and liabilities of NAFCO. The Seller has taken and will take
steps in structuring the transactions contemplated hereby and by the related
Prospectus Supplement that are intended to make it unlikely that any such
attempt to consolidate the Seller and NAFCO would succeed. See "The Seller." In
addition, the Seller intends that any transfer of Receivables to a Trust will
constitute a sale, rather than a pledge of the Receivables to secure
indebtedness of the Seller. No assurance can be given, however, that such a
consolidation will not occur. If a bankruptcy trustee for NAFCO or a creditor of
NAFCO were to take the view that NAFCO and the Seller or the Trust should be
substantively consolidated or if a filing is made by or against the Seller under
any applicable
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<PAGE>
bankruptcy or insolvency laws, then delays in payments on the Securities or
reductions in such payments could result.
NATURE OF OBLIGORS
The obligors under the Receivables (the "Obligors") generally have
marginal credit and fall into one of two categories: (1) customers with moderate
income, limited assets and other income characteristics which cause difficulty
in borrowing from banks, captive finance companies of auto manufacturers or
other traditional sources of auto loan financing and (2) customers with poor
credit records that may include a history of irregular employment, previous
bankruptcy filings, voluntary repossessions of property or prior defaults in the
repayment of personal debt obligations. Because of the greater credit risk
associated with non-prime motor vehicle retail installment contracts, NAFCO
expects to sustain a higher level of delinquencies and credit losses than that
experienced by auto financing sources that finance motor vehicle purchasers with
lower credit-risk profiles. In addition, the payment experience of Obligors with
marginal credit is likely to be more sensitive to changes in the economic
climate in the areas in which such Obligors reside. In the event of a default
under a Receivable, the only source of payment on such Receivable may be
liquidation proceeds from the related Financed Vehicle.
SUBORDINATION
To the extent specified in the related Prospectus Supplement,
distributions of interest and principal on some or all classes of Certificates
of such series may be subordinated in priority of payment to interest and
principal due on the Notes (if any) of such series and/or to distributions of
interest and principal on other classes of Certificates of such series.
Accordingly, the yield on such subordinated classes of Securities will be more
sensitive to losses on the Receivables than classes of Securities that are prior
in right of distribution to such subordinated classes.
LIMITED ASSETS
No Trust will have any significant assets or sources of funds other
than the Receivables and, to the extent provided in the related Prospectus
Supplement, a Pre-Funding Account, a Revolving Account and any credit
enhancement specified in the related Prospectus Supplement. The Notes, if any,
of any series will represent obligations solely of, and the Certificates of such
series will represent interests solely in, the related Trust, and neither the
Notes nor the Certificates of any such series will be insured or guaranteed by
the Seller, the Servicer, the applicable Trustee, the applicable Indenture
Trustee, if any, or, except as specified in the related Prospectus Supplement,
any other person or entity. Consequently, holders of the Securities of any
series must rely for payment upon payments on the related Receivables and, if
and to the extent available, amounts on deposit in the Pre-Funding Account
and/or Revolving Account, if any, and any credit enhancement, if any, as
specified in the related Prospectus Supplement. In connection with the
origination and sale of the Receivables by the Originators to the Seller and by
the Seller to the Trust, either or both of the Originators and the Seller will
make certain representations and warranties regarding the characteristics of the
Receivables and, in certain circumstances, either or both of the Originators and
the Seller are required to repurchase Receivables with respect to which such
representations or warranties are not true as of the date made. There is no
assurance, however, that the Originators or the Seller will have the financial
ability to effect any such repurchase obligation.
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<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
The weighted average life of the Securities will be reduced by full or
partial prepayments on the Receivables. The Receivables will generally be
prepayable at any time without penalty. Prepayments (or, for this purpose,
equivalent payments to the related Trust) may result from payments by Obligors,
liquidations due to default, the receipt of proceeds from physical damage or
credit insurance, repurchases by the Originators as a result of certain uncured
breaches of the warranties made by it with respect to the Receivables ("Warranty
Receivables"), purchases by the Servicer as a result of certain uncured breaches
of the covenants made by it with respect to the Receivables ("Administrative
Receivables") in the related Agreement, or either of the Seller or the Servicer
exercising its option to purchase all of the remaining Receivables.
The amounts paid to Securityholders in respect of principal on any
Distribution Date or Payment Date will generally include all or a portion of the
prepayments on the Receivables during the corresponding Monthly Periods. The
Certificateholders and the Noteholders will bear all reinvestment risk resulting
from the timing of payments of principal on the Securities.
LIMITED LIQUIDITY
There is currently no market for the Securities of any series. There
can be no assurance that any such market will develop or, if it does develop,
that it will provide Securityholders with liquidity of investment or will
continue for the life of the Securities. The Securities will not be listed on
any securities exchange.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be issued in book-entry, rather than physical, form and, as a
result, in certain circumstances the liquidity of the Securities in the
secondary market and the ability of the Certificate Owners and Note Owners to
pledge them may be adversely affected. See "Plan of Distribution" and "Certain
Information Regarding the Securities -- Book-Entry Registration."
LIMITED OPERATING HISTORY
NAFCO commenced operations in October of 1994 and ACCH commenced
operations in September 1995. Accordingly, their historical delinquency,
repossession and loss experience is limited. No assurance can be given that the
delinquency, repossession and loss experience on the Receivables will be as
favorable as the experience reflected in the applicable Prospectus Supplement,
especially in light of such limited historical experience. In particular, there
can be no assurance that the rate of delinquencies and loan losses may not
increase over time.
FEDERAL AND STATE CONSUMER PROTECTION LAWS
Various federal and state laws impose requirements and restrictions
applicable to the origination and the servicing of the Receivables. Violations
of certain of those laws may give rise to claims and defenses by an Obligor
under a Receivable against the Seller, the Servicer or the Trustee. In addition,
an Obligor may be entitled to assert against the Seller, the Servicer or the
Trustee claims and defenses which it has against the seller of the Financed
Vehicle. In either such case, the Servicer or the Trustee may be unable to
enforce the affected Receivable, thereby potentially diminishing payments on the
Certificates. See "Certain Legal Aspects of the Receivables."
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<PAGE>
THE TRUSTS
With respect to each series of Securities, the Seller will establish a
Trust pursuant to the related Trust Documents. Prior to the sale and assignment
of the related Receivables pursuant to the related Trust Documents, the Trust
will have no assets or obligations. The Trust will not engage in any business
activity other than acquiring and holding the Trust Property, issuing the
Certificates and the Notes, if any, of such series and distributing payments
thereon.
Each Certificate will represent a fractional undivided interest in, and
each Note, if any, will represent an obligation of, the related Trust. The Trust
Property of each Trust will include (i) a Receivables Pool; (ii) all monies paid
or payable thereon on or after the Cutoff Date (as specified in the related
Prospectus Supplement); (iii) such amounts as from time to time may be held in
the Collection Account (including all investments in the Collection Account and
all income from the investment of funds therein and all proceeds thereof) and
certain other accounts (including the proceeds thereof); (iv) an assignment of
the security interests of the Originators in the Financed Vehicles securing the
related Receivables; (v) an assignment of the right to receive proceeds from the
exercise of rights against Dealers under agreements between the Originators and
such Dealers (the "Dealer Agreements") and the assignment of rights in respect
of each related Receivable from the applicable Dealer to the applicable
Originator (the "Dealer Assignments"); (vi) an assignment of the right to
receive proceeds from claims on certain insurance policies covering the related
Financed Vehicles or Obligors; (vii) an assignment of the rights of the Seller
under the related Purchase Agreement, and (viii) certain other rights under the
related Trust Documents. See "The Receivables" and "Description of the Purchase
Agreements and the Trust Documents -- Collections." The Trust Property will also
include, if so specified in the related Prospectus Supplement, monies on deposit
in a Pre-Funding Account and/or Revolving Account to be established with the
Indenture Trustee or the Trustee, which will be used to purchase Subsequent
Receivables from the Seller from time to time (and as frequently as daily)
during the Pre-Funding Period and/or Revolving Period specified in the related
Prospectus Supplement. Any Subsequent Receivables so purchased will be included
in the related Receivables Pool forming part of the Trust Property, subject to
the prior rights of the related Indenture Trustee and the Noteholders therein.
In addition, to the extent specified in the related Prospectus Supplement, a
financial guaranty insurance policy or some other form of credit enhancement may
be issued to or held by the Trustee or the Indenture Trustee for the benefit of
holders of one or more classes of Securities.
THE TRUSTEE
The Trustee for each Trust will be specified in the related Prospectus
Supplement. The Trustee's liability in connection with the issuance and sale of
the Securities of such series will be limited solely to the express obligations
of such Trustee set forth in the related Trust Documents. A Trustee may resign
at any time, in which event the Seller will be obligated to appoint a successor
trustee acceptable to the Security Insurer, if any. The Seller, with the consent
of the Security Insurer, if any (prior to an Insurer default), may also remove
the Trustee if the Trustee ceases to be eligible to continue as Trustee under
the related Trust Documents or if the Trustee becomes insolvent. In such
circumstances, the Seller will be obligated to appoint a successor trustee
acceptable to the Security Insurer. Any resignation or removal of an Trustee and
appointment of a successor trustee will be subject to any conditions or
approvals specified in the related Prospectus Supplement and will not become
effective until acceptance of the appointment by the successor trustee.
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THE RECEIVABLES
GENERAL
Pursuant to the Purchase Agreements, the Seller will acquire the
Initial Receivables from the Originators and/or one or more special-purpose
finance subsidiaries of NAFCO to which the Originators may have previously
transferred such Receivables (each of the Originators and any such subsidiary,
in its a capacity as transferor of Receivables to the Seller, a "NAFCO
Transferor"). The Originator or Originators will make certain representations
and warranties with respect to each Receivable as of the date of the transfer of
such Receivable to the Seller pursuant to the applicable Purchase Agreement and
the Seller will assign such representations and warranties to the Trustee. In
the case of a series consisting of one or more classes of Notes, the Trustee
will in turn assign such representations and warranties of the Originators to
the Indenture Trustee pursuant to the Indenture. See "Description of the
Purchase Agreements and the Trust Documents."
Each Dealer makes representations and warranties with respect to each
motor vehicle retail installment sale contract submitted for purchase to the
Originators and with respect to the security interests in the motor vehicles
relating thereto pursuant to a Dealer Agreement. Upon breach of any
representation or warranty made by such a Dealer with respect to a retail
installment sale contract, the Originators have the right under the applicable
Dealer Agreement (which rights will be assigned to the Seller by the Originators
or any special-purpose finance subsidiary of NAFCO to which an Originator has
previously transferred such Receivable, and in turn by the Seller to the Trust)
to require such Dealer to repurchase such retail installment sale contract.
Except for the right to require such repurchases, no Dealer Agreement provides
for recourse to the Dealer for unpaid amounts on a retail installment sale
contract. The failure of a Dealer or a group of affiliated Dealers to repurchase
Receivables pursuant to a Dealer Agreement with the Originators upon a breach of
representations or warranties made therein with respect to such Receivables
could adversely impact the applicable Originator's ability to honor its
corresponding obligations, if any, to repurchase such Receivables under the
Purchase Agreement as well as the Seller's ability to honor its own obligations,
if any, to accept retransfers of such Receivables under the Trust Documents. See
"Description of the Purchase Agreements and Trust Documents--Sale and Assignment
of the Receivables" herein and the related Prospectus Supplement. No
representations are made as to the financial condition of any of the Dealers
from whom the Originators have or will purchase Receivables and there can be no
assurance as to the ability of any Dealer to perform its obligations under any
Dealer Agreement.
UNDERWRITING
Each Receivable has been or will be purchased by one of the Originators
after a review in accordance with underwriting procedures intended to assess the
borrower's ability to repay the loan evidenced by such Receivable and the
adequacy of the related Financed Vehicle as collateral.
The Obligors under the Receivables generally have marginal credit and
fall into one of two categories: (1) customers with moderate income, limited
assets and other income characteristics which cause difficulty in borrowing from
banks, captive finance companies of automakers or other traditional sources of
auto loan financing and (2) customers with poor credit records which may include
a history of irregular employment, previous bankruptcy filings,
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voluntary repossessions of property or prior defaults in the repayment of
personal debt obligations. Because of the greater credit risk associated with
non-prime motor vehicle retail installment contracts, the Originators expect to
sustain a higher level of delinquencies and credit losses than that experienced
by auto financing sources that finance motor vehicle purchasers with lower
credit risk profiles. In addition, the payment experience on Receivables of
Obligors with marginal credit is likely to be more sensitive to changes in the
economic climate in the areas in which such Obligors reside. Although the
interest rates charged to such customers is higher than the interest rates
charged to more creditworthy customers, there can be no assurance that the
incremental interest charged to such customers will be sufficient to offset
losses on the Receivables.
Each of the Originators requires each Dealer submitting a Receivable
for purchase to provide certain information, including a completed loan
application listing the applicant's assets, liabilities, income, credit and
employment history and other personal information. Each Originator evaluates an
applicant by considering the relationship of the applicant's monthly income to
monthly expenses, including expenses relating to such motor vehicle loan and
ownership of the motor vehicle. Each Originator also obtains a credit report on
the applicant from an independent credit bureau. The credit report typically
contains information on matters such as previous payment experience, credit
history with merchants and lenders, installment debt payments, defaults and
bankruptcies, if any.
Each loan application and the related credit report are reviewed by a
credit officer. In addition, the credit officer obtains verification of
information in the loan application regarding residence, employment, and income.
The credit officer then calculates certain debt-to-income ratios and
payment-to-income ratios on the basis of the verified information in the loan
application and the anticipated monthly auto loan payment and associated
expenses (including the expense of insuring the vehicle) and compares the
results to the target ratios established in the Originator's general
underwriting guidelines. In addition to evaluating the loan applicant's ability
to make payments on the auto loan and to service its other consumer debt
obligations, the Originators consider the value of the car in relation to the
amount of the loan requested. Although the Originators do not adhere to any
specific loan-to-value ratios, the amount of a motor vehicle loan for a new
motor vehicle generally will not exceed 115% of the price paid by the Dealer for
the motor vehicle, in the case of new vehicles, or 115% of the vehicle's
trade-in value indicated in the National Automobile Dealers Association's Guide
on Retail and Wholesale Values, in the case of used vehicles. In many instances,
the Originator will request additional supporting information or discuss
possible changes to the terms of a Receivable that would allow it to be
purchased in accordance with such Originator's standards. The Originators allow
some flexibility in applying the underwriting guidelines, but a greater level of
management scrutiny is involved in approving loans which deviate from these
guidelines. A substantial majority of each Originator's loans meet all of its
requirements.
If the Originator decides to purchase a Receivable, it reviews the
actual Receivable submitted for purchase and the required supporting
documentation. In addition, the Originator verifies that the Obligor on the
Receivable has obtained a comprehensive and collision insurance policy naming
the Originator as loss payee. Certain Receivables also may be covered by credit
accident and health and credit life insurance policies which provide for
payments on behalf of the insured Obligor in the event of disability or death.
These insurance policies are obtained solely at the election of the Obligor but
are for the benefit of the creditor under the Receivable. No data will be
compiled as to the number of Receivables in the Trust that will be covered by
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such insurance. Accordingly no assurance can be given as to the extent to which
any such Receivables are covered by any such insurance.
SERVICING PROCEDURES
The Servicer will service and administer the Receivables in each Trust
on behalf of the Trustee and will have full power and authority, acting alone
and/or through subservicers, to do any and all things which it may deem
necessary or desirable in connection with such servicing and administration and
which are consistent with the Trust Documents. In the Trust Documents the
Servicer will acknowledge that it is holding any Receivable documents in its
possession and any other property constituting a part of the Trust Property held
by it in trust, for the benefit of the Securityholders and any Security Insurer.
Consistent with the terms of the Trust Documents, the Servicer may
waive, modify or vary any term of any Receivable or consent to the postponement
of strict compliance with any such term or in any manner grant indulgence to any
Obligor if, in the Servicer's sole determination, such waiver, modification,
postponement or indulgence is not materially adverse to the Securityholders or
any Security Insurer (without taking into account the coverage available under
any Policy). However, except as otherwise provided herein or in the related
Prospectus Supplement, the Servicer may not permit any modification with respect
to any Receivable that would change its APR or reduce the outstanding principal
balance thereof (except for actual payments of principal).
The Servicer will service and administer the Receivables by employing
such procedures (including collection procedures) and degree of care, in each
case consistent with prudent industry standards, as are customarily employed by
the Servicer in servicing and administering motor vehicle retail installment
sale contracts and notes owned or serviced by the Servicer comparable to the
Receivables.
Servicing activities required to be performed pursuant to the Trust
Documents will include collecting and recording payments, communicating with
Obligors, investigating payment delinquencies, providing billing and tax records
to Obligors and maintaining internal records with respect to each Receivable.
The Servicer will be required to take all actions that are necessary or
desirable to maintain continuous perfection and first priority of security
interests granted by the Obligors in the Financed Vehicles. These actions
include, but are not limited to, using reasonable efforts to obtain the
execution by the Obligors and the recording, registering, filing, re-recording,
re-registering and refiling of all title documents, security agreements,
financing statements, continuation statements or other instruments as are
necessary to maintain the security interests granted by the respective Obligors
under the Receivables. Neither the Servicer nor any subservicer will be
required, however, to expend its own funds to remove any security interest, lien
or other encumbrance on a Financed Vehicle.
The Servicer may perform any of its duties pursuant to the Pooling and
Servicing Agreement, including those delegated to it by the Trustee pursuant to
the Trust Documents, through persons appointed by the Servicer. Such persons may
include affiliates of the Servicer. Notwithstanding any such delegation of a
duty, the Servicer will remain obligated and liable for the performance of such
duty as if the Servicer were performing such duty. The Servicer may delegate
such duties by entering into subservicing agreements (each, a "Subservicing
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Agreement") with one or more subservicers for the servicing and administration
of certain Receivables with the prior written consent of any Security Insurer.
References herein to actions taken or to be taken by the Servicer in servicing
the Receivables include actions taken or to be taken by a subservicer on behalf
of the Servicer. Each Subservicing Agreement may be upon such terms and
conditions as are not inconsistent with the Trust Documents. The Servicer has
initially engaged OFSA to perform substantially all servicing activities related
to servicing of the Receivables.
The Servicer will, to the extent such procedures shall be consistent
with the Trust Documents, follow or cause to be followed such collection
procedures as it follows with respect to motor vehicle retail installment sale
contracts and notes comparable to the Receivables. Consistent with the
foregoing, the Servicer may in its discretion (i) waive any late payment charge
and (ii) extend the then current maturity date of a Receivable by two months
during each calendar year but no more than four months during the life of such
Receivable at the request of the related Obligor on account of the Obligor's
adverse financial circumstances. No such arrangement shall alter or modify the
amortization schedule of such Receivable for purposes of calculating required
distributions on the Securities.
If a Receivable becomes and continues to be a Defaulted Receivable (as
defined below), the Servicer will be required to take all reasonable and lawful
steps necessary for repossession. However, neither the Servicer nor any
subservicer will be obligated to institute any action for repossession through
judicial proceedings unless it determines in its good faith judgment that the
liquidation proceeds that would be realized in connection therewith would be
sufficient for the reimbursement in full of its out-of-pocket expenses in
connection therewith. A Receivable will become a "Defaulted Receivable" upon the
occurrence of certain events of default or payment delinquency specified in the
related Prospectus Supplement, including (i) the determination in good faith by
the Servicer (or applicable subservicer) that all amounts that it expects to
recover under such defaulted Receivable have been received and (ii) the
repossession of the Financed Vehicle that secures the Receivable without
reinstatement of the Receivable and the expiration of any applicable redemption
period.
DELINQUENCY, LOAN LOSS AND REPOSSESSION INFORMATION
Certain information relating to NAFCO's delinquency, loan loss and
repossession experience with respect to all Receivables it has serviced will be
set forth in each Prospectus Supplement. This information will include the
experience with respect to all Receivables in the Originators' portfolio of
Receivables serviced, including Receivables which do not meet the criteria for
selection as a Receivable for any particular Receivables Pool. There can be no
assurance that the delinquency, loan loss and repossession experience on any
Receivables Pool will be comparable to prior experience.
SELECTION CRITERIA AND CERTAIN OTHER CHARACTERISTICS
Information with respect to each Receivables Pool will be set forth in
the related Prospectus Supplement, including, to the extent appropriate, the
criteria used to select the related Receivables and the composition,
distribution by annual percentage rate ("APR"), Dealer and geographic
concentration of such Receivables.
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TYPES OF RECEIVABLES
The Receivables will be selected from the Originators' portfolios of
Receivables by several criteria, including that each Receivable (a) is secured
by a new or used automobile, lightduty truck, van or minivan, (b) was not more
than 30 days delinquent as of its Cut-off Date and (c) satisfies the other
criteria set forth herein. See "Description of the Purchase Agreements and Trust
Documents--Sale and Assignment of the Receivables."
The Receivables in each Trust will include Receivables that provide for
payments according to one or more of the following payment allocation methods:
(i) the "sum of periodic balances" or "sum of monthly payments" method similar
to the Rule of 78's ("Rule of 78's Receivables"), (ii) the simple interest
method ("Simple Interest Receivables") and (iii) the actuarial method
("Actuarial Receivables").
RULE OF 78'S RECEIVABLES. Although a Rule of 78's Receivable provides
for amortization over a series of fixed level monthly installments and
allocations between interest and principal on a scheduled basis, it is a
non-level yield instrument. The yield in the initial months of a Rule of 78's
Receivable is somewhat higher than the stated APR (computed on an actuarial
basis) and the yield at the end of the loan is somewhat less than the stated
APR. Each Rule of 78's Receivable provides for the payment by the Obligor
thereon of a specified total amount of payments, payable in equal monthly
installments on each payment due date for such Rule of 78's Receivable. This
total represents the principal amount financed and add-on interest in an amount
calculated on the basis of the APR stated in a Receivable for the term of the
Rule of 78's Receivable. The rate at which such amount of add-on interest is
earned and, correspondingly, the amount of each fixed monthly payment allocated
to earned interest and to reduction of the outstanding principal are calculated
in accordance with the "Rule of 78's."
SIMPLE INTEREST RECEIVABLES. Like Rule of 78's Receivables, a Simple
Interest Receivable initially provides for the payment by the Obligor of a
specified total amount of payments, payable in equal monthly installments on
each payment due date for such Simple Interest Receivable. However, the
allocation of each monthly payment to principal and interest on a Simple
Interest Receivable is made based on the actual date on which a payment is
received, using the simple interest method. Under the simple interest method, as
a payment is received under a Simple Interest Receivable, the payment is applied
first to pay accrued interest to the date of payment and the remaining amount of
the payment is applied to reduce principal. Accordingly, if an Obligor pays the
fixed monthly installment in advance of the payment due date, the portion of the
payment allocable to interest for the period since the preceding payment will be
less than it would be if the payment were made on the payment due date, and the
portion of the payment allocable to reduce the principal balance will be
correspondingly greater. Conversely, if the Obligor pays the fixed monthly
installment after its due date, the portion of the payment allocable to interest
for the period since the last payment will be greater than it would be if the
payment were made on the payment due date, and the portion of the payment
allocable to reduce the principal balance will be correspondingly smaller. When
necessary, an adjustment is made by scheduling additional payments at the
maturity of the Simple Interest Receivable in an amount no greater than the
regularly scheduled payments to reflect the smaller allocations of payments to
repay the principal balance under the Simple Interest Receivable as a result of
late payments. Alternatively, when necessary, an adjustment is made to the
scheduled final payment or to earlier payments to reflect any larger allocation
of payments to principal as a result of early payments.
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Due to the method of allocating the portion of monthly payments on
Simple Interest Receivables between principal and interest, it is possible that
either more or less than one month's interest on a Simple Interest Receivable at
the applicable APR will be collected in a calendar month, depending on when the
monthly payments are received. In addition, in the event that more than one
month's interest at the Pass-Through Rate or the Interest Rate, as applicable on
the outstanding principal balance of a Simple Interest Receivable is collected
in a calendar month, the amount of such excess, to the extent not otherwise
distributed to Securityholders, will be distributed to NAFCO on such
Distribution Date.
ACTUARIAL RECEIVABLES. An Actuarial Receivable is a Receivable that
provides for amortization of the loan over a series of fixed level payment
monthly installments. Payments are allocated between interest and principal on a
scheduled basis, without regard to the time period that has elapsed since the
last payment was made, using the actuarial method. Under the actuarial method,
each monthly installment consists of an amount of interest equal to 1/12 of the
APR of the loan multiplied by the unpaid principal balance of the loan and an
amount of principal equal to the remainder of the monthly payment.
YIELD AND PREPAYMENT CONSIDERATIONS
The Securities will not be sold at a material discount or premium to
the initial purchasers thereof. Accordingly, except as described in the next
paragraph, prepayments, late payments, delinquencies and defaults on the
underlying Receivables and the rate of the transfer of any Subsequent
Receivables to a Trust will not materially affect the yield on the Securities to
such purchasers because each distribution of principal on such Securities will
be accompanied by all accrued interest thereon at the Pass-Through Rate or
Interest Rate, as applicable, through the Distribution Date.
The average life of the Securities may be reduced by prepayments on the
Receivables, by the early termination of certain of the Trust Documents due to
the sale, liquidation or disposal of the Receivables upon the occurrence of
certain bankruptcy or insolvency events with respect to the Seller as described
herein and by prepayments from unutilized funds in any Pre-Funding Account or
Revolving Account or as otherwise specified in the related Prospectus
Supplement. In addition, the average life of the Securities may be increased by
the transfer of any Subsequent Receivables to Trust. The Receivables may be
prepaid in full at any time. Prepayments may result from, among other things,
(i) the sale, insured loss or other disposition of the Financed Vehicle securing
any Receivable, (ii) Receivables becoming Defaulted Receivables, (iii) the
retransfer to the Seller of Receivables due to a breach by the Seller of the
warranties made by it with respect thereto in the Trust Documents, (iv) a
permitted refinancing of the related Financed Vehicle by the Obligor, or (v) the
Seller's exercise of its right to require the retransfer to it of all of the
Receivables in the Trust after the Aggregate Principal Balance has declined to
less than percentage specified in the related Prospectus Supplement of the
CutOff Date Outstanding Principal Balance. The rate of prepayments on the
Receivables could be influenced by a variety of economic, geographic and social
factors. These factors may include unemployment rates, servicing decisions,
seasoning of loans, destruction of vehicles by accident, sale of vehicles and
market interest rates.
If a Receivable contains provisions requiring prepayment in full in the
event of a sale or other disposition of the Financed Vehicle securing the
Receivable, the Servicer will be required by the Trust Documents to take
reasonable steps under the circumstances to enforce such provisions.
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The Securityholders could receive a principal prepayment on the
Distribution Date following the end of each of any Pre-Funding Period or
Revolving Period if and to the extent that Subsequent Receivables are not
transferred to the Trust in amounts sufficient to fully utilize the amounts on
deposit in the Pre-Funding Account or Revolving Account, respectively.
Prepayments resulting from the application of funds remaining in the
Pre-Funding Account or Revolving Account to prepay the Securities or from the
receipt of prepayments on the Receivables could result in the Securityholders
receiving unexpected principal payments at a time when the Securityholders are
unable to reinvest such payments in investments having a yield and rating
comparable to the yield and rating on the Securities.
No assurances can be given, and no prediction can be made, as to the
actual prepayment experience on the Receivables.
POOL FACTOR
The "Pool Factor" of the Securities will be a seven-digit decimal,
computed as of each Distribution Date, indicating the remaining principal
balance of the Securities as of the close of business on such Distribution Date,
as a fraction of the initial principal amount of such Securities. The Pool
Factor initially will be 1.0000000. Thereafter, the Pool Factor will decline to
reflect reductions in the outstanding principal balance of the Securities. A
Securityholder's portion of the aggregate outstanding principal balance of the
Securities will be the product of (i) the original denomination of the
Securityholder's Securities and (ii) the applicable Pool Factor.
The Holder or Holders of record of the Securities will receive reports
on or about each Distribution Date concerning payments received on the
Receivables, the Aggregate Principal Balance, the Pool Factor and various other
items of information. Securityholders of record during any calendar year also
will be furnished information for tax reporting purposes not later than the
latest date permitted by law. See "Certain Information Regarding the
Securities--Statements to Securityholders."
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement, the
net proceeds to be received by the Seller from the sale of each series of
Securities will be used to pay to the NAFCO Transferors the purchase price for
the Receivables and to make the deposit of the PreFunded Amount into the
Pre-Funding Account, if any, to repay warehouse lenders and/or to provide for
other forms of credit enhancement specified in the related Prospectus
Supplement. The net proceeds to be received by the NAFCO Transferors will be
used to reduce indebtedness under warehouse loans or other interim financing
sources, and any additional proceeds will be added to the Originators' general
funds and used for its general corporate purposes. See "National Auto Finance
Company L.P."
THE SELLER
National Financial Auto Funding Trust (the "Seller") is a Delaware
business trust 100% of the beneficial ownership of which is owned by NAFCO or
affiliates of NAFCO. The Seller is organized for the limited purposes of
purchasing motor vehicle retail installment sale contracts, transferring such
contracts to third parties, forming trusts and engaging in related
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activities. The principal office of the Seller is located at One Park Place, 621
N.W. 53rd Street, Boca Raton, Florida, 33487, and its telephone number at such
office is (407) 997-2747.
NATIONAL AUTO FINANCE COMPANY L.P.
NAFCO will act as master servicer (in such capacity, the "Servicer") of
the Receivables in each Trust pursuant to the related Trust Documents.
GENERAL
NAFCO is a limited partnership organized under the laws of the State of
Delaware in November 1994. ACCH is a limited partnership organized under the
laws of the State of Delaware in September 1995. The sole general partner of
each of NAFCO and ACCH, National Auto Finance Corporation, was incorporated in
the State of Delaware in October 1994. NAFCO is the majority limited partner of
ACCH. Unless the context otherwise requires, references in this section of the
Prospectus to NAFCO shall refer to NAFCO and its subsidiary, ACCH, and the
descriptions of the procedures and guidelines set forth below are those both of
NAFCO and ACCH.
The principal business of NAFCO is to acquire from automobile dealers
and service motor vehicle retail installment sale and lease contracts. NAFCO's
principal office is located at One Park Place, 621 N.W. 53rd Street, Suite 200,
Boca Raton, Florida 33487, and its telephone number at such office is (407)
997-2747.
NAFCO is an automotive finance company engaged primarily in the
indirect financing (by the purchase of motor vehicle retail installment sale
contracts from automotive Dealers) of automotive purchases by individuals with
non-prime credit. The non-prime market segment is comprised of individuals who
are deemed to be relatively high credit risks due to various factors, including,
among other things, the manner in which they have handled previous credit, the
limited extent of their prior credit history and/or their limited financial
resources. Because of the greater credit risk associated with non-prime motor
vehicle retail installment contracts, NAFCO expects to sustain a higher level of
delinquencies and credit losses than that experienced by auto financing sources
that finance motor vehicle purchasers with lower credit risk profiles. The
interest rates charged on such contracts are generally higher than those rates
charged on prime motor vehicle retail installment sale contracts. There can be
no assurance, however, that the interest rates on the Receivables will be
sufficient to cover losses on Defaulted Receivables.
NAFCO serves as an alternative source of financing to automotive
dealers by offering them the opportunity for increased sales to customers who
typically do not qualify for financing by the automotive dealers' traditional
financing sources. NAFCO purchases motor vehicle retail installment sale
contracts from such dealers (the "Dealers") pursuant to non-exclusive dealer
agreements (the "Dealer Agreements"). The Dealer Agreements generally provide
for the sale of such retail installment sale contracts to NAFCO without recourse
to the Dealer, and accordingly, the Dealer generally has no liability to NAFCO
if the Obligor defaults on the Receivable. From time to time, NAFCO may
determine to commence business in additional jurisdictions or cease doing
business in any state in which it presently does business. In certain cases
NAFCO may effect purchases of non-prime motor vehicle retail installment sale
contracts, or may hold and effect ownership of contracts by means of a
wholly-owned subsidiary.
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SERVICING PROCEDURES
The Servicer conducts substantially all of its servicing activities
through OFSA pursuant to a servicing contract (the "Servicing Agreement")
between the Servicer and OFSA. OFSA will collect payments received on the
Receivables, engage in collection efforts in respect of past due Receivables
and, where appropriate, repossess and liquidate Financed Vehicles securing
Defaulted Receivables. OFSA utilizes various automated systems to support its
servicing and collections activities. Notwithstanding the delegation by the
Servicer of certain servicing duties to OFSA, the Servicer will remain primarily
liable to the Trust under the related Trust Documents for performance of such
duties.
The Servicer's standard collection practices for the collection of past
due payments include, but are not limited to, automated mailing of delinquency
notices to Obligors and oral communications with Obligors as necessary. The
Servicer also attempts to have telephone communication with each Obligor once
the related Receivable is five days delinquent. Additional telephone
communications are made in an effort to bring the Receivable current. Once it is
determined that a Receivable cannot be brought current, the Servicer generally
will initiate steps to repossess the related Financed Vehicle. The Servicer
handles repossessions through independent contractors.
Occasionally, situations occur in the collection process where an
Obligor has become delinquent and is willing but unable to bring the related
Receivable current. In this situation, at the discretion of the Servicer's
collection department management, and subject to the guidelines described under
"The Receivables-Servicing Procedures," the term of the Receivable may be
extended by two months once during each calendar year but not more than four
months during the life of such Receivable.
If the Servicer receives a notice that an Obligor on a Receivable has
filed for relief under the United States Bankruptcy Code, the Servicer will file
a proof of claim and notify the Trustee, any Indenture Trustee and any Security
Insurer of the bankruptcy filing. In the event that activities outside the scope
of routine bankruptcy filings and follow-up are necessary, the Servicer may hire
the services of a law firm to represent the Trustee and any Indenture Trustee in
the Obligor's bankruptcy.
Each Obligor is required to obtain insurance with respect to the
financed vehicle. However, the Servicer does not monitor the maintenance of
insurance coverage and, in the event the Servicer becomes aware of a lapse in
insurance coverage, does not currently force place insurance. The Servicer does,
however, maintain supplemental vendor's single interest insurance that protects
the Servicer's interest in financed vehicles against uninsured physical damage
(including total loss) and instances where neither the vehicle nor the borrower
can be located.
The Servicer will coordinate all servicing of the Receivables at its
office in Boca Raton, Florida.
The Servicer is substantially dependent upon OFSA to perform direct
servicing functions with respect to the Seller's portfolio of motor vehicle
retail installment sale contracts. There can be no assurance that there would
not be delays in collections and other servicing interruptions associated with
transfer of servicing to the Servicer or any Back-Up Servicer in the event of
OFSA's resignation or termination or that the Servicer would have sufficient
staffing and resources to service the Receivables to the standards required in
the related Trust Documents.
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The Servicer is currently considering its options with respect to developing its
own servicing capability and enhancing its management information systems.
OMNI FINANCIAL SERVICES OF AMERICA, INC. ("OFSA")
Omni Financial Services of America, Inc., a Delaware corporation
("OFSA"), will act as servicer of the Receivables pursuant to the Servicing
Agreement. OFSA is a wholly-owned subsidiary of World Omni Financial Corp., a
Florida corporation ("World Omni"). The Servicing Agreement was assigned by
World Omni to OFSA effective as of October 23, 1995.
OFSA was incorporated in July 1995 primarily to service subprime retail
motor vehicle contracts, including the Receivables. As of October 1, 1996, OFSA
has over 250 employees operating at a new service center in Memphis, Tennessee.
The Servicer and the OFSA will maintain files relating to the Receivables at the
Memphis service center and will coordinate servicing for the Receivables at such
office. The address of the Memphis service center is 1769 Paragon Avenue,
Memphis, Tennessee 38132, and its telephone number is (901) 344-7200.
World Omni is a wholly-owned subsidiary of JM Family Enterprises, Inc.,
a Delaware corporation ("JMFE"). World Omni provides retail installment contract
and lease contract financing to retail customers of certain automotive dealers,
and wholesale floorplan financing and capital and mortgage loans primarily to
dealers and customers of Southeast Toyota Distributors, Inc., another
wholly-owned subsidiary of JMFE. The principal executive offices of World Omni
are located at 120 NW 12th Avenue, Deerfield Beach, Florida 33442, and its
telephone number is (954) 429-2200.
World Omni originates and services retail and lease contracts primarily
through its service center located in Mobile, Alabama.
THE CERTIFICATES
GENERAL
With respect to each Trust, one or more classes of Certificates of a
given series will be issued pursuant to Trust Documents to be entered into
between the Seller, NAFCO and the Trustee, forms of which have been filed as
exhibits to the Registration Statement of which this Prospectus forms a part.
The following summary does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all of the material provisions of the
Trust Documents. Where particular provisions of or terms used in the Trust
Documents are referred to, the actual provisions (including definitions of
terms) are incorporated by reference as part of this summary.
Unless the related Prospectus Supplement provides for physical delivery
of the Certificates, each class of Certificates will initially be represented by
a single Certificate registered in the name of the nominee of DTC (together with
any successor depository selected by the Seller, the "Depository"). See "Certain
Information Regarding the Securities -- BookEntry Registration." Unless
otherwise specified in the related Prospectus Supplement, the Certificates
evidencing interests in a Trust will be available for purchase in minimum
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denominations of $20,000 initial principal amount and integral multiples of
$1,000 in excess thereof, except that one Certificate evidencing an interest in
such Trust may be issued in a denomination that is less than $1,000 initial
principal amount. Certificates may be transferred or exchanged without the
payment of any service charge other than any tax or governmental charge payable
in connection with such transfer or exchange. The Trustee or such other party
designated in the related Prospectus Supplement will initially be designated as
the registrar for the Certificates.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL
The timing and priority of distributions, seniority, allocations of
loss, Pass-Through Rate and amount of or method of determining distributions
with respect to principal and interest (or, where applicable, with respect to
principal only or interest only) on the Certificates of any series will be
described in the related Prospectus Supplement. Distributions of interest on the
Certificates will be made on the dates specified in the related Prospectus
Supplement (each, a "Distribution Date") and will be made prior to distributions
with respect to principal. A series may include one or more classes of Strip
Certificates entitled to (i) distributions in respect of principal with
disproportionate, nominal or no interest distribution, or (ii) interest
distributions, with disproportionate, nominal or no distributions in respect of
principal. Each class of Certificates may have a different Pass-Through Rate,
which may be a fixed, variable or adjustable Pass-Through Rate (and which may be
zero for certain classes of Strip Certificates), or any combination of the
foregoing. The related Prospectus Supplement will specify the PassThrough Rate
for each class of Certificate, or the initial Pass-Through Rate and the method
for determining the Pass-Through Rate. Interest on the Certificates will be
calculated on the basis of a 360-day year consisting of twelve 30-day months or
a 365-day year consisting of actual calendar months. Distributions in respect of
the Certificates will be subordinate to payments in respect of the Notes, if
any, as more fully described in the related Prospectus Supplement. Distributions
in respect of principal of any class of Certificates will be made on a pro rata
basis among all of the Certificateholders of such class.
In the case of a series of Certificates which includes two or more
classes of Certificates, the timing, sequential order, priority of payment or
amount of distributions in respect of principal, and any schedule or formula or
other provisions applicable to the determination thereof, of each such class
shall be as set forth in the related Prospectus Supplement.
THE NOTES
GENERAL
A series of Securities may include one or more classes of Notes issued
pursuant to the terms of an Indenture, a form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part. The
following summary does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all of the provisions of the notes
and the Indenture, and the following summary may be supplemented by the related
Prospectus Supplement. Where particular provisions of or terms used in the
Indenture are referred to, the actual provisions (including definition of terms)
are incorporated by reference as part of this summary.
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Unless the related Prospectus Supplement provides for physical delivery
of the Notes, each class of Notes will initially be represented by a single Note
registered in the name of the nominee of the Depository. See "Certain
Information Regarding the Securities -- Book-Entry Registration." Notes will be
available for purchase in the denominations specified in the related Prospectus
Supplement. Notes may be transferred or exchanged without the payment of any
service charge other than any tax or governmental charge payable in connection
with such transfer or exchange. The Indenture Trustee or such other party
specified in the related Prospectus Supplement will initially be designated as
the registrar for the Notes.
PRINCIPAL AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of loss,
Interest Rate and amount of or method of determining payments of principal and
interest on the Notes will be described in the related Prospectus Supplement.
The right of holders of any class of Notes to receive payments of principal and
interest may be senior or subordinate to the rights of holders of any class or
classes of Notes of such series, or any class of Certificates, as described in
the related Prospectus Supplement. Payments of interest on the Notes will be
made prior to payments of principal thereon. A series may include one or more
classes of Strip Notes entitled to (i) principal payments with disproportionate,
nominal or no interest payments, or (ii) interest payments with
disproportionate, nominal or no principal payments. Each class of Notes may have
a different Interest Rate, which may be a fixed, variable or adjustable Interest
Rate (and which may be zero for certain classes of Strip Notes), or any
combination of the foregoing. The related Prospectus Supplement will specify the
Interest Rate for each class of Notes, or the initial Interest Rate and the
method for determining the Interest Rate. One or more classes of Notes of a
series may be redeemable under the circumstances specified in the related
Prospectus Supplement.
Unless the related Prospectus Supplement provides for subordination of
payments of interest on certain classes within a series to payments of interest
on certain other classes within such series, payments in respect of interest to
Noteholders of all classes within a series will have the same priority. Under
certain circumstances, the amount available for such payments could be less than
the amount of interest payable on the Notes on any of the dates specified for
payments in the related Prospectus Supplement (each, a "Payment Date"), in which
case each class of Noteholders will receive their ratable share (based upon the
aggregate amount of interest due to such class of Noteholders) of the aggregate
amount available to be distributed in respect of interest on the Notes.
In the case of a series of Securities which includes two or more
classes of Notes, the sequential order and priority of payment in respect of
principal and interest, and any schedule or formula or other provisions
applicable to the determination thereof, of each such class will be set forth in
the related Prospectus Supplement. Payments in respect of principal and interest
of any class of Notes will be made on a pro rata basis among all of the Notes of
such class.
THE INDENTURE
A form of Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. The Seller will provide a copy
of the applicable Indenture (without exhibits) upon request to a holder of Notes
issued thereunder. Requests for such copies should be directed to Chief
Financial Officer, National Auto Finance Company L.P., One Park Place, Suite
200, 621 N.W. 53rd Street, Boca Raton, Florida 33487 (telephone (407) 997-2747).
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MODIFICATION OF INDENTURE WITHOUT NOTEHOLDER CONSENT. Each Trust and
related Indenture Trustee (on behalf of such Trust) may, with the consent of the
Security Insurer, if any (prior to an Insurer Default), but without consent of
the related Noteholders, enter into one or more supplemental indentures for any
of the following purposes: (i) to correct or amplify the description of the
collateral or add additional collateral; (ii) to provide for the assumption of
the Note and the Indenture obligations by a permitted successor to the Trust;
(iii) to add additional covenants for the benefit of the related Noteholders, or
to surrender any rights or power conferred upon the Trust; (iv) to convey,
transfer, assign, mortgage or pledge any property to or with the Indenture
Trustee; (v) to cure any ambiguity or correct or supplement any provision in the
Indenture or in any supplemental indenture; (vi) to provide for the acceptance
of the appointment of a successor Indenture Trustee or to add to or change any
of the provisions of the Indenture or in any supplemental indenture which may be
inconsistent with any other provision of the Indenture as shall be necessary and
permitted to facilitate the administration by more than one trustee; (vii) to
modify, eliminate or add to the provisions of the Indenture in order to comply
with the Trust Indenture Act of 1939, as amended, and (viii) to add any
provisions to, change in any manner, or eliminate any of the provisions of, the
Indenture or modify in any manner the rights of Noteholders under such
Indenture; provided that any action specified in this clause (viii) shall not,
as evidenced by an opinion of counsel, adversely affect in any material respect
the interests of any related Noteholder unless such Noteholder's consent is
otherwise obtained as described below.
MODIFICATIONS OF INDENTURE WITH NOTEHOLDER CONSENT. With respect to
each Trust, with the consent of the Security Insurer, if any (prior to an
Insurer Default) and the holders representing a majority of the principal
balance of the outstanding related Notes (a "Note Majority"), the Trustee and
the Indenture Trustee may execute a supplemental indenture to add provisions to
change in any manner or eliminate any provisions of, the related Indenture, or
modify in any manner the rights of the related Noteholders.
Without the consent of the Security Insurer, if any (prior to an
Insurer Default), and the holder of each outstanding related Note affected
thereby, however, no supplemental indenture may: (i) change the due date of any
installment of principal of or interest on any Note or reduce the principal
amount thereof, the interest rate specified thereon or the redemption price with
respect thereto or change the manner of calculating any such payment or any
place of payment where the coin or currency in which any Note or any interest
thereon is payable; (ii) impair the right to institute suit for the enforcement
of certain provisions of the Indenture regarding payment; (iii) reduce the
percentage of the aggregate amount of the outstanding Notes the consent of the
holders of which is required for any such supplemental indenture or the consent
of the holders of which is required for any waiver of compliance with certain
provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the related
Trust, any other obligor on the Notes, the Seller or an affiliate of any of
them; (v) reduce the percentage of the aggregate outstanding amount of the Notes
the consent of the holders of which is required to direct the Indenture Trustee
to sell or liquidate the Receivables if the proceeds of such sale would be
insufficient to pay the principal amount and accrued but unpaid interest on the
outstanding Notes; (vi) decrease the percentage of the aggregate principal
amount of the Notes required to amend the sections of the Indenture which
specify the applicable percentage of aggregate principal amount of the Notes
necessary to amend the Indenture or certain other related agreements; or (vii)
permit the creation of any lien ranking prior to or on a parity with the lien of
the Indenture with respect to any of the collateral for the Notes or, except as
otherwise permitted or contemplated in the Indenture, terminate the lien of the
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Indenture on any such collateral or deprive the holder of any Note of the
security afforded by the lien of the Indenture.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. With respect to each
Trust, unless otherwise specified in the related Prospectus Supplement, "Events
of Default" under the Indenture will consist of: (i) a default for five days or
more in the payment of any interest on any Note; (ii) a default in the payment
of the principal of or any installment of the principal of any Note when the
same becomes due and payable; (iii) a default in the observance or performance
in any material respect of any covenant or agreement of the Trust made in the
Indenture, or any representation or warranty made by the Trust in the Indenture
or in any certificate delivered pursuant thereto or in connection therewith
having been incorrect as of the time made, and the continuation of any such
default or the failure to cure such breach of a representation or warranty for a
period of 30 days after notice thereof is given to the Trust by the Indenture
Trustee or the Trust and the Indenture Trustee by the holders of at least 25% in
principal amount of the Notes then outstanding; or (iv) certain events of
bankruptcy, insolvency, receivership or liquidation of the Trust. However, the
amount of principal due and payable on any class of Notes on any Payment Date
(prior to the Final Scheduled Distribution Date, if any, for such class
specified in the related Prospectus Supplement) will generally be determined by
amounts available to be deposited in the Note Distribution Account for such
Payment Date. Therefore, unless otherwise specified in the related Prospectus
Supplement, the failure to pay principal on a class of Notes generally will not
result in the occurrence of an Event of Default unless such class of Notes has a
Final Scheduled Distribution Date, and then not until such Final Scheduled
Distribution Date for such class of Notes. Unless otherwise specified in the
related Prospectus Supplement, if an Event of Default should occur and be
continuing with respect to the Notes of any series, the related Indenture
Trustee or a Note Majority may declare the principal of the Notes to be
immediately due and payable. Such declaration may, under certain circumstances,
be rescinded by a Note Majority.
Unless otherwise specified in the related Prospectus Supplement, if the
Notes of any series have been declared due and payable following an Event of
Default with respect thereto, the related Indenture Trustee may institute
proceedings to collect amounts due or foreclose on Trust Property, exercise
remedies as a secured party, sell the related Receivables or elect to have the
Trust maintain possession of such Receivables and continue to apply collections
on such Receivables as if there had been no declaration of acceleration. The
Indenture Trustee, however, will be prohibited from selling the related
Receivables following an Event of Default, unless (i) the holders of the
percentage of the outstanding related Notes specified in the related Prospectus
Supplement consent to such sale; (ii) the proceeds of such sale are sufficient
to pay in full the principal of and the accrued interest on such outstanding
Notes at the date of such sale; or (iii) the Indenture Trustee determines that
the proceeds of the Receivables would not be sufficient on an ongoing basis to
make all payments on the Notes as such payments would have become due if such
obligations had not been declared due and payable, and the Indenture Trustee
obtains the consent of the holders of 66 2/3% of the aggregate outstanding
amount of the Notes. Following a declaration upon an Event of Default that the
Notes are immediately due and payable, (i) Noteholders will be entitled to
ratable repayment of principal on the basis of their respective unpaid principal
balances and (ii) repayment in full of the accrued interest on and unpaid
principal balances of the Notes will be made prior to any further payment of
interest or principal on the Certificates.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, if an Event of Default occurs and is continuing with
respect to a series of Notes, the Indenture
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Trustee will be under no obligation to exercise any of the rights or powers
under the Indenture at the request or direction of any of the holders of such
Notes, if the Indenture Trustee reasonably believes it will not be adequately
indemnified against the costs, expenses and liabilities which might be incurred
by it in complying with such request. Subject to the provisions for
indemnification and certain limitations contained in the Indenture, a Note
Majority in a series will have the right to direct the time, method and place of
conducting any proceeding or any remedy available to the Indenture Trustee, and
a Note Majority may, in certain cases, waive any default with respect thereto,
except a default in the payment of principal or interest or a default in respect
of a covenant or provision of the Indenture that cannot be modified without the
waiver or consent of all of the holders of such outstanding Notes.
No holder of a Note of any series will have the right to institute any
proceeding with respect to the related Indenture, unless (i) such holder
previously has given to the Indenture Trustee written notice of a continuing
Event of Default, (ii) the holders of not less than 25% in principal amount of
the outstanding Notes of such series have made written request of the Indenture
Trustee to institute such proceeding in its own name as Indenture Trustee, (iii)
such holder or holders have offered the Indenture Trustee reasonable indemnity,
(iv) the Indenture Trustee has for 60 days failed to institute such proceeding,
(v) no direction inconsistent with such written request has been given to the
Indenture Trustee during such 60-day period by the holders of a majority in
principal amount of such outstanding Notes, and (vi) in the case of a series of
Securities with respect to which a Policy is issued, an Insurer Default shall
have occurred and be continuing.
If an Event of Default occurs and is continuing and if it is known to
the Indenture Trustee, the Indenture Trustee will mail to each Noteholder notice
of the Event of Default within 90 days after it occurs. Except in the case of a
failure to pay principal of or interest on any Note, the Indenture Trustee may
withhold the notice if and so long as it determines in good faith that
withholding the notice is in the interests of the Noteholders.
In addition, each Indenture Trustee and the related Noteholders, by
accepting the related Notes, will covenant that they will not at any time
institute against the Seller or the related Trust any bankruptcy, reorganization
or other proceeding under any federal or state bankruptcy or similar law.
Neither the Indenture Trustee nor the Trustee in its individual
capacity, nor any holder of a Certificate including, without limitation, the
Seller, nor any of their respective owners, beneficiaries, agents, officers,
directors, employees, affiliates, successors or assigns will, in the absence of
an express agreement to the contrary, be personally liable for the payment of
the related Notes or for any agreement or covenant of the related Trust
contained in the Indenture.
CERTAIN COVENANTS. Each Indenture will provide that the related Trust
may not consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the laws
of the United States or any state, (ii) such entity expressly assumes the
Trust's obligation to make due and punctual payments upon the Notes and the
performance or observance of every agreement and covenant of the Trust under the
Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Trustee has been
advised that the then current rating of the related Notes or Certificates then
in effect would not be reduced or withdrawn by the Rating Agencies as a result
of such merger or consolidation, (v) the Security Insurer, if any (prior to an
Insurer Default), has consented to such merger or consolidation, and (vi) the
Trustee has
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received an opinion of counsel to the effect that such consolidation or merger
would have no material adverse tax consequence to the Trust or to any related
Noteholder or Certificateholder.
Each Trust will not, among other things, (i) except as expressly
permitted by the Indenture, the Purchase Agreement, the Trust Documents or
certain related documents for such Trust (collectively, the "Related
Documents"), sell, transfer, exchange or otherwise dispose of any of the assets
of the Trust, (ii) claim any credit on or make any deduction from the principal
and interest payable in respect of the related Notes (other than amounts
withheld under the Code or applicable state law) or assert any claim against any
present or former holder of such Notes because of the payment of taxes levied or
assessed upon the Trust, (iii) dissolve or liquidate in whole or in part, (iv)
permit the validity or effectiveness of the related Indenture to be impaired or
permit any person to be released from any covenants or obligations with respect
to the related Notes under such Indenture except as may be expressly permitted
thereby, or (v) except as expressly permitted by the related Trust Documents,
permit any lien, charge, excise, claim, security interest, mortgage or other
encumbrance to be created on or extend to or otherwise arise upon or burden the
assets of the Trust or any part thereof, or any interest therein or proceeds
thereof.
No Trust may engage in any activity other than as specified under the
section of the related Prospectus Supplement entitled "The Trust." No Trust will
incur, assume or guarantee any indebtedness other than indebtedness incurred
pursuant to the related Notes and the related Indenture or otherwise in
accordance with the related Trust Documents.
ANNUAL COMPLIANCE STATEMENT. Each Trust will be required to file
annually with the related Indenture Trustee a written statement as to the
fulfillment of its obligations under the Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT. The Indenture Trustee will be
required to mail each year to all related Noteholders a brief report relating to
its eligibility and qualification to continue as Indenture Trustee under the
related Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by the Trust to
the Indenture Trustee in its individual capacity, the property and funds
physically held by the Indenture Trustee as such and any action taken by it that
materially affects the Notes and that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE. The Indenture will be
discharged with respect to the collateral securing the related Notes upon the
delivery to the related Indenture Trustee for cancellation of all such Notes or,
with certain limitations, upon deposit with the Indenture Trustee of funds
sufficient for the payment in full of all such Notes.
THE INDENTURE TRUSTEE
The Indenture Trustee for a series of Notes will be specified in the
related Prospectus Supplement. The Indenture Trustee may resign at any time, in
which event the Seller will be obligated to appoint a successor trustee
acceptable to the Security Insurer, if any (prior to an Insurer Default). The
Seller may also remove the Indenture Trustee, with the consent of the Security
Insurer, if any (prior to an Insurer Default), if the Indenture Trustee ceases
to be eligible to continue as such under the Indenture or if the Indenture
Trustee becomes insolvent. In such circumstances, the Seller will be obligated
to appoint a successor trustee acceptable to the Security Insurer, if any (prior
to an Insurer Default). Any resignation or removal of the
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Indenture Trustee and appointment of a successor trustee will be subject to any
conditions or approvals, if any, specified in the related Prospectus Supplement
and will not become effective until acceptance of the appointment by a successor
trustee.
CERTAIN INFORMATION REGARDING THE SECURITIES
BOOK-ENTRY REGISTRATION
Unless the related Prospectus Supplement provides for physical delivery
of the Securities, the Securities of each series will be registered in the name
of Cede & Co., the nominee 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
Uniform Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC accepts securities for
deposit from its participating organizations ("Participants") and facilitates
the clearance and settlement of securities transactions between Participants in
such securities through electronic book-entry changes in accounts of
Participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks and
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system is also 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").
Certificate Owners and Note Owners who are not Participants but desire
to purchase, sell or otherwise transfer ownership of Securities may do so only
through Participants (unless and until Definitive Certificates or Definitive
Notes, each as defined below, are issued). In addition, Certificate Owners and
Note Owners will receive all distributions of principal of, and interest on, the
Securities from the Trustee or the Indenture Trustee, as applicable, through DTC
and Participants. Certificate Owners and Note Owners will not receive or be
entitled to receive certificates representing their respective interests in the
Securities, except under the limited circumstances described below and such
other circumstances, if any, as may be specified in the related Prospectus
Supplement.
Unless and until Definitive Securities are issued, it is anticipated
that the only Certificateholder of the Certificates and the only Noteholder of
the Notes, if any, will be Cede & Co., as nominee of DTC. Certificate Owners and
Note Owners will not be recognized by the Trustee as Certificateholders or by
the Indenture Trustee as Noteholders as those terms are used in the related
Trust Documents or Indenture. Certificate Owners and Note Owners will be
permitted to exercise the rights of Certificateholders or Noteholders, as the
case may be, only indirectly through Participants and DTC.
With respect to any series of Securities, while the Securities are
outstanding (except under the circumstances described below), under the rules,
regulations and procedures creating and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among Participants on
whose behalf it acts with respect to the Securities and is required to receive
and transmit distributions of principal of, and interest on, the Securities.
Participants with whom Certificate Owners or Note Owners have accounts with
respect to Securities are similarly required to make book-entry transfers and
receive and transmit such distributions on behalf of their respective
Certificate Owners and Note Owners. Accordingly, although Certificate
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Owners and Note Owners will not possess Securities, the Rules provide a
mechanism by which Certificate Owners and Note Owners will receive distributions
and will be able to transfer their interests.
With respect to any series of Securities, Certificates and Notes (if
any) will be issued in registered form to Certificate Owners and Note Owners, or
their nominees, rather than to DTC (such Certificates and Notes being referred
to herein as "Definitive Certificates" and "Definitive Notes," respectively),
only if (i) DTC, the Seller or the Servicer advises the Trustee or the Indenture
Trustee, as the case may be, in writing that DTC is no longer willing or able to
discharge properly its responsibilities as nominee and depository with respect
to the Certificates or the Notes, and the Seller, the Servicer, the Trustee or
the Indenture Trustee, as the case may be, is unable to locate a qualified
successor, (ii) the Seller or the Administrator (if any) at its sole option has
advised the Trustee or the Indenture Trustee, as the case may be, in writing
that it elects to terminate the book-entry system through DTC and (iii) after
the occurrence of a Servicer Termination Event, the holders representing a
majority of the Certificate Balance (a "Certificate Majority") or a Note
Majority advises the Trustee or the Indenture Trustee, as the case may be,
through DTC, that continuation of a book-entry system is no longer in their best
interests. Upon issuance of Definitive Certificates or Definitive Notes to
Certificate Owners or Note Owners, such Certificates or Notes will be
transferable directly (and not exclusively on a book-entry basis) and registered
holders will deal directly with the Trustee or the Indenture Trustee, as the
case may be, with respect to transfers, notices and distributions.
DTC has advised the Seller that, unless and until Definitive
Certificates or Definitive Notes are issued, DTC will take any action permitted
to be taken by a Certificateholder or a Noteholder under the related Trust
Documents or Indenture only at the direction of one or more Participants to
whose DTC accounts the Certificates or Notes are credited. DTC has advised the
Seller that DTC will take such action with respect to any fractional interest of
the Certificates or the Notes only at the direction of and on behalf of such
Participants beneficially owning a corresponding fractional interest of the
Certificates or the Notes. DTC may take actions, at the direction of the related
Participants, with respect to some Certificates or Notes which conflict with
actions taken with respect to other Certificates or Notes.
Issuance of Certificates and Notes in book-entry form rather than as
physical certificates or notes may adversely affect the liquidity of
Certificates or Notes in the secondary market and the ability of the Certificate
Owners or Note Owners to pledge them. In addition, since distributions on the
Certificates and Notes will be made by the Trustee or the Indenture Trustee to
DTC and DTC will credit such distributions to the accounts of its Participants,
with the Participants further crediting such distributions to the accounts of
indirect participants or Certificate Owners or Note Owners, Certificate Owners
and Note Owners may experience delays in the receipt of such distributions.
STATEMENTS TO SECURITYHOLDERS
On or prior to each Distribution Date, the Servicer will prepare and
provide to the Trustee and the Security Insurer, if any, a statement to be
delivered to the related Certificateholders on such Distribution Date. On or
prior to each Payment Date, the Servicer will prepare and provide to the
Indenture Trustee a statement to be delivered to the related Noteholders on such
Payment Date. Such statements will be based on the information in the related
Servicer's Certificate setting forth certain information required under the
Trust Documents (the "Servicer's Certificate"). Each such statement to be
delivered to
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Certificateholders will include, where appropriate, the following information as
to the Certificates with respect to such Distribution Date or the period since
the previous Distribution Date, as applicable, and each such statement to be
delivered to Noteholders will include the following information as to the Notes
with respect to such Payment Date or the period since the previous Payment Date,
as applicable:
(i) the amount of the distribution allocable to
interest on or with respect to each class of Securities;
(ii) the amount of the distribution allocable to
principal on or with respect to each class of Securities;
(iii) the aggregate outstanding principal balance and
Pool Factors for each class of Securities, after giving effect to all
payments reported under (ii) above on such date;
(iv) the amount of the Servicing Fee paid to the
Servicer with respect to the related Monthly Period or Periods, as the
case may be;
(v) the Pass-Through Rate or Interest Rate for the next
period for any class of Certificates or Notes with variable or
adjustable rates;
(vi) the amount, if any, distributed to
Certificateholders and Noteholders applicable to payments under the
related Policy or other form of credit enhancement, if any; and
(vii) such other information as may be specified in the
related Prospectus Supplement.
Each amount set forth pursuant to subclauses (i), (ii), (iv) and (vi)
with respect to Certificates or Notes will be expressed as a dollar amount per
$1,000 of the initial Certificate Balance or the initial principal balance of
the Notes, as applicable.
Unless and until Definitive Certificates or Definitive Notes are
issued, such reports with respect to a series of Securities will be sent on
behalf of the related Trust to the Trustee, the Indenture Trustee and Cede &
Co., as registered holder of the Certificates and the Notes and the nominee of
DTC. Certificate Owners and Note Owners may receive copies of such reports upon
written request, together with a certification that they are Certificate Owners
or Note Owners, as the case may be, and payment of any expenses associated with
the distribution of such reports, from the Trustee or the Indenture Trustee, as
applicable. See "Book-Entry Registration" above.
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during the term of a Trust, the Trustee and the
Indenture Trustee, as applicable, will mail to each holder of a class of
Securities who at any time during such calendar year has been a Securityholder,
and received any payment thereon, a statement containing certain information for
the purposes of such Securityholder's preparation of federal income tax returns.
See "Certain Federal Income Tax Consequences."
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LISTS OF SECURITYHOLDERS
With respect to each series of Certificates, at such time, if any, as
Definitive Certificates have been issued, the Trustee will, upon written request
by three or more Certificateholders or one or more holders of Certificates
evidencing not less than 25% of the Certificate Balance, within five Business
Days after provision to the Trustee of a statement of the applicants' desire to
communicate with other Certificateholders about their rights under the related
Trust Documents or the Certificates and a copy of the communication that the
applicants propose to transmit, afford such Certificateholders access during
business hours to the current list of Certificateholders for purposes of
communicating with other Certificateholders with respect to their rights under
the related Trust Documents. The related Trust Documents will not provide for
holding any annual or other meetings of Certificateholders.
With respect to each series of Notes, if any, at such time as
Definitive Notes have been issued, the Indenture Trustee will, upon written
request by three or more Noteholders or one or more holders of Notes evidencing
not less than 25% of the aggregate principal balance of the related Notes,
within five Business Days after provision to the Indenture Trustee of a
statement of the applicants' desire to communicate with other Noteholders about
their rights under the related Indenture or the Notes and a copy of the
communication that the applicants propose to transmit, afford such Noteholders
access during business hours to the current list of Noteholders for purposes of
communicating with other Noteholders with respect to their rights under the
Indenture. The related Indenture will not provide for holding any annual or
other meetings of Noteholders.
DESCRIPTION OF THE PURCHASE AGREEMENTS AND THE
TRUST DOCUMENTS
The following summary describes certain terms of the Purchase
Agreements (each a "Purchase Agreement") pursuant to which the Seller will
purchase Receivables from one or more NAFCO Transferors, and certain terms of
either (i) the Pooling and Servicing Agreements or (ii) the Sale and Servicing
Agreements and the Trust Agreements (in either case collectively referred to as
the "Trust Documents") pursuant to which the Seller will sell and assign such
Receivables to a Trust and the Servicer will agree to service such Receivables
on behalf of the Trust, and pursuant to which such Trust will be created and
Certificates will be issued. Forms of the Purchase Agreement and the Trust
Documents have been filed as exhibits to the Registration Statement of which
this Prospectus forms a part. The Seller will provide a copy of such agreements
(without exhibits) upon request to a holder of Securities described therein.
Requests for such copies should be directed to Chief Financial Officer, National
Auto Finance Company L.P., One Park Place, Suite 200, 621 N.W. 53rd Street, Boca
Raton, Florida 33487 (telephone (407) 997-2747). This summary does not purport
to be complete and is subject to, and qualified in its entirety by reference to,
all of the provisions of the Purchase Agreement and the Trust Documents. Where
particular provisions or terms used in the Purchase Agreement and the Trust
Documents are referred to, the actual provisions (including definitions of
terms) are incorporated by reference as part of such summary.
SALE AND ASSIGNMENT OF THE RECEIVABLES
On or prior to the Closing Date with respect to a series of Securities
specified in the related Prospectus Supplement, each applicable NAFCO Transferor
(and, if such NAFCO
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Transferor is a special-purpose finance subsidiary of NAFCO, the Originator or
Originators with respect to the Receivables being transferred thereby) will
enter into a Purchase Agreement with the Seller pursuant to which such NAFCO
Transferor will, on or prior to such Closing Date, sell and assign to the
Seller, without recourse, its entire interest in and to the related Receivables,
including its security interest in the Financed Vehicles securing such
Receivables and its rights to receive all payments on, or proceeds with respect
to, such Receivables and the related Financed Vehicles to the extent paid or
payable on or after the applicable Cutoff Date. Pursuant to the Purchase
Agreement, the applicable Originator will agree that, upon the occurrence of a
Repurchase Event under the related Trust Documents with respect to any
Receivable of a Trust, the Trustee on behalf of the Security Insurer (if any)
and the Certificateholders will be entitled to require the Originator of such
Receivable to repurchase such Receivable from the Trust. Such rights of the
Trust under the Purchase Agreement will constitute part of the property of the
Trust and may be enforced directly by the Trustee on behalf of the Security
Insurer (if any) and the Certificateholders. In addition, the Trustee will
pledge such rights to the Indenture Trustee as collateral for the Notes, if any.
On the Closing Date, the Seller will sell and assign to the Trustee,
without recourse, the Seller's entire interest in the related Receivables and
the proceeds thereof, including its security interests in the Financed Vehicles.
Each Receivable transferred by the Seller to the Trust will be identified in a
schedule appearing as an exhibit to the related Trust Documents (the "Schedule
of Receivables"). Concurrently with such sale and assignment, the Trustee will
execute and deliver the related certificates representing the Certificates to or
upon the order of the Seller, and the Trustee will execute and the Indenture
Trustee will authenticate and deliver the Notes, if any, to or upon the order of
the Seller.
In the Purchase Agreement, the Originator or Originators will warrant
to the Seller, the Trustee and the Security Insurer, if any, and in the Trust
Documents, the Seller will warrant to the Trustee and the Security Insurer, if
any, among other things, that (except as otherwise specified in the related
Prospectus Supplement): (i) each Receivable (A) has created or will create a
valid, binding and enforceable first priority security interest in favor of the
applicable Originator in the Financed Vehicle (and, within 180 days after the
Closing Date, all title documents to the Financed Vehicles will show the
applicable Originator as first lienholder), which security interest has been
validly assigned by such Originator to the Seller and by the Seller to the
Trustee, (B) was originated by a Dealer for the retail sale of a Financed
Vehicle in the ordinary course of such Dealer's business, was fully and properly
executed by the parties thereto, was purchased by the Originator from such
Dealer under an existing Dealer Agreement with such Originator and was validly
assigned by such Dealer to the Originator, (C) contains customary and
enforceable provisions adequate to enable realization against the collateral
security and (D) provides for level monthly payments (other than with respect to
the first and the final payments) which, if made when due, will fully amortize
the amount financed over the original term; (ii) no selection procedures adverse
to the Securityholders or the Security Insurer, if any, were utilized in
selecting the Receivables from those receivables owned by the Originator that
meet the selection criteria contained in the related Trust Documents; (iii) all
requirements of applicable Federal, state and local laws, and regulations
thereunder, in respect of all of the Receivables and each and every sale of the
Financed Vehicles have been complied with in all material respects; (iv) each
Receivable represents the genuine, legal, valid and binding payment obligation
to the Obligor thereon, enforceable in accordance with its terms, except as may
be limited by laws affecting creditors' rights generally or as may be modified
by the application of the Solders' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"); (v) (A) immediately before the conveyance of each
Receivable to the Trust, such Receivable will
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be secured by an enforceable and validly perfected first priority security
interest in the Financed Vehicle in favor of the Originator and (B) as of the
Closing Date there were no security interests, liens, charges, pledges,
preferences, equities or encumbrances of any kind, claims or rights of others or
claims for taxes, work, labor or materials affecting a Financed Vehicle (each, a
"Lien") which are or may be Liens prior or equal to the Lien of the related
Receivable; (vi) there has been no default, breach, violation or event
permitting acceleration under the terms of any Receivable (other than payment
delinquencies of not more than 30 days), and there has been no waiver of any of
the foregoing; and as of the Closing Date, no Financed Vehicle has been
repossessed; (vii) immediately prior to the conveyance of the Receivables to the
Seller, the applicable NAFCO Transferor had good and indefeasible title thereto
and was the sole owner thereof, free of any Lien; immediately prior to the
conveyance of the Receivables to the Trust, the Seller had good and indefeasible
title thereto and was the sole owner thereof, free of any Lien; and upon
conveyance of the Receivables by the Seller to the Trust pursuant to the Trust
Documents, the Trust will have good and indefeasible title to and will be the
sole owner of the Receivables, free of any Lien; (viii) no Dealer has a
participation in or other right to receive proceeds of any Receivable, and
neither the applicable NAFCO Transferor nor the Seller has taken any action to
convey any right to any person that would result in such person having a right
to payments received with respect to any Receivable; (ix) neither the applicable
NAFCO Transferor nor the Seller has done anything to convey any right to any
person that would impair the rights of the Trust, the Security Insurer, if any,
the Certificateholders or the Noteholders in any Receivable or the proceeds
thereof; (x) each Receivable was originated by a Dealer and was sold by the
Dealer to the Originator without any fraud or misrepresentation on the part of
such Dealer; (xi) no Obligor is the United States of America or any State or any
agency, department, subdivision or instrumentality thereof; (xii) no Receivable
is assumable by another person in a manner that would release the Obligor
thereof from such Obligor's obligations to the Originator with respect to such
Receivable; (xiii) no Receivable was originated in, or is subject to the laws
of, any jurisdiction the laws of which would make unlawful, void or voidable the
sale, transfer and assignment of such Receivable under the Purchase Agreement or
the Trust Documents or pursuant to transfers of the Securities; (xiv) all
filings and other actions required to be made, taken or performed by any person
in any jurisdiction to give the Trust a first priority perfected lien or
ownership interest in the Receivables and the proceeds thereof will have been
made, taken or performed; (xv) there exists a Receivable File pertaining to each
Receivable, and such Receivable File contains (A) the fully executed original of
the Receivable, (B) the original lien certificate or application therefor and
(C) a credit application signed by the Obligor, or a copy thereof; each of such
documents required to be signed by the Obligor has been signed by the Obligor in
the appropriate spaces, all blanks have been properly filled in and each form
has otherwise been correctly prepared; and the complete Receivable File for each
Receivable is in the possession of a custodian; (xvi) there is only one original
executed copy of each Receivable; (xvii) the Receivables constitute chattel
paper within the meaning of the UCC as in effect in the States of Florida and
Delaware; (xviii) each Receivable was entered into by an Obligor who at the
Cutoff Date had not been identified on the records of the Originator as being
the subject of a current bankruptcy proceeding; (xix) the computer tape
containing information with respect to the Receivables that was made available
by the Seller to the Trustee on the Closing Date and was used to select the
Receivables (the "Computer Tape") was complete and accurate as of the Cutoff
Date and includes a description of the same Receivables that are described in
the Schedule of Receivables; (xx) by the Closing Date, the portions of the
electronic master record of retail installment sale contracts of the Originator
(the "Electronic Ledger") relating to the Receivables will have been clearly and
unambiguously marked to show that the Receivables have been transferred to the
Seller; (xxi) as of the Closing Date, each Financed Vehicle was covered by a
comprehensive and collision insurance policy (A) in an amount at least equal to
the lesser
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of (1) its maximum insurable value or (2) the principal amount due from the
Obligor under the related Receivable, (B) naming the Originator as loss payee
and (C) insuring against loss and damage due to fire, theft, transportation,
collision and other risks generally covered by comprehensive and collision
insurance coverage; and no Financed Vehicle was or had previously been insured
under a policy of force-placed insurance; (xxii) no Receivable has been
satisfied, subordinated or rescinded; the Financed Vehicle securing each
Receivable has not been released from the lien of the related Receivable in
whole or in part; and no provision of a Receivable has been waived, altered or
modified in any respect, except by instruments or documents contained in the
Receivable File; (xxiii) no Receivable is subject to any right of rescission,
set-off, counterclaim or defense, and the operation of the terms of any
Receivable or the exercise of any right thereunder will not render such
Receivable unenforceable in whole or in part or subject to any right of
rescission, set-off, defense or counterclaim, and no such right of rescission,
set-off, defense or counterclaim has been asserted; (xxiv) no Receivable was
more than 30 days past due as of the Cutoff Date and (xxv) each Receivable had a
remaining principal balance as of the Cutoff Date equal to or greater than
$500.00.
The warranties of the Originators and the Seller will be made as of the
execution and delivery of each Purchase Agreement and the related Trust
Documents and will survive the sale, transfer and assignment of the related
Receivables and other Trust Property to the Trust but will speak only as of the
date made.
In the event of a breach by the applicable Originator of any
representation or warranty made by it in a Purchase Agreement with respect to a
Receivable that materially and adversely affects the interests of the
Securityholders, the Security Insurer (if any) or the Trust in that Receivable
(any such breach by the Originator being a "Repurchase Event"), the Originator,
unless it cures the breach within the time period specified in the related
Purchase Agreement following the date on which the Originator becomes aware of
or receives written notice from the Trustee, the Indenture Trustee, the Security
Insurer, if any, or the Servicer of such breach, will be obligated to repurchase
the Receivable from the Trust. Any such repurchase shall be made at a price
equal to the Purchase Amount. The "Purchase Amount" of any Receivable means the
outstanding principal balance of such Receivable plus accrued and unpaid
interest thereon. This repurchase obligation may be enforced by the Security
Insurer (if any), or by the Trustee or the Indenture Trustee on behalf of the
Certificateholders and the Noteholders, respectively, and will constitute the
sole remedy available to the Certificateholders, the Noteholders, the Security
Insurer (if any), the Trustee or the Indenture Trustee against the Originators
or the Seller for any such uncured breach, except that pursuant to the Trust
Documents, the applicable Originator will indemnify the Trustee, the Indenture
Trustee, the Trust, the Backup Servicer, the Collateral Agent, the Security
Insurer (if any), and the Certificateholders and Noteholders against losses,
damages, liabilities and claims which may be asserted against any of them as a
result of third-party claims arising out of the facts giving rise to such
breach.
Upon the purchase by NAFCO of a Warranty Receivable, the Trustee will
convey such Receivable and the related Trust Property to the applicable
Originator.
CUSTODY OF RECEIVABLE FILES
Unless otherwise specified in the related Prospectus Supplement, OFSA
as designee of NAFCO under a Custodial Agreement, on behalf of each Trust, will
hold the original installment sale contract as well as copies of documents and
instruments relating to each Receivable and evidencing the security interest in
the Financed Vehicle securing each Receivable (the
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"Receivable Files"). In order to protect the Trust's ownership interest in the
Receivables, the Originators will file UCC-1 financing statements in Florida and
the Seller will file UCC-1 financing statements in Florida and Delaware to give
notice of such Trust's ownership of the related Receivables and the related
Trust Property. If held by OFSA, the Receivables will not be segregated and will
not be stamped or otherwise marked to indicate that such Receivables have been
sold to the related Trust.
If so specified in the related Prospectus Supplement, NAFCO will be
appointed to act as custodian for the Receivable Files of each Trust. The Trust
and NAFCO or such other institution specified in the related Prospectus
Supplement, as the case may be, may enter into a custodial agreement pursuant to
which NAFCO or such other institution will agree to hold the Receivable Files on
behalf of the related Trust. Any such custodial agreement may be terminated by
the Trust and, if NAFCO is custodian, by the Security Insurer, on 30 days'
notice to NAFCO or such other institution or, in the case of termination by the
Security Insurer of NAFCO as custodian, immediately. If NAFCO resigns or is
terminated as the Servicer, any custodial agreement with NAFCO shall terminate
at the same time.
The Receivable Files, if held by NAFCO as custodian, will be stamped or
otherwise marked to indicate that such Receivables have been sold to the related
Trust. The Receivable Files will also be physically segregated. Despite these
precautions, if, through inadvertence or otherwise, any of the Receivables were
sold to another party (or a security interest therein were granted to another
party) that purchased (or took such security interest in) any of such
Receivables in the ordinary course of its business and took possession of such
Receivables, the purchaser (or secured party) would acquire an interest in the
Receivables superior to the interest of the related Trust if the purchaser (or
secured party) acquired (or took a security interest in) the Receivables for new
value and without actual knowledge of such Trust's interest. See "Certain Legal
Aspects of the Receivables -- Rights in the Receivables."
COLLECTIONS
With respect to each Trust, the Servicer will establish one or more
Collection Accounts in the name of the Trustee or, in the case of any series
including one or more classes of Notes, in the name of the Indenture Trustee for
the benefit of the related Securityholders. If so specified in the related
Prospectus Supplement, the Trustee will establish and maintain for each series
an account, in the name of the Trustee on behalf of the related
Certificateholders, in which amounts released from the Collection Account, any
Pre-Funding Account or any Revolving Account and any amounts received from any
source of credit enhancement for distribution to such Certificateholders will be
deposited and from which all distributions to such Certificateholders will be
made (the "Certificate Distribution Account"). With respect to any series
including one or more classes of Notes, the Indenture Trustee will establish and
maintain for each series an account, in the name of the Indenture Trustee on
behalf of the related Noteholders, in which amounts released from the Collection
Account, any Pre-Funding Account or any Revolving Account and any amounts
received from any source of credit enhancement for payment to such Noteholders
will be deposited and from which all distributions to such Noteholders will be
made (the "Note Distribution Account"). The Collection Account, the Certificate
Distribution Account (if any), and the Note Distribution Account (if any), are
referred to herein collectively as the "Designated Accounts." Any other accounts
to be established with respect to a Trust will be described in the related
Prospectus Supplement.
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Each Designated Account will be an Eligible Account maintained with the
Trustee, the Indenture Trustee and/or other depository institutions. An
"Eligible Account" is (i) a segregated trust account that is maintained with the
corporate trust department of a depository institution (acceptable to the
Security Insurer, if any) or (ii) a segregated demand deposit account maintained
with a depository institution or trust company organized under the laws of the
United States of America, or any of the states thereof, or the District of
Columbia, that has a certificate of deposit, short-term deposit or commercial
paper rating of at least A-1+ by S&P and P-1 by Moody's (the "Required Deposit
Rating"), and that is acceptable to the Security Insurer if any (prior to an
Insurer Default). On the Closing Date specified in the related Prospectus
Supplement, the Servicer will cause to be deposited in the Collection Account
all payments on the Receivables received by the Servicer after the Cutoff Date
and on or prior to the second Business Day preceding the Closing Date.
All payments from Obligors that are received by the Servicer or any
subservicer on behalf of each Trust will be deposited in the related Collection
Account not later than two Business Days after receipt thereof or within such
other time period as may be acceptable to the Rating Agencies and the Security
Insurer, if any. OFSA has established and maintains a lockbox account (the
"Lockbox Account") with Mellon Financial Services, a subsidiary of Mellon Bank
(the "Lockbox Bank") to which payments in respect of motor vehicle installment
debt obligations and lease obligations serviced by OFSA are remitted. Unless
otherwise specified in the related Prospectus Supplement, Obligors will be
notified to remit payments in respect of the Receivables directly to the Lockbox
Account. Unless otherwise specified in the related Prospectus Supplement, the
Lockbox Account will not be segregated, assigned or pledged to the Trustee or
the Indenture Trustee and payments in respect of the Receivables deposited to
the Lockbox Account will be commingled with collections in respect of motor
vehicle installment debt obligations and lease obligations serviced by OFSA.
Neither the Trustee nor the Servicer will have any rights to withdraw or
otherwise direct disposition of funds on deposit in the Lockbox Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will deposit all payments on the Receivables held by any Trust received
directly by the Servicer from Obligors and all proceeds of Receivables collected
directly by the Servicer during each Monthly Period into the Collection Account
not later than the Business Day after receipt. Notwithstanding the foregoing and
unless otherwise provided in the related Prospectus Supplement, the Servicer may
utilize an alternative remittance schedule acceptable to the Servicer and the
Security Insurer, if any (prior to an Insurer Default), if the Servicer provides
to the Trustee and the Indenture Trustee written confirmation from each Rating
Agency that such alternative remittance schedule will not result in the
downgrading or withdrawal by such Rating Agency of the rating(s) then assigned
to the Securities. NAFCO and the Servicer will also deposit into the Collection
Account within the time period specified in the related Prospectus Supplement
the Purchase Amount of each Warranty Receivable or Administrative Receivable to
be purchased by it.
For any series of Securities, funds in the Designated Accounts and any
other accounts identified in the related Prospectus Supplement will be invested,
as provided in the related Trust Documents, at the direction of the Servicer in
"Eligible Investments," consisting (unless otherwise specified in the related
Prospectus Supplement) of: interest-bearing obligations issued or guaranteed as
to principal and interest by the United States or any agency or instrumentality
of the United States, the obligations of which are backed by the full faith and
credit of the United States; interest-bearing obligations issued or guaranteed
by the Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation as long as such obligations are
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assigned the highest credit rating by S&P and Moody's; demand or time deposits,
certificates of deposit of and certain other obligations of domestic depositary
institutions with short-term unsecured debt obligations assigned the highest
credit rating by S&P and Moody's; certain repurchase obligations with respect to
the government securities described above and entered into with a domestic
depository institution or trust company, the deposits of which are rated at
least A-1+ by S&P and P-1 by Moody's; certain corporate debt securities assigned
the highest credit rating by S&P and Moody's; certain commercial paper rated in
the highest credit rating category by S&P and Moody's; and certain other
securities meeting the criteria specified in the related Trust Documents to the
extent investment in such securities would not require registration of the
related Trust under the Investment Company Act of 1940. Eligible Investments
shall mature no later than the Business Day preceding the applicable
Distribution Date or Payment Date, as the case may be, for the Monthly Period to
which such amounts relate. Investments in Eligible Investments will be made in
the name of the Trustee or the Indenture Trustee, as the case may be, and such
investments will not be sold or disposed of prior to their maturity.
As an administrative convenience and subject to certain conditions
specified in the Trust Documents, the Servicer will be permitted to make
deposits of amounts actually collected by it in a Monthly Period net of
distributions to be made to it with respect to such Monthly Period, which
amounts may be netted prior to any such remittance for the Monthly Period. The
Servicer will account, however, to the Trustee, the Indenture Trustee, the
Security Insurer, if any, the Certificateholders and the Noteholders as if all
such deposits and distributions were made individually. The Servicer will be
entitled to withhold, or to be reimbursed from amounts otherwise payable into,
or on deposit in, the Collection Account with respect to a Monthly Period,
amounts previously deposited in the Collection Account but later determined to
have resulted from mistaken deposits or postings or checks returned for
insufficient funds.
SERVICING PROCEDURES
The Servicer will make reasonable efforts, consistent with the
customary servicing procedures employed by the Servicer with respect to
Receivables owned or serviced by it, to collect all payments due with respect to
the Receivables held by any Trust and, in a manner consistent with the Trust
Documents, will follow its customary collection procedures with respect to motor
vehicle loans that it services for itself and others.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will covenant in the related Trust Documents that it will not extend
the monthly payments under a Receivable more than a maximum of four months in
the aggregate and that the cumulative extensions with respect to any Receivable
will not cause the term of such Receivable to extend beyond the last day of the
Monthly Period immediately preceding the Final Scheduled Distribution Date (as
specified in the related Prospectus Supplement). The Servicer may, with the
consent of the Security Insurer, if any (prior to an Insurer Default) and
subject to certain other conditions, agree to modify a Receivable to avoid a
prepayment by the Obligor, provided that such modification may not cause the APR
on such Receivable to be below a rate equal to the highest Interest Rate or
Pass-Through Rate on the related Securities plus the applicable Servicing Rate,
nor may such modification cause the term of the modified Receivable to extend
beyond the last day of the Monthly Period immediately preceding the Final
Scheduled Distribution Date specified in the related Prospectus Supplement.
Under current Proposed Treasury Regulations, depending on the characterization
of the related Trust for federal income tax purposes, no such modification of a
Receivable may change the APR by more than .25%. The Servicer will also covenant
that it will not release a Financed Vehicle from the security
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interest granted by the Receivable except when the Receivable has been paid in
full or as otherwise contemplated by the Trust Documents.
Upon the discovery by any of the Servicer, the Security Insurer, if
any, the Trustee or the Indenture Trustee, or receipt of written notice by the
Servicer of any breach by the Servicer of certain of its covenants that
materially and adversely affects the interests of a Trust, the Security Insurer
(if any) or the related Securityholders in a Receivable, unless such breach
shall have been cured within the applicable cure period provided for in the
Trust Documents and specified in the related Prospectus Supplement, the Servicer
will be required to purchase the related Receivable for the Purchase Amount. The
purchase obligation will constitute the sole remedy available to the Security
Insurer (if any), the Certificateholders, the Trustee on behalf of
Certificateholders, the Noteholders or the Indenture Trustee on behalf of
Noteholders against the Servicer for any such uncured breach, expect with
respect to certain indemnities of the Servicer under the Trust Documents.
Under the Trust Documents, the Servicer will be required to use its
best efforts to repossess or otherwise comparably convert the ownership of any
Financed Vehicle securing a Receivable with respect to which the Servicer has
determined that payments thereunder are not likely to be resumed as soon as
practicable after default on such Receivable, but in no event later than the day
on which any portion of a Scheduled Payment has become 91 days delinquent. The
Servicer is authorized to follow such of its normal collection practices and
procedures as it deems necessary or advisable to realize upon any Receivable.
The Servicer may repossess and sell the Financed Vehicle securing such
Receivable at judicial sale, or take any other action permitted by applicable
law. See "Certain Legal Aspects of the Receivables." The Servicer will be
entitled to recover all reasonable expenses incurred by it in connection
therewith. The proceeds of such realization (net of such expenses) will be
deposited in the Collection Account at the time and in the manner described
above under "-- Collections."
Unless otherwise specified in the related Prospectus Supplement,
neither the Servicer nor any Subservicer will have any obligation to make
advances of delinquent payments of principal and interest on the Receivables.
The Trust Documents will provide that the Servicer will indemnify and
defend the Trustee, the Indenture Trustee, the Backup Servicer, the Trust, the
Security Insurer (if any) and the Securityholders against, among other things,
any and all costs, expenses, losses, damages, claims and liabilities, including
reasonable fees and expenses of counsel and expenses of litigation, arising out
of or resulting from the use, ownership or operation by the Servicer or any
affiliate thereof of any Financed Vehicle (as may occur, for instance, upon
repossession of a Financed Vehicle) or in respect of any action taken or failed
to be taken by the Servicer with respect to any portion of the Trust Property in
violation of the provisions of the Trust Documents. The Servicer's obligations
to indemnify the Trustee, the Indenture Trustee, the Backup Servicer, the Trust,
the Security Insurer (if any) and the Securityholders for the Servicer's actions
or omissions will survive the removal of the Servicer but will not apply to any
action or omission of a successor Servicer.
SERVICING COMPENSATION
With respect to each series of Securities, the Servicer will be
entitled to receive the Servicing Fee for each Monthly Period in an amount
generally equal to the product of one-twelfth of the Servicing Rate specified in
the related Prospectus Supplement and the Aggregate
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Principal Balance as of the first day of such Monthly Period. The Servicer also
will be entitled to collect and retain any late fees or other administrative
fees or similar charges allowed by the terms of the Receivables or applicable
law. The Servicing Fee and any additional servicing compensation will be paid
out of collections on or with respect to the Receivables prior to distributions
to Certificateholders and Noteholders. A "Monthly Period" with respect to any
Distribution Date will generally be the calendar month immediately preceding the
month in which the Distribution Date occurs.
NAFCO, as Servicer, will be required to pay all expenses incurred by it
in connection with its servicing activities (including fees, expenses and
disbursements of the Trustee, the Indenture Trustee, the Lockbox Bank, the
Custodian and independent accountants, taxes imposed on the Servicer and
expenses incurred in connection with distributions and reports to
Certificateholders and Noteholders and the Security Insurer (if any)), except
certain expenses incurred in connection with realizing upon the Receivables.
DISTRIBUTIONS
With respect to each Trust, beginning on the Distribution Date or
Payment Date, as applicable, specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal or
interest only) on each class of Securities entitled thereto will be made by the
Trustee or the Indenture Trustee, as applicable, to the Certificateholders and
the Noteholders. The timing, calculation, allocation, order, source, priorities
of and requirements for all distributions to each class of Certificateholders
and all payments to each class of Noteholders will be set forth in the related
Prospectus Supplement.
CREDIT ENHANCEMENT
The amounts and types of credit enhancement arrangements and the
provider thereof, if applicable, with respect to each class of Securities 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
financial guaranty insurance policy, subordination of one or more classes of
Securities, reserve accounts, overcollateralization, letters of credit, credit
or liquidity facilities, repurchase obligations, third party payments or other
support, cash deposits or such other arrangements as may be described in the
related Prospectus Supplement or any combination of two or more of the
foregoing. If specified in the applicable Prospectus Supplement, credit
enhancement for a series of Securities may cover one or more other series of
Securities.
The presence of credit enhancement is intended to enhance the
likelihood of receipt by the Certificateholders and the Noteholders of the full
amount of principal and interest due thereon and to decrease the likelihood that
the Certificateholders and the Noteholders will experience losses. The credit
enhancement for a class of Securities will not provide protection against all
risks of loss and will not guarantee repayment of the entire principal and
interest thereon unless so provided in the related Prospectus Supplement. If
losses occur which exceed the amount covered by any credit enhancement or which
are not covered by any credit enhancement, Securityholders will bear their
allocable share of deficiencies. In addition, 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.
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EVIDENCE AS TO COMPLIANCE
The Trust Documents will require the Servicer to cause a firm of
independent certified public accountants to furnish to the Trustee and the
Indenture Trustee, the Security Insurer, if any, and each Rating Agency, on or
before March 31 of each year (or, if the Servicer's fiscal year ends on a date
other than December 31, the date 90 days after the end of the Servicer's fiscal
year), beginning on the first March 31 after the Closing Date, with respect to
the twelve months ended the immediately preceding December 31 or other fiscal
year-end (or such other period as shall have elapsed from the Closing Date to
the date of such certificate), a statement addressed to the Board of Directors
of the Servicer, to the Trustee, the Indenture Trustee, the Backup Servicer and
the Security Insurer, if any, as to compliance by the Servicer during such
period with certain standards relating to the servicing of the Receivables set
forth in the Trust Documents. A copy of such statement may be obtained by any
Certificate Owner or Note Owner upon compliance with the requirements described
above. See "Certain Information Regarding the Securities -- Statements to
Securityholders" above.
The Trust Documents will also provide for delivery to the Trustee, the
Indenture Trustee, the Security Insurer, if any, and each Rating Agency, if any,
and the Backup Servicer, on or before March 31 (or, if the Servicer's fiscal
year ends on a date other than December 31, the date 90 days after the end of
the Servicer's fiscal year) of each year, beginning on the first March 31
following the Closing Date, of an officers' certificate signed by any two of the
president, any vice-president or assistant vice president, or the controller of
the Servicer (each, a "Servicer Responsible Officer"), dated as of December 31
of such year (or such other date on which the Servicer's fiscal year ends),
stating that (i) a review of the activities of the Servicer during the preceding
12-month period (or such other period as shall have elapsed from the Closing
Date to the date of the first such certificate) and of its performance under the
Trust Documents has been made under such officer's supervision, and (ii) to such
officer's knowledge, based on such review, the Servicer has fulfilled all its
obligations under the Trust Documents throughout such period, or, if there has
been a default in the fulfillment of any such obligation, specifying each such
default known to such officer and the nature and status thereof. A copy of such
certificate may be obtained by any Certificate Owner or Note Owner upon
compliance with the requirements described above. See "Certain Information
Regarding the Securities -Statements to Securityholders" above.
CERTAIN MATTERS REGARDING THE SERVICER
If a Policy has been issued with respect to a series of Securities,
NAFCO's appointment as Servicer under the related Trust Documents may be subject
to periodic renewal by the Security Insurer, if any (prior to an Insurer
Default). It is expected that the Security Insurer (if any) will renew NAFCO's
appointment as Servicer until such time, if any, as a Servicer Termination Event
shall have occurred. Unless otherwise provided in the related Prospectus
Supplement, if an Insurer Default occurs or if no Policy is issued with respect
to a series, NAFCO's appointment as Servicer under the related Trust Documents
will continue until such time as it resigns, is terminated as Servicer, or until
such time, if any, as a Servicer Termination Event shall have occurred under the
related Trust Documents. The related Trust Documents will provide that the
Servicer may not resign from its obligations and duties as Servicer thereunder,
except upon a determination (as evidenced by an opinion of independent counsel,
delivered and acceptable to the Trustee, the Indenture Trustee and the Security
Insurer, if any (prior to an Insurer Default)), that by reason of a change in
legal requirements its performance of such duties would cause it to be in
violation of such legal requirements in a manner which would result in
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a material adverse effect on the Servicer. No such resignation will become
effective until the Backup Servicer or other successor Servicer has assumed the
servicing obligations and duties under the related Trust Documents.
Any corporation or other entity into which the Servicer may be merged
or consolidated, resulting from any merger or consolidation to which the
Servicer is a party, which acquires by conveyance, transfer or lease
substantially all of the assets of the Servicer or succeeding to all or
substantially all the business of the Servicer, where the Servicer is not the
surviving entity, which corporation or other entity assumes every obligation of
the Servicer under each Trust Document, will be the successor to the Servicer
under the related Trust Documents; provided, however, that (i) such entity is an
Eligible Servicer, (ii) immediately after giving effect to such transaction, no
Servicer Termination Event, no event of default under the agreement (if any),
providing for the issuance of the Policy (the "Insurance Agreement") (prior to
an Insurer Default) and no event which, after notice or lapse of time, or both,
would become a Servicer Termination Event or an event of default under the
related Insurance Agreement, if any (prior to an Insurer Default), shall have
occurred and be continuing, (iii) the Servicer shall have delivered to the
Trustee, the Indenture Trustee and the Security Insurer (if any) an officers'
certificate and an opinion of counsel each stating that such consolidation,
merger or succession and such agreement of assumption comply with the related
Trust Documents and that all conditions precedent provided for in the Trust
Documents relating to such transaction have been complied with, and (iv) the
Servicer shall have delivered an opinion of counsel either (A) stating that, in
the opinion of such counsel, all financing statements and continuation
statements and amendments thereto have been executed and filed that are
necessary fully to preserve and protect the interest of the Trustee and the
Indenture Trustee in the Receivables and the other Trust Property and reciting
the details of such filings, or (B) stating that, in the opinion of such
counsel, no such action shall be necessary to preserve and protect such
interest.
INDEMNIFICATION AND LIMITS ON LIABILITY
The Trust Documents will provide that the Servicer will be liable only
to the extent of the obligations specifically undertaken by it under the Trust
Documents and will have no other obligations or liabilities thereunder. The
Trust Documents will further provide that neither the Servicer nor any of its
directors, officers, employees and agents will have any liability to the Trust,
the Certificateholders or the Noteholders or the Security Insurer, if any,
except as provided in the Trust Documents, for any action taken or for
refraining from taking any action pursuant to the Trust Documents, other than
any liability that would otherwise be imposed by reason of the Servicer's breach
of the Trust Documents or willful misfeasance, bad faith or negligence
(including errors in judgment) in the performance of its duties, or by reason of
reckless disregard of obligations and duties under the Trust Documents or any
violation of law.
The Servicer may, with the prior consent of the Security Insurer, if
any (prior to an Insurer Default), the Trustee, the Indenture Trustee, if any,
and the Backup Servicer, delegate duties under the related Trust Documents to
any of its affiliates. In addition, the Servicer may at any time perform the
specific duty of repossessing Financed Vehicles through subcontractors who are
in the business of servicing automotive receivables. The Servicer may also
perform other specific duties through subcontractors, with the prior consent of
the Security Insurer, if any (prior to an Insurer Default); provided, however,
that no such delegation of such duties by the Servicer shall relieve the
Servicer of its responsibility with respect thereto.
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SERVICER TERMINATION EVENTS
"Servicer Termination Events" under the Trust Documents will consist
of, among other things (except as otherwise provided in the related Prospectus
Supplement), (i) any failure by the Servicer to deliver to the Trustee for
distribution to Certificateholders or the Indenture Trustee for distribution to
Noteholders any proceeds or payment required to be so delivered to be so
delivered under the terms of the Certificates, the Trust Documents, the Notes or
the Indenture (or, for so long as NAFCO is the Servicer, the Purchase Agreement)
that continues unremedied for a period of two Business Days after written notice
is received by the Servicer from the Trustee, the Indenture Trustee or the
Security Insurer (if any), or after discovery of such failure by a responsible
officer of the Servicer; (ii) any failure by the Servicer to deliver to the
Trustee and the Indenture Trustee and the Security Insurer, if any (prior to an
Insurer Default), certain reports required by the Trust Documents by the fourth
Business Day prior to the related Distribution Date; (iii) failure on the part
of the Servicer duly to observe or perform in any material respect any other
covenants or agreements of the Servicer set forth in the Certificates, the Trust
Documents, the Notes or the Indenture (or, for so long as NAFCO is the Servicer,
the Purchase Agreement), which failure (A) materially and adversely affects the
rights of Securityholders (determined without regard to the availability of
funds under any Policy) or of the Security Insurer, if any (prior to an Insurer
Default), and (B) continues unremedied for a period of 30 days after the date on
which written notice of such failure, requiring the same to be remedied, shall
have been given to the Servicer by the Trustee, the Indenture Trustee or the
Security Insurer, if any (or, if an Insurer Default shall have occurred and be
continuing, any Securityholder); (iv)(A) the commencement of an involuntary case
under the federal bankruptcy laws with respect to the Servicer or the Seller, as
now or hereinafter in effect, or another present or future federal or state
bankruptcy, insolvency or similar law (the "Bankruptcy Laws"), and such case is
not dismissed within 60 days; or (B) the entry of a decree or order for relief
by a court or regulatory authority having jurisdiction in respect of the
Servicer or the Seller under the Bankruptcy Laws, or appointing a receiver,
liquidator, assignee, trustee, custodian, sequestrator or other similar official
of the Servicer or the Seller or of any substantial part of their respective
properties or ordering the winding up or liquidation of the affairs of the
Servicer or the Seller; (v) the commencement by the Servicer or the Seller of a
voluntary case under any Bankruptcy Law, or the consent by the Servicer or the
Seller to the appointment of or taking possession by a receiver, liquidator,
assignee, trustee, custodian, sequestrator or other similar official of the
Servicer or the Seller or of any substantial part of the Servicer's or the
Seller's property or the making by the Servicer or the Seller of an assignment
for the benefit of creditors or the failure by the Servicer or the Seller
generally to pay its debts as such debts become due or the taking of corporate
action by the Servicer or the Seller in furtherance of any of the foregoing;
(vi) any representation, warranty or statement of the Servicer made in the Trust
Documents or any certificate, report or other writing delivered pursuant thereto
shall prove to be incorrect in any material respect as of the time when the same
shall have been made, and the incorrectness of such representation, warranty or
statement has a material adverse effect (determined without regard to the
availability of funds under any Policy) on the Trust and, within 30 days after
written notice thereof shall have been given to the Servicer by the Trustee, the
Indenture Trustee or the Security Insurer, if any (or, if an Insurer Default
shall have occurred and be continuing, any Securityholder), the circumstances or
condition in respect of which such representation, warranty or statement was
incorrect shall not have been eliminated or otherwise cured; or (vii) if
applicable, unless an Insurer Default shall have occurred and be continuing, the
occurrence of an event of default under the Insurance Agreement.
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If a Servicer Termination Event occurs and is continuing, the Security
Insurer, if any (or, if no Policy was issued with respect to such series or an
Insurer Default shall have occurred and be continuing, the Trustee, the
Indenture Trustee (if any), or a Certificate Majority or a Note Majority), by
notice then given in writing to the Servicer (and to the Trustee and the
Indenture Trustee if given by the Security Insurer or the Securityholders) may
terminate all of the rights and obligations of the Servicer under the Trust
Documents. Immediately upon the giving of such notice, and, in the case of a
successor Servicer other than the Backup Servicer, the acceptance by such
successor Servicer of its appointment, all authority of the Servicer will pass
to the Backup Servicer or other successor Servicer. The Trustee, the Indenture
Trustee and the successor Servicer may set off and deduct any amounts owed by
the Servicer from any amounts payable to the outgoing Servicer.
On and after the time the Servicer receives a notice of termination,
the Backup Servicer or other successor Servicer will be the successor in all
respects to the Servicer and will be subject to all the responsibilities,
restrictions, duties and liabilities of the Servicer under the related Trust
Documents; provided, however, that the successor Servicer shall have no
liability with respect to any obligation which was required to be performed by
the prior Servicer prior to the date that the successor Servicer becomes the
Servicer or any claim of a third party (including a Securityholder) based on any
alleged action or inaction of the prior Servicer. If a Policy has been issued
with respect to the series, such Policy may permit the Security Insurer (prior
to an Insurer Default) to exercise at any time its right to appoint as Backup
Servicer or as successor to the Servicer a person other than the Backup Servicer
named in the related Prospectus Supplement. Notwithstanding the above, if the
Backup Servicer shall be legally unable or shall be unwilling to act as
Servicer, and if an Insurer Default shall have occurred or if no Policy was
issued with respect to such series, the Trustee, the Indenture Trustee, a
Certificate Majority or a Note Majority may petition a court of competent
jurisdiction to appoint any Eligible Servicer as the successor to the Servicer.
Pending any such appointment, the Backup Servicer shall act as successor
Servicer unless it is legally unable to do so, in which event the Trustee shall
act as Servicer until a successor has been appointed and accepted such
appointment. "Eligible Servicer" means a person which, at the time of its
appointment as Servicer, (A) is servicing a portfolio of motor vehicle retail
installment sale contracts and/or motor vehicle installment loans, (B) is
legally qualified and has the capacity to service the Receivables and (C) has
demonstrated the ability to service professionally and competently a portfolio
of motor vehicle retail installment sale contracts and/or motor vehicle
installment loans similar to the Receivables in accordance with high standards
of skill and care.
Any successor Servicer shall be entitled to such compensation payable
out of the Collection Account as the outgoing Servicer would have been entitled
to under the Trust Documents if the outgoing Servicer had not resigned or been
terminated.
Upon any termination of, or appointment of a successor to, the
Servicer, the Trustee and the Indenture Trustee (if any) will each give prompt
written notice thereof to Certificateholders and Noteholders, respectively, at
their respective addresses appearing in the Certificate Register or the Note
Register, to the Security Insurer, if any (prior to an Insurer Default) and to
each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, if a
Policy has been issued with respect to a series, the Security Insurer (or, if an
Insurer Default shall have occurred and be continuing, a Certificate Majority or
Note Majority) may waive any Servicer Termination Event.
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AMENDMENT
The Trust Documents will generally provide for amendment by the Seller,
the Servicer, the Trustee and the Indenture Trustee, if any, with the prior
written consent of the Security Insurer, if any (prior to an Insurer Default),
but without the consent of any of the Securityholders, to cure any ambiguity or
to correct or supplement any provision therein, provided that such action will
not, in the opinion of counsel (which may be internal counsel to the Seller,
NAFCO or the Servicer) reasonably satisfactory to the Trustee, the Security
Insurer, if any, and the Indenture Trustee, materially and adversely affect the
interests of the Securityholders. The Trust Documents may also be amended by the
Seller, the Servicer and the Trustee and the Indenture Trustee (if any), with
the prior written consent of the Security Insurer, if any (prior to an Insurer
Default), and a Certificate Majority and a Note Majority (if applicable), for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Trust Documents or of modifying, in any manner, the
rights of the Certificateholders or the Noteholders. 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 on any related Certificate or Note or the related
Pass-Through Rate or Interest Rate or (ii) reduce the percentage of the
Certificate Balance evidenced by Certificates or of the aggregate principal
amount of Notes then outstanding required to consent to any such amendment,
without the consent of the holders of all Certificates or all Notes, as the case
may be, then outstanding.
TERMINATION
With respect to each Trust, the Trust and the respective obligations of
the Seller, the Servicer, the Trustee and the Indenture Trustee pursuant to the
related Trust Documents will terminate upon the later of (i) the Distribution
Date or Payment Date, as the case may be, immediately following the maturity or
other liquidation of the last Receivable (including the Seller's or Servicer's
purchase of the Receivables, as described below), or (ii) payment to
Certificateholders and Noteholders of all amounts required to be paid to them
pursuant to the related Trust Documents and the related Indenture and the
payment to the Security Insurer, if any, of all amounts payable or reimbursable
to it pursuant to the related Insurance Agreement, if any, and in either case
there shall be delivered to the Trustee and the Indenture Trustee an opinion of
counsel that all applicable preference periods under federal, state and local
bankruptcy, insolvency and similar laws have expired with respect to the
payments made pursuant to clause (i) or (ii) above.
With respect to each series of Securities, in order to avoid excessive
administrative expense, the Seller and Servicer each will be permitted, at its
option (with the consent of the Security Insurer, if any (prior to an Insurer
Default), if such purchase would result in a claim on the Policy or in an amount
owing to the Security Insurer under the Insurance Agreement remaining unpaid),
to purchase from the Trust, on any Distribution Date immediately following an
Accounting Date as of which the Aggregate Principal Balance is equal to or less
than 10% (or such other percentage as may be specified in the related Prospectus
Supplement) of the Cutoff Date Principal Balance, all remaining Receivables in
the related Trust and the other remaining Trust Property at a price equal to the
aggregate of the Purchase Amounts therefor and the appraised value of any other
remaining Trust Property. The exercise of this right will effect an early
retirement of the related Certificates and Notes.
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Unless otherwise specified in the related Prospectus Supplement, the
Trust Agreement will provide that, in the event that the Seller becomes
insolvent, withdraws or is expelled as a Certificateholder or is terminated or
dissolved, the Trust will terminate in 90 days and effect redemption of the
Notes (if any) and prepayment of the Certificates following the winding-up of
the affairs of the related Trust, unless within such 90 days holders of 51% of
the Certificates of such series and the Security Insurer, if any, agree in
writing to the continuation of the business of the Trust and to the appointment
of a successor to the Seller, and the Trustee is able to obtain an opinion of
counsel satisfactory to the Security Insurer (if any) to the effect that the
Trust will not thereafter be an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. Prepayment of the
Securities resulting from the early termination of the related Trust could
result in the Securityholders receiving unexpected principal payments at a time
when the Securityholders are unable to reinvest such payments in investments
having a yield and rating comparable to the yield and rating on the Securities.
With respect to each series of Securities, the Trustee will give
written notice of the final distribution with respect to the Certificates to
each Certificateholder of record and the Indenture Trustee will give written
notice of the final payment with respect to the Notes (if any), to each
Noteholder of record. The final distribution to any Certificateholder and the
final payment to any Noteholder will be made only upon surrender and
cancellation of such holder's Certificate or Note at the office or agency of the
Trustee, with respect to Certificates, or of the Indenture Trustee, with respect
to Notes, specified in the notice of termination. Any funds remaining in the
Trust, after the Trustee or the Indenture Trustee has taken certain measures to
locate a Certificateholder or Noteholder, as the case may be, and such measures
have failed, will be distributed to the Seller, and the Certificateholders and
Noteholders, by acceptance of their Certificates and Notes, will waive any
rights with respect to such funds.
LIMITATIONS ON RIGHTS OF SECURITYHOLDERS
Until such time as an Insurer Default shall have occurred and is
continuing, the Security Insurer will have certain rights to take actions, elect
remedies and instruct the Trustee under the Trust Documents to the exclusion of
the exercise of such rights by the Securityholders, including, among other
things, the right to consent to the engagement of subservicers, the right to
terminate the Servicer in the event of a Servicer Termination Event, and the
right to waive defaults under the Trust Documents.
THE TRUSTEE
The Trustee for each Trust will be specified in the related Prospectus
Supplement. The Trustee, in its individual capacity or otherwise, and any of its
affiliates may hold Certificates or Notes in their own names or as pledgee. In
addition, for the purpose of meeting the legal requirements of certain
jurisdictions, the Trustee, with the consent of the Servicer and the Security
Insurer, if any (so long as an Insurer Default shall not have occurred and be
continuing), shall have the power to appoint co-trustees or separate trustees of
all or any part of the related Trust. In the event of such appointment, all
rights, powers, duties and obligations conferred or imposed upon the Trustee by
the related Trust Documents will be conferred or imposed upon the Trustee and
such separate trustee or co-trustee jointly, or, in any jurisdiction where the
Trustee is incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who shall exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee.
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The Trustee of any trust may resign at any time, in which event the
Seller, or if so specified in the related Prospectus Supplement, the Servicer or
its successor will be obligated to appoint a successor trustee, acceptable to
the Security Insurer, if any (prior to an Insurer Default). The Seller, or if so
specified in the related Prospectus Supplement, the Servicer may also remove the
Trustee, with the prior written consent of the Security Insurer, if any (prior
to an Insurer Default), if the Trustee ceases to be eligible to serve, becomes
legally unable to act, is adjudged insolvent or is placed in receivership or
similar proceedings. In such circumstances, the Seller, or if so specified in
the related Prospectus Supplement, the Servicer will be obligated to appoint a
successor trustee, acceptable to the Security Insurer, if any (prior to an
Insurer Default). Any resignation or removal of the Trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by the successor trustee.
DUTIES OF THE TRUSTEE
The Trustee will make no representation as to the validity or
sufficiency of any Trust Document, the Certificates or the Notes (other than its
execution of the Certificates and the Notes), the Receivables, the Policy, if
any, or any related documents, and will not be accountable for the use or
application by the Servicer of any funds paid to the Servicer in respect of the
Certificates, the Notes or the Receivables prior to deposit in the related
Collection Account.
The Trustee will be required to perform only those duties specifically
required of it under the Trust Documents. Generally, those duties will be
limited to the receipt of the various certificates, reports or other instruments
required to be furnished by the Servicer to the Trustee under the Trust
Documents, in which case it will only be required to examine such certificates,
reports or instruments to determine whether they conform substantially to the
requirements of the Trust Documents.
The Trustee will be under no obligation to exercise any of the rights
or powers vested in it by the Trust Documents or to institute, conduct, or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the Certificateholders or Noteholders, unless such
Certificateholders or Noteholders have offered the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby. No Certificateholder nor any Noteholder will have any right
under the Trust Documents to institute any proceeding with respect to such Trust
Documents, unless such holder has given the Trustee written notice of default
and unless the holders of Certificates evidencing not less than 25% of the
Certificate Balance or the holders of Notes evidencing not less than 25% of the
aggregate principal balance of the Notes then outstanding, as the case may be,
have made written request to the Trustee to institute such proceeding in its own
name as Trustee thereunder and have offered to the Trustee reasonable indemnity,
and the Trustee for 30 days after the receipt of such notice, request and offer
to indemnify has neglected or refused to institute any such proceedings.
Certificateholders and Noteholders will not have the right to make a claim
directly under any Policy issued with respect to such series, but in the event
that the Trustee or the Indenture Trustee fails to make such a claim,
Certificateholders and Noteholders may compel the Trustee or the Indenture
Trustee, as applicable, to do so.
THE BACKUP SERVICER
The Backup Servicer for each Trust will be specified in the related
Prospectus Supplement, although the Security Insurer, if any (prior to an
Insurer Default), may exercise its
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right at any time to appoint another Backup Servicer. While NAFCO is the
Servicer, the Backup Servicer will not be liable or responsible for any
obligation of the Servicer, and the Certificateholders and Noteholders may look
only to NAFCO to perform such obligations. The Backup Servicer will be required
to verify the monthly Servicer's Certificate each month, to notify the
Certificateholders, Noteholders and the Security Insurer (if any) of any item
that appears substantially out of the ordinary, and to seek a written
explanation thereof from the Servicer; however, neither the Trustee nor the
Backup Servicer will be required to otherwise monitor the Servicer. Upon the
Servicer's receipt of a termination notice after the occurrence of a Servicer
Termination Event, the Backup Servicer will automatically become the Servicer,
unless the Security Insurer, if any (prior to an Insurer Default), shall have
appointed a different Backup Servicer or successor Servicer. To facilitate the
transfer of servicing responsibility, the Servicer will deliver to the Trustee
and the Backup Servicer each month a computer tape containing information with
respect to the Receivables.
ADMINISTRATOR
If an Administrator (the "Administrator") is specified in the related
Prospectus Supplement, such Administrator will enter into an agreement (the
"Administration Agreement") pursuant to which such Administrator will agree, to
the extent provided in such Administration Agreement, to provide the notices and
to perform other administrative obligations require by the related Indenture and
the Trust Agreement.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
The following discussion contains summaries of certain legal aspects of
consumer motor vehicle retail installment sale contracts that are general in
nature. Because such legal aspects are governed by applicable state law (which
laws may differ substantially), the summaries do not purport to be complete nor
to reflect the laws of any particular state, nor to encompass the laws of all
states in which the security for the Receivables is located. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the Receivables and the Financed Vehicles.
RIGHTS IN THE RECEIVABLES
The Receivables are "chattel paper" as defined in the UCC as in effect
in the States of Florida and Delaware. Pursuant to the UCC, an ownership
interest in chattel paper may be perfected by possession or by filing a UCC-1
financing statement in the state where the seller's principal executive office
is located. Accordingly, financing statements covering the Receivables will be
filed by the NAFCO Transferors in Florida and by the Seller in Florida and
Delaware. In addition, the documents evidencing the Receivables initially will
be held by OFSA or any other Custodian specified in the related Prospectus
Supplement on behalf of the related Trust.
The Servicer will be obligated from time to time to take such actions
as are necessary to continue the perfection of each Trust's interest in the
related Receivables and the proceeds thereof. The Originators will warrant in
each Purchase Agreement with respect to the Receivables held by the related
Trust, and in the related Trust Document the Seller will assign the right to
enforce such warranties to the Trustee on behalf of such Trust and the Trustee
will pledge such right to the Indenture Trustee as collateral for the Notes, if
any, that, as of the Closing Date, such Receivables have not been sold, pledged
or assigned by the Originator or the Seller to any other person, and that it has
good and indefeasible title thereto and is the sole
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owner thereof free of any Liens and that, immediately upon the transfer of the
Receivables to such Trust pursuant to the related Trust Document, the Trust will
have good and indefeasible title to and will be the sole owner of the
Receivables, free of any Liens. In the event of an uncured breach of any of such
warranties in a Purchase Agreement that materially and adversely affects the
related Trust's, Security Insurer's (if any), Certificateholders' or
Noteholders' interest in any Receivable (a "Repurchase Event"), the applicable
Originator will be obligated to repurchase such Receivable.
Unless otherwise specified in the related Prospectus Supplement, OFSA
as designee of NAFCO under a Custodial Agreement, on behalf of each Trust, will
hold the original installment sale contract as well as copies of documents and
instruments relating to each Receivable and evidencing the security interest in
the Financed Vehicle securing each Receivable (the "Receivable Files"). In order
to protect the Trust's ownership interest in the Receivables, the Originators
will file UCC-1 financing statements in Florida and the Seller will file UCC-1
financing statements in Florida and Delaware to give notice of such Trust's
ownership of the related Receivables and the related Trust Property. If held by
OFSA, the Receivable Files will not be segregated and will not be stamped or
otherwise marked to indicate that such Receivables have been sold to the related
Trust.
The Receivable Files, if held by NAFCO as custodian, will be stamped or
otherwise marked to indicate that such Receivables have been sold to the related
Trust. Despite this precaution, if, through inadvertence or otherwise, any of
the Receivables were sold to another party (or a security interest therein were
granted to another party) that purchased (or took such security interest in) any
of such Receivables in the ordinary course of its business and took possession
of such Receivables, the purchaser (or secured party) would acquire an interest
in the Receivables superior to the interest of the related Trust if the
purchaser (or secured party) acquired (or took a security interest in) the
Receivables for new value and without actual knowledge of such Trust's interest.
See "Description of the Purchase Agreements and the Trust Documents - Custody of
Receivable Files"
SECURITY INTERESTS IN THE FINANCED VEHICLES
Security interests in the Financed Vehicles must be perfected by
notation of the secured party's lien on the certificate of title or by such
notation on or actual possession of the certificate of title, depending on the
law of the state wherein the purchaser resides. The practice of NAFCO is to take
such action as is required to perfect its security interest under the laws of
the state in which the Financed Vehicle is registered. In the event of clerical
errors, administrative delays or otherwise, such actions may not have been taken
with respect to a Financed Vehicle and such security interest may be subordinate
to the interests of, among others, subsequent purchasers of the Financed
Vehicles, holders of perfected security interests in the Financed Vehicle, and
the trustee in bankruptcy of the Obligor. However, such failure would give rise
to a Repurchase Event and obligate NAFCO to repurchase the affected Receivable
if the interests of the related Certificateholders, Noteholders or Trust were
materially and adversely affected.
Pursuant to the related Trust Document, the Seller will assign the
security interests in the Financed Vehicles assigned to it by the Originators or
the special-purpose subsidiary of NAFCO that was assigned the security interest
by the Originators under the related Purchase Agreement to the Trustee on behalf
of the related Trust. However, because of the administrative burden and expense
that would be entailed in doing so, none of the Originators, the Seller, the
Trustee or the Servicer will be required, except to the extent provided below,
to amend the certificates
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of title (or other lien certificates) to identify the Trustee (or the Seller) as
the new secured party and, accordingly, the applicable Originator will continue
to be named as the secured party on the certificates of title (or other lien
certificate) relating to the Financed Vehicles. Further, the Servicer will be
required to note the interest of the related Trust on the certificates of title
for the Financed Vehicles only upon a Servicer Termination Event, or in an event
of default under the Insurance Agreement, if any (prior to an Insurer Default),
or (under certain circumstances and unless an Insurer Default shall have
occurred and be continuing) at the request of the Security Insurer, if any. In
most states, an assignment such as that under the related Trust Documents should
be an effective transfer of a security interest without amendment of any lien
noted on the related certificate of title, and the assignee should succeed to
the assignor's status as the secured party. In the absence of fraud or forgery
by the Obligor or administrative error by state recording officials, the
notation of the lien of the Originator on the certificate of title should be
sufficient to protect the related Trust against the rights of subsequent
purchasers of a vehicle or subsequent lenders who take a security interest in
the related Financed Vehicle. However, in the absence of such an amendment, the
security interest of the related Trust in the related Financed Vehicles might be
defeated by, among others, the trustee in bankruptcy of the Originator or the
Obligor. However, such failure would give rise to a Repurchase Event and
obligate the Originator to repurchase the affected Receivable if the interest of
the related Certificateholders, the Security Insurer, if any, Noteholders or
Trust were materially and adversely affected.
In most states, a perfected security interest in a motor vehicle
continues for four months after the vehicle is moved to a different state and
thereafter until the owner re-registers the motor vehicle in the new state, but
in no event beyond the surrender of the certificate of title. A majority of
states require surrender of a certificate of title to re-register a motor
vehicle. Accordingly the secured party most surrender possession if it holds the
certificate of title to such vehicle. In the case of motor vehicles registered
in states which provide for notation of a lien but not possession of the
certificate of title by the holder of the security interest in the related motor
vehicle, the secured party should receive notice of surrender if the security
interest in the vehicle is noted on the certificate of title. Accordingly, the
secured party should have the opportunity to re-perfect its security interest in
the vehicle in the state of relocation. In states that do not require a
certificate of title for registration of a motor vehicle, re-registration could
defeat perfection.
In the ordinary course of servicing its receivables portfolio, it is
the practice of NAFCO to effect such re-perfection upon receipt of notice or
information from the Obligor as to relocation. Similarly, when an Obligor sells
a Financed Vehicle, NAFCO must surrender possession of the certificate of title
or receive notice as a result of its lien noted thereon and accordingly should
have an opportunity to require satisfaction of the related Receivable before
release of the lien. Under the related Trust Document, the Servicer will be
obligated to take such steps, at the Servicer's expense, as are necessary to
maintain perfection of security interest in such Financed Vehicle, and the
failure to take such steps would obligate the Servicer to purchase the related
Receivable if such failure materially and adversely affects the interests of the
related Certificateholders, the Security Insurer, if any, Noteholders and Trust
in such Receivables.
Under the laws of most states, liens for repairs performed on a motor
vehicle and liens for unpaid taxes take priority over even a perfected security
interest in a motor vehicle. The Seller in the related Trust Document (and the
Originator in the related Purchase Agreement) will represent that, immediately
prior to the sale, assignment and transfer thereof to the related Trust,
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each Receivable held by such Trust was secured by a valid, subsisting and
enforceable first priority perfected security interest in favor of the Seller
(or the Originator), as secured party. However, liens for taxes, judicial liens
or liens arising by operation of law could arise at any time during the term of
a Receivable. In addition, the laws of certain states and federal law permit the
confiscation of motor vehicles by governmental authorities under certain
circumstances if used in unlawful activities, which may result in the loss of a
secured party's perfected security interest in the confiscated motor vehicle. No
notice will be given to the Trustee, Indenture Trustee, Certificateholders or
Noteholders in the event such a lien or confiscation arises, and if such lien
arises or confiscation occurs after the date of issuance of any series of
Certificates and Notes, neither the Originator nor the Servicer will be required
to repurchase or purchase the related Receivable.
REPOSSESSION
In the event of default by an Obligor, the owner of a retail
installment sale contract or installment loan has all the remedies of a secured
party under the UCC, except where specifically limited by other state laws. The
remedies of a secured party under the UCC include the right to repossession by
self-help means, unless such means would constitute a breach of the peace.
Self-help repossession is the method employed by NAFCO in most cases and is
accomplished simply by taking possession of the motor vehicle. In the event of
default by the Obligor, some jurisdictions require that the Obligor be notified
of the default and be given a time period within which he may cure the default
prior to repossession. In cases where the Obligor objects or raises a defense to
repossession, or if otherwise required by applicable state law, a court order
must be obtained from the appropriate state court, and the vehicle must then be
repossessed in accordance with that order. Other jurisdictions permit
repossession without notice, but only if the repossession can be accomplished
peacefully. If a breach of the peace cannot be avoided, judicial action is
required. A secured party may be held responsible for damages caused by a
wrongful repossession of a vehicle, including, in Florida, a wrongful
repossession conducted by an agent of the secured party. The Servicer will be
required to indemnify the related Trust for any liability imposed upon such
Trust as a result of a wrongful repossession. In Texas and many other states, a
vehicle may be repossessed without notice to the Obligor, but only if the
repossession can be accomplished without a breach of the peace.
NOTICE OF SALE; REDEMPTION RIGHTS
The UCC and various other state laws require a secured party who has
repossessed the collateral securing an obligation to provide an obligor 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. The obligor has the
right to redeem the collateral prior to actual sale by paying the secured party
the entire unpaid time balance of the obligation (less any unaccrued finance
charges) plus accrued default charges, reasonable expenses for repossessing,
holding and preparing the collateral for disposition and arranging for its sale,
plus, to the extent provided in the financing documents, reasonable attorneys'
fees, or in some states, by payment of delinquent installments or the unpaid
principal balance of the related obligation.
DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
The proceeds of resale of Financed Vehicles generally will be applied
first to the expense of repossession and resale and then to the satisfaction of
the related Receivables. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale
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do not cover the full amount of the indebtedness, a deficiency judgment can be
sought in other states that do not prohibit or limit such judgments, subject to
satisfaction of statutory procedural requirements by the holder of the
obligation. However, any deficiency judgment would be a personal judgment
against the Obligor for the shortfall, and a defaulting Obligor can be expected
to 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 significant
discount or not paid at all. NAFCO generally seeks to recover any deficiency
existing after repossession and sale of a Financed Vehicle.
Occasionally, after resale of a repossessed motor vehicle, and payment
of all expenses and indebtedness, there is a surplus of funds. In that case, the
law of most states requires the secured party to remit the surplus to any holder
of another lien with respect to the vehicle, if proper notification of demand
for proceeds is received prior to distribution, or, if no such lienholder
exists, to remit the surplus to the former owner of the motor vehicle.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
The Relief Act imposes certain limitations upon the actions of
creditors with respect to persons serving in the Armed Forces of the United
States and, to a more limited extent, their dependents and guarantors and
sureties of debt incurred by such persons. An obligation incurred by a person
prior to entering military service cannot bear interest at a rate in excess of
6% during the person's term of military service, unless the obligee petitions a
court which determines that the person's military service does not impair his or
her ability to pay interest at a higher rate. Further, a secured party may not
repossess during a person's military service a motor vehicle subject to an
installment sale contract entered into prior to the person's entering military
service, for a loan default which occurred prior to or during such service,
without court action. The Relief Act imposes penalties for knowingly
repossessing property in contravention of its provisions. Additionally,
dependents of military personnel are entitled to the protection of the Relief
Act, upon application to a court, if such court determines the obligation of
such dependent has been materially impaired by reason of the military service.
To the extent an obligation is unenforceable against the person in military
service or a dependent, any guarantor or surety of such obligation will not be
liable for performance.
CONSUMER PROTECTION LAWS
Numerous Federal and state consumer protection laws and related
regulations impose substantive and disclosure requirements upon lenders and
servicers involved in consumer finance. Some of the Federal laws and regulations
include the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal
Trade Commission Act, the Fair Credit Reporting Act, the Fair Debt Collection
Practices Act, the Motor Vehicle Information and Cost Savings Act (the "Odometer
Act"), the Magnuson-Moss Warranty Act, and the Federal Reserve Board's
Regulations B and Z.
In addition to Federal law, state consumer protection statutes
regulate, among other things, the terms and conditions of the motor vehicle
retail installment contracts pursuant to which purchasers finance the
acquisition of motor vehicles. These laws place finance charge ceilings on the
amount that a creditor may charge in connection with financing the purchase of
an automobile. These laws also impose other restrictions on consumer
transactions and require contract disclosures in addition to those required
under federal law. These requirements impose specific statutory liabilities upon
creditors who fail to comply. In some cases, this liability could
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affect the ability of an assignee, such as the Trustee, to enforce consumer
finance contracts such as the Receivables. The "Credit Practices" Rule of the
Federal Trade Commission (the "FTC") imposes additional restrictions on contract
provisions and credit practices.
The FTC's so-called holder-in-due-course rule has the effect of
subjecting persons that finance consumer credit transactions (and certain
related lenders and their assignees) to all claims and defenses which the
purchaser could assert against the seller of the goods and services. An
assignee's affirmative liability to pay money to such aggrieved purchaser in the
event of a successful claim is limited to amounts paid by the purchaser under
the consumer credit contract. However, the assignee's ability to collect any
balance remaining due thereunder is subject to these claims and defenses.
Accordingly, each Trust, as assignee of the related Receivables, will be subject
to claims or defenses, if any, that the purchaser of the related Financed
Vehicle may assert against the seller of such vehicle. Under the motor vehicle
dealer licensing laws of most states, sellers of motor vehicles are required to
be licensed to sell motor vehicles at retail.
In addition, with respect to used vehicles, the FTC's Rule on Sale of
Used Vehicles requires that all sellers of used vehicles prepare, complete, and
display a "Buyer's Guide" which explains the warranty coverage for such
vehicles. Federal regulations promulgated under the Odometer Act require that
all sellers of used vehicles furnish a written statement signed by the seller
certifying the accuracy of the odometer readings. If a seller is not properly
licensed or if either a Buyer's Guide or odometer disclosure statement was not
provided to the purchaser of a Financed Vehicle, the purchaser may be able to
assert a defense as to a retail installment sale contract against the seller of
the motor vehicle.
Courts have applied general equitable principles to secured parties
pursuing repossession or litigation involving deficiency balances. These
equitable principles may have the effect of relieving an Obligor from some or
all of the legal consequences of a default.
The Seller will warrant in the related Trust Document (and the
Originator will warrant in the related Purchase Agreement) that as of the date
of origination each Receivable held by the related Trust complied with all
requirements of applicable law in all material respects. Accordingly, if such
Trust's interest in a Receivable were materially and adversely affected by a
violation of any such law, such violation would constitute a Repurchase Event
and would obligate the Originator to repurchase the Receivable unless the breach
were cured. Under each Purchase Agreement, the Originator will be required to
indemnify the related Trust for any liability resulting from the failure of a
Receivable to be in compliance with all requirements of law. See "Description of
the Purchase Agreements and the Trust Documents--Sale and Assignment of the
Receivables."
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including Federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a lender to
realize upon collateral or enforce a deficiency judgment. For example, in a
proceeding under Chapter 13 of the U.S. Bankruptcy Code of 1978, as amended, a
court may prevent a lender from repossessing a motor vehicle, and as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the market
value of the motor vehicle at the time of bankruptcy (as determined by the
court), leaving the party providing financing as a general unsecured creditor
for the remainder of the indebtedness. A bankruptcy
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court may also reduce the monthly payments due under a contract, change the rate
of interest and time of repayment of the indebtedness or substitute collateral
securing such indebtedness.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the Notes
and the Certificates of any series thereof, to the extent it relates to matters
of law or legal conclusions with respect thereto, represents the opinion of
Thacher Proffitt & Wood, special federal tax counsel for the Seller ("Federal
Tax Counsel") subject to the qualifications set forth herein. This summary is
directed solely to prospective investors that hold Notes or Certificates as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986 (the "Code") and does not purport to discuss all federal income tax
consequences that may be applicable to particular categories of investors, some
of which (such as banks, insurance companies and foreign investors) may be
subject to special rules. Further, the authorities on which this discussion, and
the opinion referred to below, are based are subject to change or differing
interpretations, which could apply retroactively. Taxpayers and preparers of tax
returns should be aware that under applicable Treasury regulations a provider of
advice on specific issues of law is not considered an income tax return preparer
unless the advice (i) is given with respect to events that have occurred at the
time the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (ii) is directly relevant to the determination of an
entry on a tax return. Accordingly, taxpayers should consult their own tax
advisors and tax return preparers regarding the preparation of any item on a tax
return, even where the anticipated tax treatment has been discussed herein.
Prospective investors should note that no rulings have been or will be
sought from the Internal Revenue Service (the "IRS") with respect to any of the
federal income tax consequences discussed below, and no assurance can be given
the IRS will not take contrary positions. Moreover, there are no cases or IRS
rulings on similar transactions involving both debt and equity interests issued
by a trust with terms similar to those of the Notes and the Certificates. As a
result, the IRS may disagree with all or part of the discussion below. The
Placement Agent, NAFCO and the Seller make no representations regarding the tax
consequences of purchase, ownership or disposition of the Notes or Certificates
under the tax laws of any state, locality or foreign jurisdiction. Investors
considering an investment in the Notes or Certificates should consult their own
tax advisors regarding such tax consequences.
The following summary is based upon current provisions of the Code, the
Treasury regulations promulgated thereunder and judicial or ruling authority,
all of which are subject to change, which change may be retroactive. The opinion
of Federal Tax Counsel, however, is not binding on the IRS or the courts. No
ruling on any of the issues discussed below will be sought from the IRS. For
purposes of the following summary, references to the Trust, the Notes, the
Certificates and related terms, parties and documents shall be deemed to refer,
unless otherwise specified herein, to each Trust and the Notes, Certificates and
related terms, parties and documents applicable to such Trust. In addition, for
purposes of this tax discussion, references to a "Certificateholder" or a
"holder" are to the beneficial owner of a Certificate.
Certain Certificates ("Debt Certificates") may be issued hereunder that
are intended to be treated as indebtedness for federal income tax purposes. In
that event, the applicable Prospectus Supplement will disclose that intended
treatment. For purposes of this summary,
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references to Notes and Noteholders are intended in all respects to refer to
Debt Certificates and holders thereof, including references to opinions as to
federal income tax matters that will be delivered in connection with issuance of
Notes. Conversely, references in this summary to Certificates and
Certificateholders are not intended to refer to Debt Certificates and holders
thereof.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271-1273 and 1275 of the
Code and in the Treasury regulations issued thereunder (the "OID Regulations").
The OID Regulations do not adequately address certain issues relevant to, and in
some instances provide that they are not applicable to, securities such as the
Certificates.
The federal income tax consequences to Certificateholders will vary
depending on whether the Trust will be treated as a partnership or as a grantor
trust under the Code. The Prospectus Supplement for each series of
Certificateholders will specify whether the Trust will be treated as a
partnership or a grantor trust for federal income tax purposes.
TRUSTS CLASSIFIED AS PARTNERSHIPS
CLASSIFICATION OF PARTNERSHIP TRUST FUNDS
With respect to each series in which the related Trust is intended to
be classified as a partnership, Federal Tax Counsel will give its opinion that,
assuming compliance with all provisions of the related Trust Agreement and
related documents, the related Trust will be classified as a partnership and
will not be classified as an association or publicly traded partnership taxable
as a corporation for federal income tax purposes. The following general
discussion of the anticipated federal income tax consequences of the purchase,
ownership and disposition of Notes and Certificates, to the extent it relates to
matters of law or legal conclusions with respect thereto, represents the opinion
of Federal Tax Counsel, subject to any qualifications set forth herein. In
addition, Special Tax Counsel have prepared or reviewed the statements in this
Prospectus under the heading "Certain Federal Income Tax Consequences," and are
of the opinion that such statements are correct in all material respects. Such
statements are intended as an explanatory discussion of the possible effects of
the characterization of the Notes as indebtedness and the classification of each
Trust as a partnership for federal income tax purposes on investors generally
and of related tax matters affecting investors generally, but do not purport to
furnish information in the level of detail or with the attention to an
investor's specific tax circumstances that would be provided by an investor's
own tax advisor. Accordingly, each investor is advised to consult its own tax
advisors with regard to the tax consequences to it of investing in Notes or
Certificates. This opinion will be based on the assumption that the terms of the
related Trust Agreement and related documents will be complied with, and on
counsel's conclusions that the (1) Trust will not have certain characteristics
necessary for a business trust to be classified as an association taxable as a
corporation or as a publicly traded partnership taxable as a corporation or (2)
if Certificates (other than Debt Certificates) are publicly traded, the nature
of the income of the Trust will exempt it from the rule that certain publicly
traded partnerships are taxable as corporation.
If the Trust were taxable as a corporation for federal income tax
purposes, the Trust would be subject to corporate income tax on its taxable
income. The Trust's taxable income would include all its income on the
Receivables, possibly reduced by its interest expense on the Notes. Any such
corporate income tax could materially reduce cash available to make payments
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on the Notes and distributions on the partnership Certificates, and Noteholders
or Certificateholders could be liable for any such tax that is unpaid by the
Trust. In addition, if contrary to the opinion of Federal Tax Counsel, the IRS
successfully asserted that one or more of the Notes did not represent debt for
federal income tax purposes, the Notes might be treated as equity interest in
the Trust. If so treated, the Trust might be an association or a publicly traded
partnership taxable as a corporation with the adverse consequences described
above (and the taxable corporation would not be able to reduce its taxable
income by deductions for interest expense on Notes recharacterized as equity).
See "Trusts Classified as Partnerships". Alternatively, the Trust might be
treated as a publicly traded partnership that would not be taxable as a
corporation if it met certain qualifying income tests. Nonetheless, treatment of
the Notes as equity interests in such a publicly traded partnership could have
adverse tax consequences to certain holders. For example, income to certain
tax-exempt entities (including pension funds) would be "unrelated business
taxable income," income to foreign holders generally would be subject to U.S.
tax and U.S. tax return filing and withholding requirements, and individual
holders might be subject to certain limitations on their ability to deduct their
share of Trust expenses.
TAXATION OF NOTEHOLDERS
TREATMENT OF THE NOTES AND DEBT CERTIFICATES AS INDEBTEDNESS
NAFCO, the Seller and the Noteholders will agree by their purchase of
Notes, to treat the Notes (which term includes, for purposes of the discussion,
Debt Certificates) as debt for federal income tax purposes. No regulations,
published rulings, or judicial decisions exist that discuss the characterization
for federal income tax purposes of securities with terms substantially the same
as the Notes. However, with respect to each series of Notes, Federal Tax Counsel
will, except as otherwise provided in the related Prospectus Supplement, deliver
its opinion that the Notes will be classified as indebtedness for federal income
tax purposes. The discussion below assumes this characterization of the Notes is
correct.
If, contrary to the opinion of Federal Tax Counsel, the IRS
successfully asserted that the Notes were not debt for federal income tax
purposes, the Notes might be treated as equity interests in the Partnership
Trust. If so, the Partnership Trust Fund might be taxable as a corporation with
the adverse consequences described above (and the taxable corporation would not
be able to deduct interest on the Notes).
OID, INDEXED SECURITIES, ETC. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID Regulations relating to original issue discount, and
that any original issue discount on the Notes (I.E., any excess of the principal
amount of the Notes over their issue price) does not exceed a DE MINIMIS amount
(I.E., 1/4% of their principal amount multiplied by the number of full years
included in their term), all within the meaning of the OID Regulations. If these
conditions are not satisfied with respect to any given series of Notes,
additional tax considerations with respect to such Notes will be disclosed in
the applicable Prospectus Supplement.
INTEREST INCOME ON THE NOTES. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued
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in accordance with such Noteholder's method of tax accounting. Under the OID
regulations, a holder of a Note issued with a de minimis amount of OID must
include such OID in income, on a pro rata basis, as principal payments are made
on the Note. Although not entirely clear, it appears that any prepayment premium
paid as a result of a mandatory redemption will be taxable as contingent
interest when it becomes fixed and unconditionally payable. A purchaser who buys
a Note for more or less than its principal amount will generally be subject,
respectively, to the premium amortization or market discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain cash
method holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a Short-Term Note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
ShortTerm Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
SALE OR OTHER DISPOSITION. If a Noteholder sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition cap, discount,
OID, if any, and gain previously included by such Noteholder in income with
respect to the Note and decreased by the amount of bond premium (if any)
previously amortized and by the amount of principal payments previously received
by such Noteholder with respect to such Note. Any such gain or loss will be
capital gain or loss if the Note was held as a capital asset, except for gain
representing accrued interest and accrued market discount not previously
included in income. The Code as of the date of this Prospectus provides for a
top marginal tax rate of 39.6% for individuals and a maximum marginal rate for
long-term capital gains of individuals of 28%. No such rate differential exists
for corporations. In addition, the distinction between a capital gain or loss
and ordinary income or loss remains relevant for other purposes.
FOREIGN HOLDERS. Interest payments made (or accrued) to a Noteholder
who is a nonresident alien, foreign corporation or other non-United States
person (a "foreign person") generally will be considered "portfolio interest",
and generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the Trust or the Seller (including a holder of 10% of the outstanding
Certificates) or a "controlled foreign corporation" with respect to which the
Trust or the Seller is a "related person" within the meaning of the Code and
(ii) provides the Owner Trustee or other person who is otherwise required to
withhold U.S. tax with respect to the Notes with an appropriate statement (on
Form W-8 or a similar form), signed under penalties of perjury, certifying that
the beneficial owner of the Note is a
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foreign person and providing the foreign person's name and address. If a Note is
held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant signed
statement to the withholding agent; in that case, however, the signed statement
must be accompanied by a Form W-8 or substitute form provided by the foreign
person that owns the Note. If such interest is not portfolio interest, then it
will be subject to United States federal income and withholding tax at a rate of
30 percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
BACKUP WITHHOLDING. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust will be required to withhold 31
percent of the amount otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the
opinion of Federal Tax Counsel, the IRS successfully asserted that one or more
of the Notes did not represent debt for federal income tax purposes, the Notes
might be treated as equity interest in the Trust. If so treated, the Trust might
be an association or a publicly traded partnership taxable as a corporation with
the adverse consequences described above (and the taxable corporation would not
be able to reduce its taxable income by deductions for interest expense on Notes
recharacterized as equity). See "Trusts Classified as Partnerships".
Alternatively, the Trust might be treated as a publicly traded partnership that
would not be taxable as a corporation if it met certain qualifying income tests.
Nonetheless, treatment of the Notes as equity interests in such a publicly
traded partnership could have adverse tax consequences to certain holders. For
example, income to certain tax-exempt entities (including pension funds) would
be "unrelated business taxable income," income to foreign holders generally
would be subject to U.S. tax and U.S. tax return filing and withholding
requirements, and individual holders might be subject to certain limitations on
their ability to deduct their share of Trust expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Certificates generally will be subject to the same rules of taxation as
Notes issued by a Trust, as described above. See "TAXATION OF
NOTEHOLDERS--TREATMENT OF THE NOTES AND DEBT CERTIFICATES AS INDEBTEDNESS".
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TAXATION OF OWNERS OF PARTNERSHIP
TREATMENT OF THE TRUST AS A PARTNERSHIP. If so specified in the related
Prospectus Supplement, the Seller and NAFCO will agree, and the
Certificateholders will agree by their purchase of Certificates, to treat the
Trust as a partnership for purposes of federal and state income tax, franchise
tax and any other tax measured in whole or in part by income, with the assets of
the partnership being the assets held by the Trust, the partners of the
partnership being the Certificateholders (including the Seller), and the Notes
being debt of the partnership. However, the proper characterizations of the
arrangement involving the Trust, the Certificates, the Notes, the Seller and
NAFCO is not clear because there is no authority on transactions closely
comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates may have certain features characteristic of debt, the
Certificates might be considered debt of the Seller or the Trust. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership and not in an association or publicly traded partnership taxable as
a corporation. See "Trusts Classified as Partnerships" and "Treatment of the
Notes and Debt Certificates as Indebtedness - Possible Alternative Treatments of
the Notes".
INDEXED SECURITIES, ETC. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
PARTNERSHIP TAXATION. As a partnership, the Trust will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. In certain instances, however, the
Trust could have an obligation to make payments of withholding tax on behalf of
a Certificateholder. See "TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS" and
"BACKUP WITHHOLDING" below. The Trust's income will consist primarily of
interest and finance charges earned on the Receivables (including appropriate
adjustments for market discount, original issue discount and bond premium) and
any gain upon collection or disposition of Receivables. The Trust's deductions
will consist primarily of interest accruing with respect to the Notes, servicing
and other fees, and losses or deductions upon collection or disposition of
Receivables.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Documents). Unless otherwise disclosed in the applicable
Prospectus Supplement, the Trust Agreement will provide, in general, that the
Certificateholders will be allocated taxable income of the Trust for each month
equal to the sum of (i) the interest that accrues on the Certificates in
accordance with their terms for such month, including interest accruing at the
Pass Through Rate for such month and interest on amounts previously due on the
Certificates but not yet distributed; (ii) any Trust income attributable to
discount on the Receivables that corresponds to the economic accrual of any
discount on the Certificates, if the initial principal amount of the Certificate
exceed their
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initial price; (iii) prepayment premium payable to the Certificateholders for
such month; and (iv) any other amounts of income payable to the
Certificateholders for such month. Such allocation will be reduced by the
economic amortization of premium on certificates that corresponds to any excess
of the initial price of Certificates over their initial principal amount. All
remaining taxable income of the Trust will be allocated to the Seller. Based on
the economic arrangement of the parties, this approach for allocating Trust
income should be permissible under applicable Treasury regulations, although no
assurance can be given that the IRS would not require a greater amount of income
to be allocated to Certificateholders. Moreover, even under the foregoing method
of allocation, Certificateholders may be allocated income equal to the entire
Pass Through Rate plus the other items described above even though the Trust
might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Certificates on the accrual basis, and Certificateholders may be liable
for taxes on Trust income even if they have not received cash from the Trust to
pay such taxes. In addition, because tax allocations and tax reporting will be
done on a uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Trust.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust (including fees
to the Servicer but not interest expense) would be miscellaneous itemized
deductions. With respect to Certificates the holders of which receive an
allocation of fees and expenses in accordance with the preceding discussion, if
any holder thereof is an individual, estate or trust, or a "pass-through entity"
beneficially owned by one or more individuals, estates or trusts, (i) an amount
equal to such individual's, estate's or trust's share of such fees and expenses
will be added to the gross income of such holder and (ii) such individual's,
estate's or trust's share of such fees and expenses will be treated as a
miscellaneous itemized deduction allowable subject to the limitation of Section
67 of the Code, which permits such deductions only to the extent they exceed in
the aggregate two percent of a taxpayer's adjusted gross income. In addition,
Section 68 of the Code provides that the amount of itemized deductions otherwise
allowable for an individual whose adjusted gross income exceeds a specified
amount will be reduced by the lesser of (i) 3% of the excess of the individual's
adjusted gross income over such amount or (ii) 80% of the amount of itemized
deductions otherwise allowable for the taxable year. The amount of additional
taxable income reportable by Certificateholders that are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Furthermore, in determining the alternative minimum taxable income of such a
holder of a Certificate that is an individual, estate or trust, or a
"pass-through entity" beneficially owned by one or more individuals, estates or
trusts, no deduction will be allowed for such holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the Trust, even
though an amount equal to the amount of such fees and other deductions will be
included in such holder's gross income. Accordingly, such Certificates may not
be appropriate investments for individuals, estates, or trusts, or pass-through
entities beneficially owned by one or more individuals, estates or trusts. Such
prospective investors should consult with their tax advisors prior to making an
investment in such Certificates.
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The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Receivable, the Trust
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Receivables will not be
issued with original issue discount, and, therefore, the Trust should not have
original issue discount income. However, the purchase price paid by the Trust
for the Receivables may be greater or less than the remaining principal balance
of the Receivables at the time of purchase. If so, the Receivables will have
been acquired at a premium or discount, as the case may be. (As indicated above,
the Trust will make this calculation on an aggregate basis, but might be
required to recompute it on a Receivable-by-Receivable basis.)
If the Trust acquires the Receivables at a market discount or premium,
the Trust will elect to include any such discount in income currently as it
accrues over the life of the Receivables or to offset any such premium against
interest income on the Receivables. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the Trust will be considered to
distribute its assets to the partners, who would then be treated as
recontributing those assets to the Trust, as a new partnership. The Trust will
not comply with certain technical requirements that might apply when such a
constructive termination occurs. As a result, the Trust may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Trust might not be able to
comply due to lack of data. Under proposed Treasury regulations, the foregoing
treatment would be replaced by a new regime under which a 50% or greater
transfer, as described above, would cause a deemed contribution of the assets of
a partnership (the "old partnership") to a new partnership (the "new
partnership") in exchange for interests in the new partnership. Such interests
would be deemed distributed to the partners of the old partnership in
liquidation thereof, which would not constitute a sale or exchange. It is not
known when or whether such proposed Treasury regulations will be adopted in
final (or temporary) form.
POSSIBLE TAX-RELATED RESTRICTIONS ON TRANSFERS OF CERTIFICATES. In some
circumstances, transfers of Certificates may be restricted in order to avoid
having the Trust classified as a publicly traded partnership taxable as a
corporation or to avoid the administrative complexities that would be associated
with a deemed or constructive termination of the Trust. SEE "TRUSTS CLASSIFIED
AS PARTNERSHIPS" and "TAX CONSEQUENCES TO THE HOLDERS OF CERTIFICATES -- SECTION
708 TERMINATION". In that event, the nature of such restrictions will be
disclosed in the applicable Prospectus Supplement.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust income (includible in
income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include
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the holder's share of the Notes and other liabilities of the Trust. A holder
acquiring Certificates at different prices may be required to maintain a single
aggregate adjusted tax basis in such Certificates, and, upon sale or other
disposition of some of the Certificates, allocate a portion of such aggregate
tax basis to the Certificates sold (rather than maintaining a separate tax basis
in each Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Receivables would generally
be treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust does not expect to have any other assets that
would give rise to such special reporting requirements. Thus, to avoid those
special reporting requirements, the Trust will elect to include market discount
in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
Trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. The Seller is
authorized to revise the Trust's method of allocation between transferors and
transferees to conform to a method permitted by future regulations.
SECTION 731 DISTRIBUTIONS. In the case of any distribution to a
Certificateholder, no gain will be recognized to that Certificateholder to the
extent that the amount of any money distributed with respect to such Certificate
does not exceed the adjusted basis of such Certificateholder's interest in the
Certificate. To the extent that the amount of money distributed exceeds such
Certificateholder's adjusted basis, gain will be currently recognized. In the
case of any distribution to a Certificateholder, no loss will be recognized
except upon a distribution in liquidation of a Certificateholder's interest. Any
gain or loss recognized by a Certificateholder will be capital gain or loss.
SECTION 754 ELECTION. In the event that a Certificateholder sells its
Certificates at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such election. As a
result, Certificateholders might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
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ADMINISTRATIVE MATTERS. The Owner Trustee is required to keep or have
kept complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust and will report each expense to holders and the IRS on Schedule K-1. The
Trust will provide the Schedule K-1 information to nominees that fail to provide
the Trust with the information statement described below and such nominees will
be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust or be subject to penalties unless the
holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the Trust. The information referred to above for any
calendar year must be furnished to the Trust on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the Trust
with the information described above may be subject to penalties.
The Seller will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. As discussed below, an
investment in a Certificate may not be suitable for any non-U.S. person.
Accordingly, no interest in a Certificate should be acquired by or on behalf of
any such non-U.S. persona without first considering the United States tax
consequences of holding a Certificate. No regulations, published rulings or
judicial decisions exist that would discuss the characterization for Federal
withholding tax purposes with respect to non-U.S. persons of a partnership with
activities substantially the same as the Trust. It is not clear whether the
Trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is not clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust would be engaged in a trade or business in the United States for
such purposes, the Trust will
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withhold as if it were so engaged in order to protect the Trust from possible
adverse consequences of a failure to withhold. The Trust expects to withhold on
the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income were
effectively connected to a U.S. trade or business, at a rate of approximately
35% for foreign holders that are taxable as corporations and 39.6% for all other
foreign holders. Amounts withheld will be deemed distributed to the foreign
Certificateholders. Subsequent adoption of Treasury regulations or the issuance
of other administrative pronouncements may require the Trust to change its
withholding procedures. In determining a holder's withholding status, the Trust
may rely on IRS Form W-8, IRS Form W-9 or the holder's certification of
nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust's income. Each foreign holder must obtain
a taxpayer identification number from the IRS and submit that number to the
Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust, taking the
position that no taxes were due because the Trust was not engaged in a U.S.
trade or business. However, interest payment made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust. If these interest payments are properly characterized
as guaranteed payments, then the interest will not be considered "portfolio
interest." As a result, Certificateholders who are foreign persons will be
subject to United States federal income tax and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable treaty. In such
case, a foreign holder would only be entitled to claim a refund for that portion
of the taxes in excess of the taxes that should be withheld with respect to the
guaranteed payments.
BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
TRUSTS TREATED AS GRANTOR TRUSTS
CLASSIFICATION OF THE TRUST AS A GRANTOR TRUST
CLASSIFICATION OF GRANTOR TRUST FUNDS. With respect to each series of
Grantor Trust Certificates, in the opinion of Federal Tax Counsel for such
series, assuming compliance with all provisions of the related Trust Servicing
Agreement, the related Grantor Trust Fund will be classified as a grantor trust
under subpart E, part I of subchapter J of the Code and not as a partnership or
an association taxable as a corporation, and each holder of a Grantor Trust
Certificate generally will be treated as the owner of an interest in the Trust
assets included in the Grantor Trust Fund. The following general discussion of
the anticipated federal income tax consequences of the purchase, ownership and
disposition of Grantor Trust Certificates, to the extent it relates to matters
of law or legal conclusions with respect thereto, represents the opinion of
Special Tax Counsel, subject to any qualifications set forth herein. In
addition, Special Tax Counsel have prepared or reviewed the statements in this
Prospectus under the heading "Certain Federal Income Tax Consequences Grantor
Trust Funds." and are of the opinion that such statements are correct in all
material respects. Such statements are intended as an explanatory
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discussion of the possible effects of the classification of the Grantor Trust
Fund as a grantor trust for federal income tax purposes on investors generally
and of related tax matters affecting investors generally, but do not purport to
furnish information in the level of detail or with the attention to an
investor's specific tax circumstances that would be provided by an investor's
own tax advisor. Accordingly, each investor is advised to consult its own tax
advisors with regard to the tax consequences to it of investing in Grantor Trust
Certificates.
TAXATION OF OWNERS OF GRANTOR TRUST CERTIFICATES
GENERAL. Holders of a particular series of Grantor Trust Certificates
generally will be required to report on their federal income tax returns their
shares of the entire income from the Receivables (including amounts used to pay
reasonable servicing fees and other expenses) and will be entitled to deduct
their shares of any such reasonable servicing fees and other expenses. Because
of stripped interests, market or original issue discount, or premium, the amount
includible in income on account of a Grantor Trust Certificate may differ
significantly from the amount distributable thereon representing interest on the
Receivables. Under Section 67 of the Code, an individual, estate or trust
holding a Grantor Trust 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.
In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by holders of Grantor Trust
Certificates who are subject to the limitations of either Section 67 or Section
68 of the Code may be substantial. Further, Certificateholders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holder's alternative
minimum taxable income. Although it is not entirely clear, it appears that in
transactions in which multiple classes of Grantor Trust Certificates (including
Grantor Trust Certificates constituting stripped coupons) are issued, such fees
and expenses should be allocated among the classes of Grantor Trust Certificates
using a method that recognizes that each such class benefits from the related
services. In the absence of statutory or administrative clarification as to the
method to be used, it currently is intended to base information returns or
reports to the IRS and Certificateholders on a method that allocates such
expenses among classes of Grantor Trust Certificates with respect to each period
based on the distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Certificates of any
series will depend on whether they are subject to the "stripped bond" rules of
Section 1286 of the Code. Grantor Trust Certificates may be subject to those
rules if (i) a class of Grantor Trust Certificates constituting stripped coupons
is issued as part of the same series of Certificates or (ii) the Seller or any
of its affiliates retains (for its own account or for purposes of resale) a
right to receive a specified portion of the interest payable on a Receivable.
Further, an unreasonably high servicing fee retained by a seller or servicer may
be treated as a retained ownership interest that constitutes a stripped coupon.
IF STRIPPED BOND RULES APPLY. If the stripped bond rules apply, each
Grantor Trust Certificate will be treated as having been issued with "original
issue discount" within the meaning of Section 1273(a) of the Code, subject,
however, to the discussion below regarding the treatment of certain stripped
bonds as market discount bonds and the discussion regarding
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DE MINIMIS market discount. See "--TAXATION OF GRANTOR TRUST
CERTIFICATES--MARKET DISCOUNT". Under the stripped bond rules, the holder of a
Grantor Trust Certificate (whether a cash or accrual method taxpayer) will be
required to report interest income from its Grantor Trust Certificate for each
month in an amount equal to the income that accrues on such Certificate in that
month calculated under a constant yield method, in accordance with the rules of
the Code relating to original issue discount.
The original issue discount on a Grantor Trust Certificate will be the
excess of such Certificate's stated redemption price over its issue price. The
issue price of a Grantor Trust Certificate as to any purchaser will be equal to
the price paid by such purchaser for the Grantor Trust Certificate. The stated
redemption price of a Grantor Trust Certificate will be the sum of all payments
to be made on such Certificate, other than "qualified stated interest", if any,
as well as such Certificate's share of reasonable servicing fees and other
expenses. See "--TAXATION OF GRANTOR TRUST CERTIFICATES--IF STRIPPED BOND RULES
DO NOT APPLY" for a definition of "qualified stated interest". In general, the
amount of such income that accrues in any month would equal the product of such
holder's adjusted basis in such Grantor Trust Certificate at the beginning of
such month (see "--Sales of Grantor Trust Certificates") and the yield of such
Grantor Trust Certificate to such holder. Such yield would be computed at the
rate (compounded based on the regular interval between payment dates) that, if
used to discount the holder's share of future payments on the Receivables, would
cause the present value of those future payments to equal the price at which the
holder purchased such Certificate. In computing yield under the stripped bond
rules, a Certificateholder's share of future payments on the Receivables will
not include any payments made in respect of any spread or any other ownership
interest in the Receivables retained by the Seller, a Servicer, or its
respective affiliates, but will include such Certificateholder's share of any
reasonable servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption, with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions to the Grantor Trust
Certificates. It is unclear whether those provisions would be applicable to the
Grantor Trust Certificates or whether use of a reasonable prepayment assumption
may be required or permitted without reliance on these rules. It is also
uncertain, if a prepayment assumption is used, whether the assumed prepayment
rate would be determined based on conditions at the time of the first sale of
the Grantor Trust Certificate or, with respect to any holder, at the time of
purchase of the Grantor Trust Certificate by that holder. Certificateholders are
advised to consult their own tax advisors concerning reporting original issue
discount in general and, in particular, whether a prepayment assumption should
be used in reporting original issue discount with respect to Grantor Trust
Certificates.
In the case of a Grantor Trust Certificate acquired at a price equal to
the principal amount of the Receivables allocable to such Certificate, the use
of a prepayment assumption generally would not have any significant effect on
the yield used in calculating accruals of interest income. In the case, however,
of a Grantor Trust Certificate acquired at a discount or premium (that is, at a
price less than or greater than such principal amount, respectively), the use of
a reasonable prepayment assumption would increase or decrease such yield, and
thus accelerate or decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Receivable prepays
in full, the holder of a Grantor Trust Certificate acquired at a discount or a
premium generally will
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recognize ordinary income or loss equal to the difference between the portion of
the prepaid principal amount of the Receivable that is allocable to such
Certificate and the portion of the adjusted basis of such Certificate that is
allocable to such Certificateholder's interest in the Receivable. If a
prepayment assumption is used, it appears that no separate item of income or
loss should be recognized upon a prepayment. Instead, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Certificate and accounted for under a method consistent with Section 1272(a)(6)
of the Code. It is unclear whether any other adjustments would be required to
reflect differences between an assumed prepayment rate and the actual rate of
prepayments.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Seller nor any other person will make any representation that the
Receivables will in fact prepay at a rate conforming to such Prepayment
Assumption or any other rate and Certificateholders should bear in mind that the
use of a representative initial offering price will mean that such information
returns or reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial Certificateholders of each series
who bought at that price.
IF STRIPPED BOND RULES DO NOT APPLY. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Certificate, the Certificateholder will be required to report its share of
the interest income on the Receivables in accordance with such
Certificateholder's normal method of accounting. The original issue discount
rules will apply to a Grantor Trust Certificate to the extent it evidences an
interest in Receivables issued with original issue discount.
The original issue discount, if any, on the Receivables will equal the
difference between the stated redemption price of such Receivables and their
issue price. Under the OID Regulations, the stated redemption price is equal to
the total of all payments to be made on such Receivable other than "qualified
stated interest". "Qualified stated interest" includes interest that is
unconditionally payable at least annually at a single fixed rate, at a
"qualified floating rate", or at an "objective rate", a combination of a single
fixed rate and one or more "qualified floating rates" or one "qualified inverse
floating rate", or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on such
Receivable. In general, the issue price of a Receivable will be the amount
received by the borrower from the lender and the stated redemption price of a
Receivable will equal its principal amount.
In the case of Receivables bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Receivables by the Trustee in
preparing information returns to the Certificateholders and the IRS.
Notwithstanding the general definition of original issue discount,
original issue discount will be considered to be DE MINIMIS if such original
issue discount is less than 0.25% of the stated redemption price multiplied by
the weighted average maturity of the Receivable. For this purpose, the weighted
average maturity of the Receivable will be computed as the sum of the amounts
determined, as to each payment included in the stated redemption price of such
Receivable, by multiplying (i) the number of complete years (rounding down for
partial years)
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from the issue date until such payment is expected to be made by (ii) a
fraction, the numerator of which is the amount of the payment and the
denominator of which is the stated redemption price of the Receivable. Under the
OID Regulations, original issue discount of only a DE MINIMIS amount (other than
DE MINIMIS original issue discount attributable to a so-called "teaser" rate or
initial interest holiday) will be included in income as each payment of stated
principal price is made, based on the product of the total amount of such DE
MINIMIS original issue discount and a fraction, the numerator of which is the
amount of each such payment and the denominator of which is the outstanding
stated principal amount of the Receivable. The OID Regulations also permit a
Certificateholder to elect to accrue DE MINIMIS original issue discount into
income currently based on a constant yield method. See "--TAXATION OF OWNERS OF
GRANTOR TRUST CERTIFICATES--MARKET DISCOUNT" below.
If original issue discount is in excess of a DE MINIMIS amount, all
original issue discount with respect to a Receivable will be required to be
accrued and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code may
require that a prepayment assumption be made in computing yield with respect to
all asset-backed securities. Certificateholders are advised to consult their own
tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Certificates.
Certificateholders should refer to the related Prospectus Supplement with
respect to each series to determine whether and in what manner the original
issue discount rules will apply to Receivables in such series.
A purchaser of a Grantor Trust Certificate (other than a Certificate
subject to the stripped bond rules) that purchases such Grantor Trust
Certificate at a cost less than such Certificate's allocable portion of the
aggregate remaining stated redemption price of the Receivables held in the
related Trust Fund will also be required to include in gross income such
Certificate's daily portions of any original issue discount with respect to such
Receivables. However, each such daily portion will be reduced, if the cost of
such Grantor Trust Certificate to such purchaser is in excess of such
Certificate's allocable portion of the aggregate "adjusted issue prices" of the
Receivables held in the related Trust Fund, approximately in proportion to the
ratio such excess bears to such Certificate's allocable portion of the aggregate
original issue discount remaining to be accrued on such Receivables. The
adjusted issue price of a Receivable on any given day equals the sum of (i) the
adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Receivable at the beginning of the accrual period that includes
such day and (ii) the daily portions of original issue discount for all days
during such accrual period prior to such day. The adjusted issue price of a
Receivable at the beginning of any accrual period will equal the issue price of
such Receivable, increased by the aggregate amount of original issue discount
with respect to such Receivable that accrued in prior accrual periods, and
reduced by the amount of any payments made on such Receivable in prior accrual
periods of amounts included in its stated redemption price.
Unless otherwise provided in the related Prospectus Supplement, the
Trustee or the Servicer as applicable, in addition to its regular reports will
provide to any holder of a Grantor Trust Certificate such information as such
holder may reasonably request from time to time with respect to original issue
discount accruing on Grantor Trust Certificates. See "--GRANTOR TRUST REPORTING"
below.
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MARKET DISCOUNT. If the stripped bond rules do not apply to a Grantor
Trust Certificate, a Certificateholder may be subject to the market discount
rules of Sections 1276 through 1278 of the Code to the extent an interest in a
Receivable is considered to have been purchased at a "market discount", that is,
in the case of a Receivable issued without original issue discount, at a
purchase price less than its remaining stated redemption price or in the case of
a Receivable issued with original issue discount, at a purchase price less than
its adjusted issue price (as defined above). If market discount is in excess of
a DE MINIMIS amount (as described below), the holder generally will be required
to include in income in each month the amount of such discount that has accrued
(under the rules described in the next paragraph) through such month that has
not previously been included in income, but limited, in the case of the portion
of such discount that is allocable to any Receivable, to the payment of stated
redemption price on such Receivable that is received by (or, in the case of
accrual basis Certificateholders, due to) the Trust Fund in that month. A
Certificateholder may elect to include market discount in income currently as it
accrues (under a constant yield method based on the yield of the Certificate to
such holder) rather than including it on a deferred basis in accordance with the
foregoing. If made, such election will apply to all market discount bonds
acquired by such Certificateholder during or after the first taxable year to
which such election applies. In addition, the OID Regulations would permit a
Certificateholder to elect to accrue all interest, discount (including DE
MINIMIS market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were made with respect to
a Receivable with market discount, the Certificateholder would be deemed to have
made an election to include currently market discount in income with respect to
all other debt instruments having market discount that such Certificateholder
acquires during the taxable year of the election and thereafter, and possibly
previously acquired instruments. Similarly, a Certificateholder that made this
election for a Certificate acquired at a premium would be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. Each of
these elections to accrue interest, discount and premium with respect to a
Certificate on a constant yield method or as interest is irrevocable.
Section 1276(b)(3) of the Code authorized the Treasury Department to
issue regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the legislative history to Section 1276 of the Code apply.
Under those rules, in each accrual period market discount on the Receivables
should accrue, at the Certificateholder's option: (i) on the basis of a constant
yield method, (ii) in the case of a Receivable issued without original issue
discount, in an amount that bears the same ratio to the total remaining market
discount as the stated interest paid in the accrual period bears to the total
stated interest remaining to be paid on the Receivable as of the beginning of
the accrual period, or (iii) in the case of a Receivable issued with original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the original issue discount accrued in the accrual period
bears to the total original issue discount remaining at the beginning of the
accrual period. The prepayment assumption, if any, used in calculating the
accrual of original issue discount is to be used in calculating the accrual of
market discount. The effect of using a prepayment assumption could be to
accelerate the reporting of such discount income. Because the regulations
referred to in this paragraph have not been issued, it is not possible to
predict what effect such regulations might have on the tax treatment of a
Receivable purchased at a discount in the secondary market.
Because the Receivables will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower
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than the rate at which such discount would be included in income if it were
original issue discount.
Market discount with respect to Receivables generally will be
considered to be DE MINIMIS if it is less than 0.25% of the stated redemption
price of the Receivables multiplied by the number of complete years to maturity
remaining after the date of its purchase. In interpreting a similar rule with
respect to original issue discount on obligations payable in installments, the
OID Regulations refer to the weighted average maturity of obligations, and it is
likely that the same rule will be applied with respect to market discount,
presumably taking into account the prepayment assumption used, if any. The
effect of using a prepayment assumption could be to accelerate the reporting of
such discount income. If market discount is treated as DE MINIMIS under the
foregoing rule, it appears that actual discount would be treated in a manner
similar to original issue discount of a DE MINIMIS amount. See "--TAXATION OF
OWNERS OF GRANTOR TRUST CERTIFICATES--IF STRIPPED BOND RULES DO NOT APPLY".
Further, under the rules described above any discount that is not
original issue discount and exceeds a DE MINIMIS amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the Receivables.
PREMIUM. If a Certificateholder is treated as acquiring the underlying
Receivables at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Receivables originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to Receivables originated before September 28, 1985 or to Receivables
for which an amortization election is not made, should be allocated among the
payments of stated redemption price on the Receivable and be allowed as a
deduction as such payments are made (or, for a Certificateholder using the
accrual method of accounting, when such payments of stated redemption price are
due).
It is unclear whether a prepayment assumption should be used in
computing amortization of premium allowable under Section 171 of the Code. If
premium is not subject to amortization using a prepayment assumption and a
Receivable prepays in full, the holder of a Grantor Trust Certificate acquired
at a premium should recognize a loss, equal to the difference between the
portion of the prepaid principal amount of the Receivable that is allocable to
the Certificate and the portion of the adjusted basis of the Certificate that is
allocable to the Receivable. If a prepayment assumption is used to amortize such
premium, it appears that such a loss would be unavailable. Instead, if a
prepayment assumption is used, a prepayment should be treated as a partial
payment of the stated redemption price of the Grantor Trust Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on the Notes See "--NOTES --TAXATION OF OWNERS OF
NOTES-ORIGINAL ISSUE DISCOUNT". It is unclear whether any other adjustments
would be required to reflect differences between the prepayment assumption used,
if any, and the actual rate of prepayments.
POSSIBLE APPLICATION OF PROPOSED CONTINGENT PAYMENT RULES. The coupon
stripping rules' general treatment of stripped coupons is to regard them as
newly issued debt instruments in the hands of each purchaser. To the extent that
payments on the Certificates subject to the
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stripped bond rules would cease if the Receivables were prepaid in full, the
Certificates subject to the stripped bond rules could be considered to be debt
instruments providing for contingent payments. Under the OID Regulations, debt
instruments providing for contingent payments are not subject to the same rules
as debt instruments providing for noncontingent payments, but no final
regulations have been promulgated with respect to contingent payment debt
instruments. Proposed regulations were promulgated on December 16, 1994
regarding contingent payment debt instruments but it appears that Certificates
subject to the stripped bond rules, due to their similarity to other
mortgage-backed securities (such as REMIC regular interests) that are expressly
excepted from the application of such proposed regulations, may be excepted from
such proposed regulations. Like the OID Regulations, such proposed regulations
do not specifically address securities, such as the Certificates subject to the
stripped bond rules, that are subject to the stripped bond rules of Section 1286
of the Code.
If the contingent payment rules under the proposed regulations were to
apply, the holder of a Grantor Trust Strip Certificate would be required to
apply the "noncontingent bond method". Under the "noncontingent bond method",
the issuer of a Grantor Trust Strip Certificate determines a projected payment
schedule on which interest will accrue. Holders of Certificates subject to the
stripped bond rules are bound by the issuer's projected payment schedule. The
projected payment schedule consists of all noncontingent payments and a
projected amount for each contingent payment based on the projected yield (as
described below) of the Grantor Trust Strip Certificate.
The projected amount of each payment is determined so that the
projected payment schedule reflects the projected yield. The projected amount of
each payment must reasonably reflect the relative expected values of the
payments to be received by the holders of a Grantor Trust Strip Certificate. The
projected yield referred to above is a reasonable rate, not less than the
"applicable Federal rate" that, as of the issue date, reflects general market
conditions, the credit quality of the issuer, and the terms and conditions of
the Receivables. The holder of a Grantor Trust Strip Certificate would be
required to include as interest income in each month the adjusted issue price of
the Grantor Trust Strip Certificate at the beginning of the period multiplied by
the projected yield.
Assuming that a prepayment assumption were used, if the proposed
regulations or their principles were applied to Certificates subject to the
stripped bond rules, the amount of income reported with respect thereto would be
substantially similar to that described under "TAXATION OF OWNERS OF GRANTOR
TRUST CERTIFICATES--IF STRIPPED BOND RULES APPLY". Certificateholders should
consult their tax advisors concerning the possible application of the contingent
payment rules to the Certificates subject to the stripped bond rules.
SALES OF GRANTOR TRUST CERTIFICATES. Any gain or loss, equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on such sale or exchange of
a Grantor Trust Certificate by an investor who holds such Grantor Trust
Certificate as a capital asset, 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 generally 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 with respect to such Grantor Trust
Certificate. The Code as
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of the date of this Prospectus provides a top marginal tax rate of 39.6% for
individuals and a maximum marginal rate for long-term capital gains of
individuals of 28%. No such rate differential exists for corporations. In
addition, the distinction between a capital gain or loss and ordinary income or
loss remains relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in certain circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income, as will gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Code. Furthermore, a portion of
any gain that might otherwise be capital gain may be treated as ordinary income
to the extent that the Grantor Trust Certificate is held as part of a
"conversion transaction" within the meaning of Section 1258 of the Code. A
conversion transaction generally is one in which the taxpayer has taken two or
more positions in the same or similar property that reduce or eliminate market
risk, if substantially all of the taxpayer's return is attributable to the time
value of the taxpayer's net investment in such transaction. The amount of gain
realized in a conversion transaction that is recharacterized as ordinary income
generally will not exceed the amount of interest that would have accrued on the
taxpayer's net investment at 120% of the appropriate "applicable Federal rate"
(which rate is computed and published monthly by the IRS) at the time the
taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income items from
the transaction. Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include such
net capital gain in total net investment income for that taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
GRANTOR TRUST REPORTING. Unless otherwise provided in the related
Prospectus Supplement, as applicable, the Trustee or the Servicer will furnish
to each holder of a Grantor Trust Certificate with each distribution a statement
setting forth the amount of such distribution allocable to principal on the
underlying Receivables and to interest thereon at the related Pass-Through Rate.
In addition, within a reasonable time after the end of each calendar year, the
Trustee or Servicer, as applicable, will furnish to each Certificateholder
during such year such customary factual information as the Depositor or the
reporting party 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 by law to do so. Because the rules
for accruing discount and amortizing premium with respect to the Grantor Trust
Certificates are uncertain in various respects, there is no assurance the IRS
will agree with the Trustee's or Servicer's, as the case may be, information
reports of such items of income and expense. Moreover, such information reports,
even if otherwise accepted as accurate by the IRS, will in any event be accurate
only as to the initial Certificateholders that bought their Certificates at the
representative initial offering price used in preparing such reports.
BACKUP WITHHOLDING. In general, the rules described in "--Notes--Backup
Withholding with Respect to Notes" will also apply to Grantor Trust
Certificates.
FOREIGN INVESTORS. In general, the discussion with respect to Notes
applies to Grantor Trust Certificates except that Grantor Trust Certificates
will, unless otherwise disclosed in the related Prospectus Supplement, be
eligible for exemption from United States withholding tax, subject to the
conditions described in such discussion, only to the extent the related
Receivables were originated after July 18, 1984.
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To the extent that interest on a Grantor Trust Certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Code from United States
withholding tax, and the Grantor Trust Certificate is not held in connection
with a Certificateholder's trade or business in the United States, such Grantor
Trust Certificate will not be subject to United States estate taxes in the
estate of a non-resident alien individual.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A CERTIFICATEHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF CERTIFICATES, DEBT CERTIFICATES AND NOTES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES", potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the Certificates offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their own tax
advisors with respect to the various tax consequences of investments in the
certificates offered hereunder.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain requirements on employee benefit plans,
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts (and as applicable, insurance company general accounts) in
which such plans, accounts or arrangements are invested that are subject to the
fiduciary responsibility provisions of ERISA and Section 4975 of the Code
("Plans"), and on persons who are fiduciaries with respect to such Plans, in
connection with the investment of Plan assets. Certain employee benefit plans,
such as governmental plans (as defined in ERISA Section 3(32)), and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Securities without regard
to the ERISA considerations described below, subject to the provisions of other
applicable federal, state and local law. Any such plan which is qualified and
exempt from taxation under Sections 401(a) and 501(a) of the Code, however, is
subject to the prohibited transaction rules set forth in Section 503 of the
Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's
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investments be made in accordance with the documents governing the Plan. In
addition, Section 406 of ERISA and Section 4975 of the Code prohibit a broad
range of transactions involving assets of a Plan and persons ("parties in
interest" within the meaning of ERISA and "disqualified persons" within the
meaning of the Code; collectively, "Parties in Interest") who have certain
specified relationships to the Plan, unless a statutory or administrative
exemption is available. Certain Parties in Interest that participate in a
prohibited transaction may be subject to an excise tax imposed pursuant to
Section 4975 of the Code or a penalty imposed pursuant to Section 502(i) of
ERISA, unless a statutory or administrative exemption is available. These
prohibited transactions generally are set forth in Section 406 of ERISA and
Section 4975 of the Code.
PLAN ASSET REGULATIONS
A Plan's investment in Securities may cause the underlying Receivables
and other assets included in a related Trust to be deemed assets of such Plan.
Section 2510.3-101 of the regulations (the "Plan Asset Regulations") of the
United States Department of Labor (the "DOL") provides that when a Plan acquires
an equity interest in an entity, the Plan's assets include both such equity
interest and an undivided interest in each of the underlying assets of the
entity, unless certain exceptions not applicable here apply, or unless the
equity participation in the entity by "benefit plan investors" (I.E., Plans and
certain employee benefit plans not subject to ERISA) is not "significant," both
as defined therein. For this purpose, in general, equity participation by
benefit plan investors will be "significant" on any date if 25% or more of the
value of any class of equity interests in the entity is held by benefit plan
investors. Equity participation in a Trust will be significant on any date if
immediately after the most recent acquisition of any Certificate, 25% or more of
any class of Securities is held by benefit plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Receivables and other assets included in a Trust constitute Plan
assets, then any party exercising management or discretionary control regarding
those assets, such as the Servicer, any Backup Servicer, any subservicer, the
Trustee, the obligor under any credit enhancement mechanism, or certain
affiliates thereof, may be deemed to be a Plan "fiduciary" and thus subject to
the fiduciary responsibility provisions and prohibited transaction provisions of
ERISA and the Code with respect to the investing Plan. In addition, if the
Receivables and other assets included in a Trust constitute Plan assets, the
purchase of Securities by a Plan, as well as the operation of the Trust, may
constitute or involve a prohibited transaction under ERISA or the Code.
The Plan Asset Regulations provide that the term "equity interest"
means any interest in an entity other than an instrument that is treated as
indebtedness under applicable local law and which has no substantial equity
features. Accordingly, if the Notes issued by a Trust are treated as debt under
applicable law and do not have substantial equity features, the Receivables
included in such Trust would not be treated as assets of Plan investors.
PROHIBITED TRANSACTION EXEMPTIONS
In considering an investment in the Securities, a Plan fiduciary should
consider the availability of prohibited transaction exemptions promulgated by
the DOL including, among others, Prohibited Transaction Class Exemption ("PTCE")
75-1, which exempts certain transactions involving Plans and certain
broker-dealers, reporting dealers and banks; PTCE 90-1,
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which exempts certain transactions between insurance company separate accounts
and Parties in Interest; PTCE 91-38, which exempts certain transactions between
bank collective investment funds and Parties in Interest; PTCE 84-14, which
exempts certain transactions effected on behalf of a Plan by a "qualified
professional asset manager"; PTCE 95-60, which exempts certain transactions
between insurance company general accounts and Parties in Interest; and PTCE 96-
23, regarding transactions effected by an "in-house asset manager".
In addition to any exemption that may be available under PTCE 95-60 for
the purchase and holding of the Securities by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Code, for transactions involving an insurance company
general account. Pursuant to Section 401(c) of ERISA, the DOL is required to
issue final regulations ("401(c) Regulations") no later than December 31, 1997
which are to provide guidance for the purpose of determining, in cases where
insurance policies supported by an insurer's general account are issued to or
for the benefit of a Plan on or before December 31, 1998, which general account
assets constitute Plan assets. Section 401(c) of ERISA generally provides that,
until the date which is 18 months after the 401(c) Regulations become final, no
person shall be subject to liability under Part 4 of Title I of ERISA and
Section 4975 of the Code on the basis of a claim that the assets of an insurance
company general account constitute Plan assets, unless (i) as otherwise provided
by the Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan assets of any Plan invested in
such separate account. Insurance companies contemplating the investment of
general account assets in the Securities should consult with their legal counsel
with respect to the applicability of Section 401(c) of ERISA, including the
general account's ability to continue to hold the Securities after the date
which is 18 months after the date the 401(c) Regulations become final.
Plan fiduciaries should consider whether an individual prohibited
transaction exemption has been issued with respect to the Securities being
offered to such Plan. There can be no assurance that any of these exemptions
will apply with respect to any particular Plan investment in the Securities or,
even if it were deemed to apply, that any exemption would apply to all
prohibited transactions that may occur in connection with such investment. The
Prospectus Supplement with respect to a series of Securities may contain
additional information regarding the availability of these or other exemptions
with respect to the Securities offered thereby and the eligibility of a class of
securities for purchase by Plans.
CONSULTATION WITH COUNSEL
Any Plan fiduciary which proposes to purchase Securities on behalf of
or with assets of a Plan should consider its general fiduciary obligations under
ERISA and should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment and the availability of
any prohibited transaction exemption in connection therewith.
- 86 -
<PAGE>
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement (the
"Underwriting Agreement") with respect to each Trust, the Seller will agree to
sell to each of the underwriters named therein and in the related Prospectus
Supplement, and each of such underwriters will severally agree to purchase from
the Seller, the principal amount of each class of Securities of the related
series set forth therein and in the related Prospectus Supplement.
In each Underwriting Agreement, the several underwriters will agree,
subject to the terms and conditions set forth therein, to purchase all the
Securities described therein which are offered hereby and by the related
Prospectus Supplement if any of such Securities are purchased. In the event of a
default by any such underwriter, each Underwriting Agreement will provide that,
in certain circumstances, purchase commitments of the nondefaulting underwriters
may be increased, or the Underwriting Agreement may be terminated.
First Union Capital Markets Corp. may be designated as an underwriter
in the related Prospectus Supplement. IronBrand Capital, LLC, an affiliate of
the First Union Capital Markets Corp. (the "First Union Partner"), is a 15%
limited partner of NAFCO. As part of a referral program, First Union National
Bank of North Carolina, an affiliate of First Union Capital Markets Corp., is
entitled to receive fees for referrals of credit applications to the extent the
related motor vehicle retail installment contracts are acquired by ACCH. First
Union National Bank of North Carolina or certain of its affiliates and ACCH are
considering an expansion of the referral program. Based upon several factors,
including the overall performance of the referral program and the total market
value of NAFCO over a specified time period, the First Union Partner may
increase its limited partnership interest in NAFCO to approximately 49%.
In the ordinary course of their respective businesses, First Union
Capital Markets Corp. and its affiliates have engaged and may engage in
investment banking and/or commercial banking transactions with NAFCO and its
affiliates.
The Prospectus and the related Prospectus Supplements may be used by
First Union Capital Markets Corp. in connection with offers and sales related to
market making transactions in any series of the Securities. First Union Capital
Markets Corp. may act as principal or agent in such transactions. Such sales
will be made at prices related to prevailing market prices at the time of the
sale or otherwise.
Each Prospectus Supplement will either (i) set forth the price at which
each class of Securities being offered thereby will be offered to the public and
any concessions that may be offered to certain dealers participating in the
offering of such Securities or (ii) specify that the related Securities are to
be resold by the underwriters in negotiated transactions at varying prices to be
determined at the time of such sale. After the initial public offering of any
Securities, the public offering price and such concessions may be changed.
Each Underwriting Agreement will provide that NAFCO and the Seller will
indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act.
The Indenture Trustee, if any, may, from time to time, invest the funds
in the Designated Accounts in Eligible Investments acquired from the
underwriters.
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<PAGE>
Under each Underwriting Agreement, the closing of the sale of any class
of Securities subject thereto will be conditioned on the closing of the sale of
all other such classes.
The place and time of delivery for the Securities in respect of which
this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
LEGAL MATTERS
Certain matters with respect to the validity of the Certificates and
the Notes will be passed upon for the Seller by Thacher Proffitt & Wood, New
York, New York.
- 88 -
<PAGE>
INDEX OF DEFINED TERMS
401(c) Regulations............................................................86
Actuarial Receivables.........................................................28
Administration Agreement......................................................59
Administrative Receivables....................................................22
Administrator ............................................................59
Aggregate Principal Balance...................................................13
Amortization Period...........................................................12
APR ............................................................27
Backup Servicer .............................................................4
Bankruptcy Laws ............................................................54
Certificate Balance............................................................5
Certificate Distribution Account..............................................47
Certificate Majority..........................................................41
Certificate Owners............................................................19
Certificateholders.............................................................5
Certificates .............................................................1
Code ............................................................65
Collection Account............................................................15
Commission .............................................................3
Computer Tape ............................................................45
Cutoff Date .............................................................1
Dealer Agreements ........................................................23, 31
Dealer Assignments............................................................23
Dealers .........................................................8, 31
Debt Certificates ............................................................65
Defaulted Receivable..........................................................27
Definitive Certificates.......................................................41
Definitive Notes ............................................................41
Depository ............................................................33
Designated Accounts...........................................................47
Distribution Date ........................................................34, 49
DOL ............................................................85
DTC .............................................................2
Electronic Ledger ............................................................45
Eligible Account ............................................................48
Eligible Investments..........................................................48
Eligible Servicer ............................................................55
ERISA ............................................................84
Events of Default ............................................................37
Exchange Act .............................................................3
Federal Tax Counsel...........................................................65
Financed Vehicles .............................................................8
First Union Partner...........................................................87
Foreign person ............................................................68
FTC ............................................................64
Indenture .............................................................1
Indenture Trustee ..........................................................1, 5
Indirect participants.........................................................40
Insolvency Laws ............................................................20
Insurance Agreement...........................................................53
Insurer Default ............................................................16
Interest Rate .............................................................7
IRS ............................................................65
JMFE ............................................................33
Lien ............................................................45
Lockbox Account ........................................................15, 48
Lockbox Bank ........................................................15, 48
Monthly Period ............................................................51
NAFCO ..........................................................1, 4
NAFCO Transferor .........................................................9, 24
Note Distribution Account.....................................................47
Note Majority ............................................................36
Note Owners ............................................................19
Noteholders .............................................................7
Notes .............................................................1
Obligor ............................................................15
Obligors ............................................................21
Odometer Act ............................................................63
OFSA ........................................................14, 33
OID Regulations ............................................................66
Originators .............................................................1
Participants ............................................................40
Parties in Interest...........................................................85
Pass-Through Rate .............................................................5
Payment Date ............................................................35
Plan Asset Regulations........................................................85
Plans ............................................................84
Policy ............................................................13
Pool Factor ............................................................30
Pooling and Servicing Agreement................................................1
Pre-Funded Amount .........................................................9, 10
Pre-Funding Account...........................................................10
Pre-Funding Period............................................................10
Prepayment Assumption.........................................................78
Prospectus Supplement..........................................................1
PTCE ............................................................85
Purchase Agreement.........................................................9, 43
Purchase Amount ............................................................46
Qualified stated interest.....................................................78
Rating Agency ............................................................18
Receivable Files ........................................................47, 60
Receivables ..........................................................1, 8
Receivables Pool .............................................................8
Registration Statement.........................................................3
Related Documents ............................................................39
Relief Act ............................................................44
Repurchase Event ................................................10, 17, 46, 60
Required Deposit Rating.......................................................48
Retained Interest ............................................................13
Revolving Period ............................................................11
Rule of 78's Receivables......................................................28
Rules ............................................................40
Sale and Servicing Agreement...................................................1
Schedule of Receivables.......................................................44
Securities .............................................................1
Security Insurer ............................................................13
Securityholders .............................................................3
Seller ......................................................1, 4, 30
Servicer .........................................................4, 31
Servicer Responsible Officer..................................................52
Servicer Termination Events...................................................54
Servicer's Certificate........................................................41
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<PAGE>
Servicing Agreement...........................................................32
Servicing Fee ............................................................13
Short-Term Note ............................................................68
Simple Interest Receivables...................................................28
Strip Certificates.............................................................5
Strip Notes .............................................................7
Subsequent Receivables......................................................1, 9
Subservicing Agreement....................................................14, 26
Trust ..........................................................1, 4
Trust Agreement .............................................................1
Trust Documents .........................................................1, 43
Trust Property ..........................................................1, 8
Trustee ..........................................................1, 4
UCC ............................................................20
Underwriting Agreement........................................................87
Warranty Receivables..........................................................22
World Omni ............................................................33
- 90 -
<PAGE>
================================================================================
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS, AND ANY INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN
OR THEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY NAFCO,
THE SELLER OR THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH THE PROSPECTUS SUPPLEMENT RELATES OR AN
OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS NOR ANY SALES MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN OR THEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS
SUPPLEMENT OR PROSPECTUS.
-------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT Page
Reports to Certificateholders................................................S-2
Incorporation of Certain Documents by Reference..............................S-2
Summary of the Terms of the Certificates.....................................S-4
Risk Factors................................................................S-16
The Trust .................................................................S-18
Use of Proceeds ............................................................S-19
The Receivables Pool........................................................S-19
The Certificate Insurer.....................................................S-28
The Certificates............................................................S-30
The Pooling and Servicing Agreement.........................................S-42
The Purchase Agreements.....................................................S-52
The Certificate Policy......................................................S-53
Certain Federal Income Tax Consequences.....................................S-55
ERISA Considerations........................................................S-65
Underwriting................................................................S-66
Legal Matters...............................................................S-67
Ratings .................................................................S-67
Experts .................................................................S-67
Annex I ..................................................................A-1
PROSPECTUS
Available Information..........................................................3
Reports to Securityholders.....................................................3
Incorporation of Certain Documents by Reference................................3
Prospectus Summary.............................................................4
Risk Factors..................................................................20
The Trusts....................................................................23
The Receivables...............................................................24
Yield and Prepayment Considerations...........................................29
Pool Factor...................................................................30
Use of Proceeds...............................................................30
The Seller....................................................................30
National Auto Finance Company L.P.............................................31
Omni Financial Services of America, Inc.......................................33
The Certificates..............................................................33
The Notes.....................................................................34
Certain Information Regarding the Securities..................................40
Description of the Purchase Agreements and the
Trust Documents..............................................................43
Certain Legal Aspects of the Receivables......................................59
Certain Federal Income Tax Consequences.......................................65
Trusts Classified as Partnerships.............................................66
Trusts Treated as Grantor Trusts..............................................75
State and Other Tax Considerations............................................84
ERISA Considerations..........................................................84
Plan of Distribution..........................................................87
Legal Matters.................................................................88
Index of Defined Terms........................................................89
-------------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CERTIFICATES, WHETHER OR NOT PARTICIPATING IN
================================================================================
NATIONAL AUTO FINANCE 1996-1 TRUST
$62,098,000
% AUTOMOBILE RECEIVABLES-
BACKED CERTIFICATES
NATIONAL FINANCIAL AUTO FUNDING TRUST
(SELLER)
NATIONAL AUTO FINANCE COMPANY L.P.
(SERVICER)
----------------------
PROSPECTUS SUPPLEMENT
----------------------
===============================================================================
