<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 1997
Registration No. 333-[ ]
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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PNC BANK, NATIONAL ASSOCIATION
as Depositor to the Trust described herein
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
UNITED STATES ONE PNC PLAZA 22-1146430
(State or other 249 FIFTH AVENUE (I.R.S. Employer
jurisdiction of PITTSBURGH, PENNSYLVANIA Identification No.)
incorporation or 15222-2707
organization) (412) 762-1553
(Address, including zip code, and telephone number,
including area code, of Registrant's principal
executive offices)
</TABLE>
THOMAS R. MOORE
VICE PRESIDENT AND ASSISTANT SECRETARY
PNC BANK, NATIONAL ASSOCIATION
ONE PNC PLAZA, 21ST FLOOR
249 FIFTH AVENUE
PITTSBURGH, PENNSYLVANIA 15222-2707
(412) 762-1901
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
GEORGE A. PECOULAS, ESQ.
MAYER, BROWN & PLATT
190 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
(312) 782-0600
RICHARD L. FRIED, ESQ.
STROOCK & STROOCK & LAVAN LLP
180 MAIDEN LANE
NEW YORK, NEW YORK 10038-4982
(212) 806-5400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(2) PER UNIT(1) OFFERING PRICE(1) FEE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior Treasury Rate Class A-1 Notes........ $1,000,000 100% $1,000,000 $303.03
Senior Treasury Rate Class A-2 Notes........ $1,000,000 100% $1,000,000 $303.03
Subordinate LIBOR Rate Class B Notes........ $1,000,000 100% $1,000,000 $303.03
===================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Also registered are secondary market sales of Notes that may be effected by
PNC Capital Markets, Inc., an affiliate of the Registrant.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains a Prospectus relating to a public
offering by PNC Student Loan Trust I of [$ ] aggregate principal amount
of PNC Student Loan Asset-Backed Notes, Series 1997-2, together with certain
pages of a second Prospectus to be used in connection with offers and sales
relating to market-making transactions in the Notes, if any, by PNC Capital
Markets, Inc., an affiliate of PNC Bank, National Association. The Prospectus
relating to the Notes follows immediately after this Explanatory Note. Following
such Prospectus are the alternate cover page and pages [ ] and the back page
of the market-making Prospectus relating to the Notes. All other pages of the
public offering Prospectus are also to be used for the market-making Prospectus.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
$
PNC STUDENT LOAN TRUST I
STUDENT LOAN ASSET BACKED NOTES, SERIES 1997-2
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PNC BANK, NATIONAL ASSOCIATION
Transferor
PNC Student Loan Trust I, a Delaware business trust (the "Trust"), will
issue $[ ] aggregate principal amount of Senior Treasury Rate Class A-1
Asset Backed Notes (the "Class A-1 Notes"), $[ ] aggregate principal amount
of Senior Treasury Rate Class A-2 Asset Backed Notes (the "Class A-2 Notes" and,
together with the Class A-1 Notes, the "Class A Notes") and $[ ] aggregate
principal amount of Subordinate LIBOR Rate Class B Asset Backed Notes (the
"Class B Notes" and, together with the Class A Notes, the "Notes"). The assets
of the Trust will include a pool of guaranteed education loans to students and
parents of students acquired by The First National Bank of Chicago, as eligible
lender trustee on behalf of the Trust (the "Eligible Lender Trustee"), from PNC
Bank, National Association (the "Transferor") (the "Financed Student Loans"),
collections and other payments with respect to the Financed Student Loans and
monies on deposit in certain trust accounts to be established (including the
Collection Account, the Reserve Account, the Note Distribution Account, the
Expense Account and the Monthly Advance Account). The Notes will be
collateralized by the assets of the Trust.
------------------
The Notes will be available for purchase in denominations of $50,000 and
integral multiples thereof in book-entry form only. Interest on and principal of
the Notes will be payable quarterly on or about the [fifteenth day] of each
, , , and , commencing [ ], 1997 (each, a
"Distribution Date"); provided, that no distribution in respect of principal of
the Class A-2 Notes will be payable until the Class A-1 Notes are paid in full
(except as otherwise described herein) and no distribution in respect of
principal of the Class B Notes will be payable until the Class A Notes are paid
in full. Interest on the Notes will accrue, subject to certain limitations
described herein, for each Interest Period at a per annum rate equal to the
T-Bill Rate plus the applicable Margin for the Class A-1 Notes and Class A-2
Notes and One-Month LIBOR plus the applicable Margin for the Class B Notes. The
Margin will be [ ]% for the Class A-1 Notes, [ ]% for the Class A-2 Notes and
[ ]% for the Class B Notes. The final maturity date for the Class A-1 Notes
will be the [ ] Distribution Date, the final maturity date for the Class
A-2 Notes will be the [ ] Distribution Date and the final maturity date for
the Class B Notes will be the [ ] Distribution Date.
(Continued on following page)
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK
FACTORS" BEGINNING ON PAGE [ ].
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THE NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT INTERESTS
IN OR OBLIGATIONS OF THE TRANSFEROR, THE MASTER SERVICER, THE SERVICERS, THE
ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES OR SUBSIDIARIES. THE NOTES ARE NOT DEPOSITS OF
A BANK. THE NOTES ARE NOT GUARANTEED OR INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY GOVERNMENTAL AGENCY.
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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.
<TABLE>
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====================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO THE
THE PUBLIC DISCOUNTS(1) TRANSFEROR(2)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
$ Senior Treasury Rate Class A-1 Notes... [100%] [ ]% [ ]%
- --------------------------------------------------------------------------------------------------------------------
$ Senior Treasury Rate Class A-2 Notes... [100%] [ ]% [ ]%
- --------------------------------------------------------------------------------------------------------------------
$ Subordinate LIBOR Rate Class B Notes... [100%] [ ]% [ ]%
- --------------------------------------------------------------------------------------------------------------------
Total....................................... [ ] [ ] [ ]
====================================================================================================================
</TABLE>
(1) The Depositor has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended.
(2) Before deducting expenses, estimated to be $[ ].
------------------
The Notes are offered by the Underwriters when, as and if issued by the
Trust, delivered to and accepted by the Underwriters and subject to approval of
certain legal matters by counsel for the Underwriters. The Underwriters reserve
the right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that delivery of the Notes will be made in book-entry
form through the Same Day Funds Settlement System of The Depository Trust
Company and also Cedel Bank, societe anonyme and the Euroclear System on or
about [ ], 1997.
------------------
SMITH BARNEY INC. PNC CAPITAL MARKETS, INC.
The date of this Prospectus is [ ], 1997
<PAGE> 4
(Cover continued from previous page)
However, payment in full of the Notes could occur earlier than such final
maturity dates as described herein. In addition, the Notes will be repaid (i) on
any Distribution Date on which the Transferor exercises its option to purchase
the Financed Student Loans, exercisable when the outstanding Pool Balance is
reduced to 5% or less of the Initial Pool Balance and (ii) under certain
circumstances as described herein, upon the insolvency of the Transferor and
subsequent termination of the Trust pursuant to the Trust Agreement (as defined
herein).
There is currently no secondary market for the Notes. Smith Barney Inc.
intends to, and PNC Capital Markets, Inc. may, make a secondary market for the
Notes, but neither of them has any obligation to do so. There can be no
assurance that a secondary market for the Notes will develop or, if one does
develop, that it will continue. The Notes will not be listed on any national
securities exchange.
------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS EFFECTING TRANSACTIONS IN
THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 5
AVAILABLE INFORMATION
The Transferor, as depositor of the Trust (the "Depositor"), has filed with
the Securities and Exchange Commission (the "Commission") a registration
statement (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Notes offered hereby. This Prospectus, which forms part of
the Registration Statement, does not contain all the information contained
therein. For further information, reference is made to the Registration
Statement which may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington D.C. 20549;
and at the Commission's regional offices at Seven World Trade Center, Suite
1300, New York, New York 10048; and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies of all or any part thereof may be obtained
from the Public Reference Branch of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 upon the payment of certain fees prescribed by the
Commission. In addition, the Registration Statement may be accessed
electronically through the Commission's Electronic Data Gathering, Analysis and
Retrieval system at the Commission's site on the World Wide Web located at
http://www.sec.gov.
REPORTS TO NOTEHOLDERS
Unless and until Definitive Notes are issued, quarterly and annual
unaudited reports containing information concerning the Financed Student Loans
will be prepared by the Administrator and sent on behalf of the Trust only to
Cede & Co. ("Cede"), as nominee of The Depository Trust Company ("DTC") and
registered holder of the Notes but will not be sent to any beneficial holder of
the Notes. Such reports will not constitute financial statements prepared in
accordance with generally accepted accounting principles. See "Description of
the Notes--Book-Entry Registration" and "--Reports to Noteholders." The Trust
will file with the Commission such periodic reports as are required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations of the Commission thereunder. The Trust intends to suspend the
filing of such reports under the Exchange Act when and if the filing of such
reports is no longer statutorily required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Administrator, on behalf of
the Trust, pursuant to Sections 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 Notes shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes 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.
The Administrator will provide without charge to each person to whom a copy
of this Prospectus is delivered, on the written or oral request of any such
person, a copy of any or all of the documents incorporated herein by reference,
except the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to Glenn Davies, Vice President-Financial Reporting , PNC
Bank Corp., One PNC Plaza, 249 Fifth Avenue, 24th Floor, Pittsburgh,
Pennsylvania 15222 or "[email protected]" on the Internet. Telephone requests
for such copies should be directed to (412) 762-1553.
3
<PAGE> 6
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by the Related
Documents. Certain capitalized terms used in this Prospectus are defined
elsewhere herein on the pages indicated in the "Index of Principal Terms."
Issuer.......................... PNC Student Loan Trust I (the "Trust") is
a statutory business trust established
under the laws of the State of Delaware.
Securities Offered.............. Senior Treasury Rate Class A-1 Asset
Backed Notes (the "Class A-1 Notes") in
the aggregate principal amount of
$ , Senior Treasury Rate Class
A-2 Asset Backed Notes (the "Class A-2
Notes" and together with the Class A-1
Notes, the "Class A Notes") in the
aggregate principal amount of $
and Subordinate LIBOR Rate Class B Asset
Backed Notes (the "Class B Notes" and,
together with the Class A Notes, the
"Notes") in the aggregate principal amount
of $ .
The Notes will be issued in minimum
denominations of $50,000 and integral
multiples of $50,000 in excess thereof.
Persons acquiring beneficial ownership
interests in the Notes will hold their
interests in the Notes through The
Depository Trust Company ("DTC") in the
United States or Cedel Bank, societe
anonyme ("Cedel") or the Euroclear System
("Euroclear") in Europe. See "Description
of the Notes-- Book-Entry Registration"
herein.
The Trust will issue the Notes pursuant to
an Indenture dated as of March 27, 1997
and a Second Terms Supplement dated as of
[ ], 1997 authorizing the Notes (as
amended and supplemented from time to
time, the "Terms Supplement" and, together
with the Indenture, as amended and
supplemented from time to time, the
"Indenture") between the Trust and the
Indenture Trustee.
Other Securities................ The Trust has previously issued $1,000
aggregate principal amount of PNC Student
Loan Trust I Asset-Backed Certificates
(the "Certificates") in a transaction
exempt from the registration requirements
of the Securities Act of 1933, as amended
(the "Securities Act").
The Certificates are not being offered
hereby and any information relating
thereto in this Prospectus is provided
solely because of its potential relevance
to a prospective purchaser of the Notes.
Transferor...................... PNC Bank, National Association (the
"Transferor"), will contribute the
Financed Student Loans to the Trust
pursuant to the Transfer and Servicing
Agreement (as amended and supplemented
from time to time, the "Transfer and
Servicing Agreement") among the Trust, the
Transferor and the Eligible Lender
Trustee.
Master Servicer and Servicers... The Transferor will act as Master Servicer
with respect to the Financed Student Loans
(in such capacity, the "Master
4
<PAGE> 7
Servicer"). The Financed Student Loans
will be serviced by the Pennsylvania
Higher Education Assistance Agency, an
agency of the Commonwealth of Pennsylvania
("PHEAA"), AFSA Data Corporation ("AFSA"),
USA Group Loan Services, Inc. ("USAG") and
Great Lakes Higher Education Corporation
("Great Lakes"), or such other parties as
may be approved by the Master Servicer.
The Transferor, PHEAA, AFSA, USAG, Great
Lakes and each other party who may, from
time to time, be servicing the Financed
Student Loans are referred to herein as a
"Servicer" and collectively as the
"Servicers."
Eligible Lender Trustee......... The First National Bank of Chicago, a
national banking association, will act as
eligible lender trustee under the Trust
Agreement and holder of legal title to the
Financed Student Loans on behalf of the
Trust (the "Eligible Lender Trustee"). See
"Formation of the Trust--Eligible Lender
Trustee."
Indenture Trustee............... Bankers Trust Company, a New York banking
corporation (the "Indenture Trustee"),
will act as trustee under the Indenture.
Administrator................... PNC Bank, National Association, will act
as administrator (the "Administrator") on
behalf of the Trust pursuant to an
Administration Agreement (as amended and
supplemented from time to time, the
"Administration Agreement"), among the
Administrator, the Eligible Lender Trustee
and the Indenture Trustee.
Distribution Dates.............. Interest on and principal of each class of
Notes will be payable quarterly on the
[fifteenth day] of each [ , ,
and ], or if such day is not a
Business Day, the next succeeding Business
Day, commencing [ ], 1997 (each, a
"Distribution Date"); provided, however,
that (except as otherwise provided herein)
no distribution in respect of principal of
the Class A-2 Notes will be made until the
Class A-1 Notes have been paid in full and
no distribution in respect of principal of
Class B Notes will be made until the Class
A Notes have been paid in full.
Record Date..................... Payments in respect of the Notes will be
payable to holders of record of the Notes
("Noteholders") as of the second business
day preceding each Distribution Date (each
a "Record Date").
Interest........................ Each class ("Class") of Notes will bear
interest during each Interest Period at a
rate per annum for such Class (the "Class
Interest Rate") as described below.
The initial Class Interest Rates during
the initial Interest Period are as
follows:
% per annum with respect to the Class
A-1 Notes;
% per annum with respect to the Class
A-2 Notes; and
% per annum with respect to the Class B
Notes.
5
<PAGE> 8
Except as otherwise described in the
following paragraph, the Class Interest
Rate for each subsequent Interest Period
for each Class of Notes will equal (i) in
the case of the Class A-1 Notes and the
Class A-2 Notes, the daily average of the
T-Bill Rates within such Interest Period
(determined as described below) plus the
applicable Margin for such Class, and (ii)
in the case of the Class B Notes,
One-Month LIBOR as of the LIBOR
Determination Date for such Interest
Period plus the applicable Margin for such
Class. See "Description of the Notes--The
Notes--Distributions of Interest." The
"Margin" will be [ ]% for the Class A-1
Notes, [ ]% for the Class A-2 Notes and
[ ]% of the Class B Notes. Interest on
the Class A Notes will be calculated on
the basis of the actual number of days
elapsed in each Interest Period divided by
365 (or 366 in the case of a leap year),
and interest on the Class B Notes will be
calculated on the basis of the actual
number of days elapsed in each Interest
Period divided by 360.
Notwithstanding the foregoing, if the
Class Interest Rate with respect to any
Class of Notes for any Interest Period is
greater than the Net Loan Rate, then such
Class Interest Rate for such Interest
Period will be the Net Loan Rate. However,
in no event will the Class Interest Rate
for any Class of Notes exceed % per
annum. See "Description of the Notes--The
Notes--Distributions of Interest."
If the Class Interest Rate for any Class
of Notes for any Interest Period is based
on the Net Loan Rate (as defined below),
the excess of (a) the amount of interest
such Class of Notes would have accrued in
respect of the related Interest Period had
interest been calculated based on the
applicable Class Interest Rate (without
giving effect to the Net Loan Rate), over
(b) the amount of interest such Class of
Notes actually accrued in respect of such
Interest Period based on the Net Loan Rate
(such excess, together with the unpaid
portion of any such excess from prior
Interest Periods and interest accrued
thereon calculated based on the T-Bill
Rate or One-Month LIBOR, as applicable) is
referred to as the "Noteholders Interest
Carryover") will be paid on the dates and
in the priority set forth herein under
"--Assets of the Trust--Collection
Account; Note Distribution Account; and
Expense Account." The rating of the Notes
does not address the likelihood of the
payment of the amount of any Noteholders'
Interest Carryover.
"Interest Period" means the period
beginning on the 15th day of each month
(or the Closing Date with respect to the
first Interest Period) and ending on (and
including) the 14th day of the following
month.
The "T-Bill Rate" will generally be
adjusted weekly on the calendar day
following each auction of direct
obligations of the United States with a
maturity of 13 weeks ("91-day Treasury
Bills") to equal the weighted average per
annum
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<PAGE> 9
discount rate (expressed on a bond
equivalent basis and applied on a daily
basis) of the 91-day Treasury Bills sold
at such auction, as reported by the U.S.
Department of Treasury; provided, however,
that in the event that the results of the
auctions of 91-day Treasury Bills cease to
be reported, or that no such auction is
held in a particular week, then the T-Bill
Rate in effect as a result of the last
such publication or report will remain in
effect until such time, if any, as the
results of auctions of 91-day Treasury
Bills shall again be reported or such an
auction is held, as the case may be;
provided, further, that (i) the T-Bill
Rate in effect from the first day of the
Interest Period, including the initial
Interest Period, through the day of the
first 91-day Treasury Bill auction on or
after the first day of each Interest
Period will be based on the results of the
most recent 91-day Treasury Bill auction
prior to such day and (ii) the T-Bill Rate
will be subject to a lock-in period of six
business days preceding each Distribution
Date, during which the T-Bill Rate will
remain in effect from the first day of
such period until the end of the Interest
Period related to such Distribution Date.
See "Description of the
Notes--Determination of the T-Bill Rates."
"One-Month LIBOR" for any Interest Period
will be determined as described under
"Description of the Notes-- Determination
of LIBOR."
Net Loan Rate................... For any Interest Period, the "Net Loan
Rate" will equal the weighted average
Effective Interest Rate for the Collection
Period immediately preceding the last day
of such Interest Period, less the Program
Operating Expense Percentage (or less
[ ]% per annum during the period from the
Closing Date through December 31, 1998).
The "Effective Interest Rate" means, for
any Financed Student Loan and any
Collection Period, the per annum rate at
which such Financed Student Loan accrues
interest during such Collection Period
after giving effect to all applicable
Interest Subsidy Payments and Special
Allowance Payments due with respect to
such Financed Student Loan.
The "Program Operating Expense Percentage"
is the fraction (expressed as a percentage
and calculated as of the end of each
calendar year by the Administrator) the
numerator of which is the annualized
operating expenses of the Trust for the
calendar month then ended, including,
without limitation, Transaction Fees, and
the denominator of which is the Pool
Balance as of the last day of such
calendar year.
Principal....................... Principal of the Notes will be payable
quarterly on each Distribution Date, first
to the principal balance of the Class A-1
Notes until such principal balance is
reduced to zero, then to the principal
balance of the Class A-2 Notes until such
principal balance is reduced to zero and
then to the principal balance of the Class
B Notes until such
7
<PAGE> 10
principal balance is reduced to zero. The
amount of principal payable on a
Distribution Date will be equal to the
Noteholders' Principal Distribution Amount
for such Distribution Date. See
"Description of the Transfer and Servicing
Agreements--Distributions." The
Noteholders' Principal Distribution Amount
generally will be equal to the amount of
principal paid with respect to the
Financed Student Loans (plus any Realized
Losses thereon) and proceeds realized upon
the sale of Financed Student Loans by the
Trust. In addition, until the Parity
Percentage equals 102.5%, accelerated
principal payments will be made in respect
of the Notes from collections of interest
and certain amounts available therefor in
the Reserve Account.
As of any date of determination, the
"Parity Percentage" will be the fraction
expressed as a percentage, the numerator
of which is the sum of (i) the then Pool
Balance and (ii) all amounts on deposit in
the Collection Account and the Reserve
Account and the denominator of which is
the sum of the aggregate outstanding
principal balance of the Notes and the
Certificates, accrued and unpaid interest
thereon plus accrued and unpaid
Transaction Fees.
Final Maturity Dates............ , 20 with respect to the Class
A-1 Notes; , 20 with respect
to the Class A-2 Notes; and , 20
with respect to the Class B Notes.
The actual maturity of one or more Classes
of Notes could occur sooner than such
dates as a result of a variety of factors,
including as a result of prepayments on
the Financed Student Loans or the exercise
by the Transferor of its option to
repurchase the Financed Student Loans when
the aggregate principal balance is reduced
to 5% or less of the Initial Pool Balance
(as defined under "--Assets of the Trust--
Collection Account--Distributions from the
Collection Account"), or under certain
circumstances as described herein, upon
the insolvency of the Transferor and
subsequent termination of the Trust
pursuant to the Trust Agreement as
described below under "Description of the
Transfer and Servicing
Agreements--Termination." See "The
Financed Student Loan Pool--Maturity and
Prepayment Assumptions."
Servicing Fee................... The Master Servicer will receive a
quarterly fee (the "Servicing Fee") in an
amount equal to the greater of (i) the
Unit Amount for the related Distribution
Date and (ii) 1/4 of [1.15%] of the
average Pool Balance as of the last day of
each of the three Collection Periods
immediately preceding such Distribution
Date. The "Unit Amount" for any
Distribution Date is an amount equal to
the average number of loan accounts in the
Trust as of the last day of each of the
three Collection Periods immediately
preceding such Distribution Date. The
Servicing Fee will be payable quarterly in
advance, out of Available Funds and
amounts on deposit in the Reserve Account,
on each Distribution Date (or in the
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<PAGE> 11
case of the initial Servicing Fee, on the
Closing Date) based on the Administrator's
good faith estimate of the Servicing Fee
that will accrue during the three
Collection Periods immediately succeeding
such Distribution Date (or in the case of
the initial Servicing Fee, the three
Collection Periods immediately succeeding
the Closing Date) plus (or minus) the
difference (or excess) of the actual
Servicing Fee accrued for the three
Collection Periods immediately preceding
such Distribution Date.
Administration Fee.............. The Administrator will receive a fee (the
"Administration Fee"), payable quarterly
in advance on each Distribution Date, in
an amount equal to 0.02% per annum of the
outstanding principal amount of the Notes
and Certificates.
The Trust....................... The Trust is a Delaware statutory business
trust established by a Trust Agreement
dated as of March 27, 1997 (as amended and
supplemented from time to time, the "Trust
Agreement"), between the Transferor, as
depositor, the Eligible Lender Trustee and
First Chicago Delaware, Inc., as Delaware
trustee. The activities of the Trust and
the Eligible Lender Trustee are limited by
the terms of the Trust Agreement to
issuing one or more classes of its
certificates and notes, acquiring, owning,
selling and managing the Financed Student
Loans and the other assets of the Trust as
described herein, collecting and making
payments thereon and other activities
related thereto.
Assets of the Trust............. The assets of the Trust will include the
following:
A. Financed Student Loans..... The "Financed Student Loans" will consist
of certain education loans to students and
parents of students ("Student Loans")
enrolled in accredited institutions of
higher education and will include rights
to receive payments made with respect to
such Financed Student Loans and the
proceeds thereof after [June ], 1997 (the
"Cut-off Date"). On [June ], 1997 (the
"Closing Date"), the Transferor will
transfer and contribute Financed Student
Loans having an aggregate principal
balance plus accrued interest thereon
expected to be capitalized upon repayment
of approximately $ as of the
Cut-off Date (the "Initial Pool Balance")
to the Eligible Lender Trustee on behalf
of the Trust, pursuant to the Transfer and
Servicing Agreement.
Certain of the Financed Student Loans have
been originated by the Transferor and the
remainder of the Financed Student Loans
will have been originated by independent
third parties and subsequently sold to the
Transferor. The Financed Student Loans
constituting the assets of the Trust
include some or all of the following types
of Student Loans: (i) Parental Loans for
Undergraduate Students ("PLUS Loans"),
(ii) Stafford Loans (formerly known as
Guaranteed Student Loans) (as defined
below), (iii) Unsubsidized Stafford Loans,
(iv) Supplemental Loans for Students ("SLS
Loans"), and (v) Consolidation Loans, all
of which
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<PAGE> 12
loans (collectively, the "Federal Loans")
are part of the federal government's
Federal Family Education Loan Program (the
"Federal Loan Program").
The Financed Student Loans are guaranteed
to the extent described herein as to the
payment of principal and interest by the
California Student Aid Commission, the
Florida Department of Education ("FDOE"),
the Georgia Higher Education Assistance
Corporation, Great Lakes, the Illinois
Student Assistance Commission, the
Kentucky Higher Education Assistance
Authority, the Michigan Higher Education
Assistance Authority, the New Jersey
Higher Education Assistance Authority
("NJHEAA"), PHEAA and United States Aid
Funds, Inc. ("USAF") (each such entity, a
"Guarantor", and collectively, the
"Guarantors"), which are in each case
reinsured to the extent described herein
by the United States Department of
Education (the "Department"). See "The
Financed Student Loan Pool--Guarantors for
the Federal Loans." Financed Student Loans
made before October 1, 1993 are 100%
guaranteed by the applicable Guarantor,
and reinsured against default by the
Department up to 100% of Guarantee
Payments. Financed Student Loans made on
or after October 1, 1993 are 98%
guaranteed by the applicable Guarantor,
and reinsured against default by the
Department up to a maximum of 98% of
Guarantee Payments. All references herein
to the guarantee and reinsurance coverage
with respect to the Financed Student Loans
shall be understood to mean such 100%
guarantee, and 100% maximum reinsurance
coverage, respectively, with respect to
Financed Student Loans made before October
1, 1993 and such 98% guarantee and 98%
maximum reinsurance coverage,
respectively, with respect to Financed
Student Loans made on or after October 1,
1993.
Certain incentive programs currently or
hereafter made available by the Transferor
to borrowers may also be made available by
the Master Servicer to borrowers with
Financed Student Loans. See "Risk
Factors--Changes in Repayment Terms of
Financed Student Loans Pursuant to
Incentive Programs" and "The Financed
Student Loan Pool--Incentive Programs."
Any Federal Consolidation Loan made with
respect to a Financed Student Loan after
the Closing Date, whether made by the
Transferor or another lender, will result
in a prepayment to the Trust of such
Financed Student Loan. See "Description of
the Transfer and Servicing Agreements."
With respect to certain of the Financed
Student Loans, during the period in which
the related borrower is in school and for
certain authorized periods as described in
the Higher Education Act (the "Deferral
Phase"), the borrower is not required to
make payments on his or her Financed
Student Loan. With respect to such
Financed Student Loans consti-
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<PAGE> 13
tuting Stafford Loans, the Department will
make all interest payments during the
related Deferral Phase. For all other
Financed Student Loans (other than certain
PLUS Loans), interest will not be paid
during the related Deferral Phase but,
instead, will accrue and be capitalized
and added to the principal balance of such
Financed Student Loan. The Trust will
consist of Financed Student Loans that are
in the Deferral Phase as well as Financed
Student Loans for which the related
borrower is currently required to make
payments of principal and interest (the
"Repayment Phase"). See "The Financed
Student Loan Pool--Distribution of
Financed Student Loans by Borrower Payment
Status."
The "Pool Balance" at any time represents
the aggregate principal balance of the
Financed Student Loans at the end of the
preceding Collection Period (including
accrued interest thereon for such
Collection Period to the extent such
interest will be capitalized), after
giving effect to the following, without
duplication: (i) all payments in respect
of principal received by the Trust during
such Collection Period from or on behalf
of borrowers and Guarantors and, with
respect to certain payments on the
Financed Student Loans, the Department
(collectively, "Obligors"), and (ii) the
principal portion of all Purchase Amounts
received by the Trust for such Collection
Period from the Transferor or the Master
Servicer.
"Collection Period" means, initially, the
period beginning [ ], 1997 and
ending on [ ], 1997, and thereafter,
the Collection Period means the calendar
month immediately following the end of the
previous Collection Period.
B. Collection Account; Note
Distribution Account;
Certificate Distribution
Account; and Expense
Account.................... The Master Servicer will be required to
remit all collections received with
respect to the Financed Student Loans for
which it is acting as primary servicer
(other than Financed Student Loans that
have been repurchased by the Transferor
pursuant to the Transfer and Servicing
Agreement) (i) within two Business Days
after it has received an aggregate of
$30,000 during any Collection Period and
(ii) on the last Business Day of each
month, all other collections received
during such month to an account in the
name of the Indenture Trustee (the
"Collection Account"). The Master Servicer
shall cause each other Servicer to remit
to the Collection Account, no less
frequently than weekly, all collections
received with respect to the Financed
Student Loans for which such other
Servicer is acting as primary servicer. A
"Business Day" is any day other than a
Saturday, a Sunday or a day on which
national banking associations or banking
institutions or trust companies in New
York, New York are authorized or obligated
by law to be closed. The Eligible Lender
Trustee will be required to remit Interest
Subsidy Payments and Special Allowance
Payments it re-
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<PAGE> 14
ceives within two Business Days of receipt
thereof to the Collection Account. See
"Description of the Transfer and Servicing
Agreements--Payments on Financed Student
Loans."
Five Business Days prior to each
Distribution Date (each, a "Determination
Date"), the Administrator will advise the
Indenture Trustee in writing of the
applicable Noteholders' Interest
Distribution Amount, the Noteholders'
Principal Distribution Amount and all
amounts payable to the holders of the
Certificates (the "Certificateholders") on
the related Distribution Date. Further,
the Administrator will advise the
Indenture Trustee in writing of the
estimated fees payable to the Master
Servicer, the Administrator, the Indenture
Trustee and the Eligible Lender Trustee
(the "Servicing Fee," "Administration
Fee," "Indenture Trustee Fee," and
"Eligible Lender Trustee Fee,"
respectively, and, collectively, the
"Transaction Fees") for the three
succeeding Collection Periods.
On each Distribution Date, the Indenture
Trustee will transfer from the Collection
Account, in the following priority and
from payments received on or with respect
to the Financed Student Loans during the
three Collection Periods immediately
preceding the month of such Distribution
Date (or with respect to the first
Distribution Date, from the Closing Date
through and including the Collection
Period immediately preceding such
Distribution Date), (i) to a separate
account held with and in the name of the
Indenture Trustee (the "Expense Account"),
an amount up to the estimated Transaction
Fees for the three immediately succeeding
Collection Periods and all overdue
Transaction Fees from prior Collection
Periods (plus (or minus) the difference
(or excess) of the actual Transaction Fees
for the three immediately preceding
Collection Periods and the Transaction
Fees deposited into the Expense Account on
the preceding Distribution Date), (ii) to
a separate account held with and in the
name of the Indenture Trustee for the
benefit of the Noteholders (the "Note
Distribution Account"), an amount up to
the Noteholders' Interest Distribution
Amount, (iii) to the Note Distribution
Account, the Noteholders' Principal
Distribution Amount, (iv) to a
supplemental account held with and in the
name of the Eligible Lender Trustee for
the benefit of the Certificateholders (the
"Certificate Distribution Account"), the
Certificateholders' Interest Distribution
Amount, and (v) after the Notes have been
paid in full, to the Certificateholder
Distribution Account and the
Certificateholders' Principal Distribution
Amount.
On each Distribution Date, following the
transfer to the Expense Account described
in the preceding paragraph, the Indenture
Trustee will distribute from the Expense
Account (in addition to any amounts
transferred from the Reserve Account as
described herein) the following amounts in
the
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<PAGE> 15
following order of priority: (i) to the
Master Servicer, the estimated Servicing
Fee for the three immediately succeeding
Collection Periods and all overdue
Servicing Fees, (ii) to the Administrator,
the estimated Administration Fee for the
three immediately succeeding Collection
Periods and all overdue Administration
Fees, (iii) to the Indenture Trustee, the
estimated Indenture Trustee Fee for the
three immediately succeeding Collection
Periods and all overdue Indenture Trustee
Fees and (iv) to the Eligible Lender
Trustee, the estimated Eligible Lender
Trustee Fee for the three immediately
succeeding Collection Periods and all
overdue Eligible Lender Trustee Fees.
On each Distribution Date, following the
transfer to the Note Distribution Account
described in the second preceding
paragraph, the Indenture Trustee will
distribute to the Noteholders as of the
related Record Date all amounts
transferred to the Note Distribution
Account as set forth above (in addition to
any amounts transferred from the Reserve
Account and the Monthly Advance Account
and any Parity Percentage Payments
transferred from the Collection Account,
each as described below) in the following
order of priority: first, to the Class A-1
and Class A-2 Noteholders, the Class A
Noteholders' Interest Distribution Amount
(pro rata based upon the portion thereof
allocable to each such Class); second, to
the Class B Noteholders, the Class B
Noteholders' Interest Distribution Amount;
third, to the Class A-1 Noteholders, the
Noteholders' Principal Distribution Amount
until the outstanding principal amount of
the Class A-1 Notes has been paid in full;
fourth, to the Class A-2 Noteholders, the
Noteholders' Principal Distribution Amount
until the outstanding principal balance of
the Class A-2 Notes has been paid in full;
and fifth, to the Class B Noteholders, the
Noteholders' Principal Distribution Amount
until the outstanding principal amount of
the Class B Notes has been paid in full.
On each Distribution Date, the Eligible
Lender Trustee will distribute to the
Certificateholders all amounts transferred
to the Certificate Distribution Account as
set forth above (in addition to any
amounts transferred from the Reserve
Account and the Monthly Advance Account,
each as described herein).
On each Distribution Date, after making
all required transfers to the Expense
Account, the Note Distribution Account
and, if applicable, the Certificate
Distribution Account the Indenture Trustee
will transfer any amounts remaining in the
Collection Account (other than amounts
representing payments received during such
month) in the following order of priority:
(i) to the Reserve Account, the amount, if
any, necessary to increase the balance
thereof to the Specified Reserve Account
Balance, (ii) to the Note Distribution
Account the amount, if any, which when
applied as a payment of principal on such
Distribution Date to the Class of Notes
then receiving payments of principal, is
necessary
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<PAGE> 16
for the Parity Percentage to equal 102.5%
on such Distribution Date (the amount so
transferred to the Note Distribution
Account is the "Parity Percentage
Payment") and (iii) to the Note
Distribution Account, the amount of any
outstanding Noteholders' Interest
Carryover. Any amounts remaining in the
Collection Account after such transfers
(other than amounts representing payments
received during such current month) will
be distributed to the Transferor.
All principal payments of Notes of any
Class shall be made pro rata within that
Class. In connection with each principal
payment of Notes of any Class, the
Indenture Trustee shall compute the
Principal Factor for that Class. The
"Principal Factor" shall be a seven-digit
decimal indicating the principal balance
of each Note of a Class as of a
Distribution Date (after giving effect to
any payments made on that date) as a
fraction of the original principal amount
of such Note. The principal balance of any
Note can be determined by multiplying the
original principal amount of such Note by
the Principal Factor applicable to that
class of Notes.
Notwithstanding the foregoing, if there
has been an Event of Default with respect
to payment of the Notes, (i) all principal
payments on the Class A Notes will be made
first, on a pro rata basis to all Class A
Noteholders (based on the ratio of the
outstanding principal balance of Class A
Notes held by each Class A Noteholder to
the aggregate outstanding principal
balance of all Class A Notes) and second,
after the Class A Notes have been paid in
full, to the outstanding principal balance
of the Class B Notes and (ii) the
Certificateholders will not be entitled to
any payments of principal or interest
until all Notes have been paid in full.
C. Reserve Account............ Pursuant to the Transfer and Servicing
Agreement, an account in the name of the
Indenture Trustee (the "Reserve Account")
will be established with and maintained by
the Indenture Trustee and will be an asset
of the Trust. On the Closing Date, the
Transferor will make an initial deposit
into the Reserve Account of cash or
Eligible Investments equal to $[ ]
(the "Reserve Account Deposit"). The
Reserve Account Deposit will be augmented
on each Distribution Date by the deposit
into the Reserve Account of any Available
Funds remaining after making all prior
distributions on such date. See
"Description of the Transfer and Servicing
Agreements--Distributions."
Amounts, if any, on deposit in the Reserve
Account will be available on each
Distribution Date to cover any shortfalls
in payments of the Transaction Fees, the
Noteholders' Distribution Amount and the
Certificateholders' Distribution Amount
for such applicable Distribution Date for
which Available Funds are insufficient to
make such payments and distributions.
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<PAGE> 17
Amounts, if any, in the Reserve Account on
any Distribution Date (after giving effect
to all distributions to be made or
allocated on such Distribution Date) in
excess of the then applicable Specified
Reserve Account Balance generally will be
distributed to the Transferor. The
"Specified Reserve Account Balance" with
respect to any Distribution Date will
equal the greater of (i) 1.5% of the sum
of the outstanding principal balance of
the Notes and the Certificates on such
Distribution Date, after giving effect to
all payments to be made on such date, or
(ii) $500,000; provided, however, that
such balance shall not exceed the sum of
the aggregate outstanding principal amount
of the Notes and the Certificate Balance.
See "Description of the Transfer and
Servicing Agreements--Credit
Enhancement--Reserve Account."
The funding and maintenance of the Reserve
Account is intended to enhance the
likelihood of timely payment to the
Noteholders of the Noteholders'
Distribution Amount. In certain
circumstances, however, the Reserve
Account could be depleted and shortfalls
in distributions to the Noteholders could
result.
D. Eligible Investments....... Pursuant to the Transfer and Servicing
Agreement, funds on deposit in the Trust
Accounts will be invested in "Eligible
Investments." See "Description of Transfer
and Servicing Agreements--Accounts."
E. Transfer and Servicing
Agreement....................... Under the Transfer and Servicing
Agreement, the Transferor will contribute
the Financed Student Loans to the Trust on
the Closing Date. The Eligible Lender
Trustee will hold legal title to all
Financed Student Loans contributed to the
Trust. In addition, the Master Servicer
will agree with the Trust to be
responsible for servicing, managing,
maintaining custody of and making
collections on the Financed Student Loans.
The obligations of the Transferor and the
Master Servicer under the Transfer and
Servicing Agreement include the following:
The Transferor and the Master Servicer
will be obligated to purchase any Financed
Student Loan if the interests of the
Noteholders or the Certificateholders
therein are materially adversely affected
by a breach of any representation,
warranty or covenant (including the Master
Servicer's covenant to service all the
Financed Student Loans in accordance with
applicable laws, restrictions and
guidelines) made by the Transferor or the
Master Servicer, as the case may be, with
respect to the Financed Student Loan, if
the breach has not been cured within 90
days following the discovery by or notice
to the Transferor or the Master Servicer,
as the case may be, of the breach (it
being understood that any such breach that
does not adversely affect any Guarantor's
obligation to guarantee payment of such
Financed Student Loan will not be
considered to have a material adverse
effect for this purpose). In addition, the
Transferor or the Master Servicer, as the
case may be, will be obligated to
reimburse
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<PAGE> 18
the Trust for any accrued interest amounts
not guaranteed by a Guarantor due to, or
any lost Interest Subsidy Payments or
Special Allowance Payments as a result of,
a breach of the Transferor's
representations and warranties or the
Master Servicer's covenants, as the case
may be; provided, however, that such
reimbursements shall not exceed the amount
that would have been paid if not for such
breach.
Pursuant to the Transfer and Servicing
Agreement, the Master Servicer will agree
with the Trust to be responsible for,
among other things, preparing and filing
with the Department and the Guarantors all
appropriate claims forms and other
documents and filings on behalf of the
Eligible Lender Trustee in order to claim
the Interest Subsidy Payments and Special
Allowance Payments from the Department and
the Guarantee Payments from the
Guarantors, in respect of the Financed
Student Loans entitled thereto and
preparing and providing periodic and
annual statements to the Eligible Lender
Trustee and the Indenture Trustee with
respect to distributions to Noteholders
and Certificateholders.
The Certificates................ Pursuant to the Trust Agreement, the Trust
has issued its Series 1997-1 Certificates
in the aggregate principal amount of
$1,000 and the Trust may, from time to
time, issue one or more additional series
of Certificates pursuant to a supplement
to the Trust Agreement. The Certificates
represent undivided beneficial interests
in the Trust. See "Formation of the
Trust."
The rights of Certificateholders in the
assets of the Trust to receive payments of
principal and interest will be
subordinated to the rights of the
Noteholders to the extent described
herein. See "Description of the Transfer
and Servicing Agreements--Credit
Enhancement--Subordination of the
Certificates."
Monthly Advances................ If the Master Servicer has applied for a
Guarantee Payment from a Guarantor or an
Interest Subsidy Payment or a Special
Allowance Payment from the Department, and
the Master Servicer has not received the
related payment prior to the end of the
Collection Period immediately preceding
the Distribution Date on which such amount
would be required to be distributed as a
payment of interest, the Master Servicer
may, no later than the Determination Date
relating to such Distribution Date,
deposit into an account in the name of the
Indenture Trustee (the "Monthly Advance
Account") an amount up to the amount of
such payments applied for but not received
(such deposits by the Master Servicer are
referred to herein as "Monthly Advances").
Monthly Advances will be distributed to
the Noteholders or Certificateholders on
the upcoming Distribution Date. Monthly
Advances are recoverable by the Master
Servicer from the source for which such
Monthly Advance was made. The Master
Servicer will have no obligation, legal or
other-
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<PAGE> 19
wise, to make any Monthly Advance, and the
making of or decision to make a particular
Monthly Advance will not create any
obligation on the Master Servicer, legal
or otherwise, to make any future Monthly
Advances.
Optional Purchase............... The Transferor may repurchase all
remaining Financed Student Loans, and thus
effect the early retirement of the Notes
and the Certificates, on any Distribution
Date on or after which the Pool Balance is
equal to 5% or less of the Initial Pool
Balance, at a price equal to, for each
Financed Student Loan, the outstanding
principal balance of such Financed Student
Loan as of the end of the preceding
Collection Period, together with all
accrued interest thereon and certain
unamortized premiums, if any. Without the
prior written consent of Moody's, the
Transferor may not effect any purchase of
the remaining Financed Student Loans as
long as the rating of the Transferor's
long-term debt obligations is less than
"Baa3" by Moody's, unless the Eligible
Lender Trustee and the Indenture Trustee
shall have received an opinion of counsel
to the effect that such purchase would not
constitute a fraudulent conveyance. See
"Description of the Transfer and Servicing
Agreements--Termination." The "Initial
Pool Balance" will equal $[ ].
Tax Considerations.............. In the opinion of special Federal tax
counsel for the Trust, the Notes will be
characterized as debt for Federal income
tax purposes.
In the opinion of special Federal tax
counsel for the Trust, for Federal income
tax purposes the Trust will not be
characterized as an association (or
publicly traded partnership) taxable as a
corporation.
See "Certain Federal Tax Consequences" for
additional information concerning the
application of Federal laws with respect
to the Notes and the Trust.
ERISA Considerations............ The Notes are eligible for purchase by or
on behalf of employee benefit plans,
retirement arrangements, individual
retirement accounts and Keogh Plans,
subject to the consideration discussed
under "ERISA Considerations."
Registration of Notes........... The Notes will be represented by global
certificates registered in the name of
Cede & Co. ("Cede"), as nominee of The
Depository Trust Company ("DTC"), or
another nominee. The Noteholders will not
be entitled to receive definitive
certificates representing such Holders'
interests, except in certain
circumstances. See "Description of the
Notes-- Book-Entry Registration."
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<PAGE> 20
Rating of the Securities........ It is a condition to the issuance and sale
of the Class A-1 Notes and the Class A-2
Notes that they be rated "AAA" by Standard
& Poor's Ratings Services, a division of
The McGraw-Hill Companies ("Standard &
Poor's"), and "Aaa" by Moody's Investors
Service, Inc. ("Moody's"), and it is a
condition to the issuance and sale of each
of the Class B Notes that they be rated at
least "A" by Standard & Poor's and at
least "A2" by Moody's. Each of Standard &
Poor's and Moody's is also referred to
herein as a "Rating Agency" and
collectively as the "Rating Agencies." A
securities rating is not a recommendation
to buy, sell or hold securities and may be
subject to revision or withdrawal at any
time by the assigning rating agency.
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<PAGE> 21
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the following
discussion of certain risk factors associated with an investment in the Notes.
Failure to Comply with Loan Origination and Servicing Procedures for
Financed Student Loans. The Higher Education Act, including the implementing
regulations thereunder, requires lenders and their assignees making and
servicing Federal Loans, and guarantors guaranteeing Federal Loans, to follow
specified procedures, including due diligence procedures, to ensure that the
Federal Loans are properly made and disbursed to, and repaid on a timely basis
by or on behalf of, borrowers. Certain of those procedures, which are
specifically set forth in the Higher Education Act, are summarized herein. See
"The Student Loan Financing Business" and "Description of the Transfer and
Servicing Agreements--Servicing Procedures." Generally, these procedures require
that completed loan applications be processed, a determination of whether an
applicant is an eligible borrower attending an eligible institution under the
Higher Education Act be made, the borrower's responsibilities under the loan be
explained to him or her, the promissory note evidencing the loan be executed by
the borrower and then that the loan proceeds be disbursed in a specified manner
by the lender. After the loan is made, the lender must establish repayment terms
with the borrower, properly administer deferrals and forbearances and credit the
borrower for payments made. If a borrower becomes delinquent in repaying a loan,
a lender must perform certain collection procedures (primarily telephone calls
and demand letters) which vary depending upon the length of time a loan is
delinquent. The Master Servicer has agreed pursuant to the Transfer and
Servicing Agreement to perform (or provide for third party servicers to perform)
servicing and collection procedures on behalf of the Trust. However, failure to
follow these procedures or failure of the Transferor or any other originator of
the Financed Student Loans to follow procedures relating to the origination of
any Financed Student Loans may result in the Department's refusal to make
reinsurance payments to the Guarantors or to make Interest Subsidy Payments and
Special Allowance Payments to the Eligible Lender Trustee with respect to such
Financed Student Loans or in the Guarantors' refusal to honor their Guarantee
Agreements with the Eligible Lender Trustee with respect to such Financed
Student Loans. Failure of the Guarantors to receive reinsurance payments from
the Department could adversely affect the Guarantors' ability or legal
obligation to make payments under the Guarantee Agreements ("Guarantee
Payments") to the Eligible Lender Trustee. Loss of any such Guarantee Payments,
Interest Subsidy Payments or Special Allowance Payments with respect to Financed
Student Loans could adversely affect the amount of Available Funds for any
Collection Period and the Trust's ability to pay principal and interest on the
Notes. Under certain circumstances, pursuant to the Transfer and Servicing
Agreement, the Transferor is obligated to purchase, or the Master Servicer is
obligated to purchase, any Financed Student Loan if a breach of the
representations, warranties or covenants of the Transferor or the Master
Servicer, as the case may be, with respect to such Financed Student Loan has a
material adverse effect on the interests of the Noteholders or the
Certificateholders therein and such breach is not cured within any applicable
cure period (it being understood that any such breach that does not affect any
Guarantor's obligation to guarantee payment of such Financed Student Loans will
not be considered to have such a material adverse effect). In addition, under
certain circumstances pursuant to the Transfer and Servicing Agreement, the
Transferor or the Master Servicer, as the case may be, is obligated to reimburse
the Trust for any accrued interest amounts not guaranteed by a Guarantor due to,
or any lost Interest Subsidy Payments or Special Allowance Payments as a result
of, a breach of the Transferor's representations and warranties or the Master
Servicer's covenants, as the case may be, with respect to a Financed Student
Loan. If the Transferor is obligated to purchase a Financed Student Loan as a
result of the Transferor's or a third party's failure to originate such Financed
Student Loan in compliance with the Higher Education Act, it will reimburse the
Trust for the remaining principal balance of such Financed Student Loan and any
accrued but unpaid interest thereon. If the Master Servicer is obligated to
purchase a Financed Student Loan as a result of a failure to service such
Financed Student Loan in accordance with the Higher Education Act and the
applicable Guarantee Agreement, as the case may be, it will reimburse the Trust
for the remaining principal balance of such Financed Student Loan and any
accrued but unpaid interest thereon. See "Description of the Transfer and
Servicing Agreements--Conveyance of Financed Student Loans; Representations and
Warranties" and "--Servicer Covenants." There can be no assurance, however, that
the Transferor or the Master Servicer will have the financial resources to do
so. The failure of the Transferor to so purchase or the Master Servicer to so
purchase a Financed Student Loan would
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<PAGE> 22
constitute a breach of the Transfer and Servicing Agreement, enforceable by the
Eligible Lender Trustee on behalf of the Trust or by the Indenture Trustee on
behalf of the Noteholders, but would not constitute an Event of Default under
the Indenture or permit the exercise of remedies thereunder.
Commingling Risk of Consolidation of Federal Benefit Billings and Receipts
with Other Trusts. Due to Department policy limiting the granting of new lender
identification numbers, the Eligible Lender Trustee will be allowed under the
Trust Agreement to permit trusts (other than the Trust) established by the
Transferor in the future to securitize other Student Loans to use the Department
lender identification number applicable to the Trust. In that event, the
billings submitted to the Department for Interest Subsidy and Special Allowance
Payments on loans in the Trust would be consolidated with the billings for such
payments for Student Loans in such other trusts using the same lender
identification number and payments on such billings would be made by the
Department in lump sum form. Such lump sum payments would then be allocated by
the Eligible Lender Trustee among the various trusts using the same lender
identification number.
In addition, the sharing of the lender identification number by the Trust
with such other trusts may result in the receipt of claim payments by guarantors
in lump sum form. In that event, such payments would be allocated by the
Eligible Lender Trustee among the trusts in a manner similar to the allocation
process for Interest Subsidy and Special Allowance Payments.
The Department regards the Eligible Lender Trustee as the party primarily
responsible to the Department for any liabilities owed to the Department or
guarantors resulting from the Eligible Lender Trustee's activities in the
Federal Loan Program. As a result, if the Department or a guarantor were to
determine that the Eligible Lender Trustee owes a liability to the Department or
a guarantor on any Financed Student Loan for which the Eligible Lender Trustee
is or was legal titleholder, including loans held in the Trust or other trusts,
the Department or guarantor might seek to collect that liability by offset
against payments due the Eligible Lender Trustee under the Trust. In the event
that the Department or a guarantor determines such a liability exists in
connection with a trust using the shared lender identification number, the
Department or a guarantor would be likely to collect that liability by
offsetting against amounts due the Eligible Lender Trustee under the shared
lender identification number, including amounts owed in connection with a Trust.
In addition, other trusts using the shared lender identification number may
in a given quarter incur origination fees that exceed the Interest Subsidy and
Special Allowance Payments payable by the Department on the loans in such other
trusts, resulting in the payment from the Department received by the Eligible
Lender Trustee under such shared lender identification number for that quarter
equaling an amount that is less than the amount owed by the Department on the
loans in the Trust for that quarter.
The Trust Agreement for the Trust and the trust agreement for other trusts
established by the Transferor which share the lender identification number to be
used by the Trust (such Trust and such other trusts, collectively, the
"Transferor Trusts") may require a Transferor Trust (including the Trust) to
indemnify the other Transferor Trusts for a shortfall or an offset by the
Department or a guarantor arising from the Financed Student Loans held by the
Eligible Lender Trustee on such Transferor Trust's behalf.
Limited Liquidity. The Notes will not be listed on any national security
exchange. While Smith Barney Inc. intends to, and PNC Capital Markets, Inc. may,
make a secondary market for the Notes, they are not obligated to do so. There
can be no assurance that a secondary market for the Notes will develop or, if a
secondary market does develop, that it will provide Noteholders with liquidity
of investment or that it will continue for the life of the Notes. As a result,
investors must be prepared to bear the risk of holding the Notes for as long as
the Notes are outstanding.
Principal Balance of Notes Exceed Initial Pool Balance of the Financed
Student Loans. On the Closing Date, the aggregate initial principal amount of
the Notes will be greater than the Initial Pool Balance of the Financed Student
Loans as of the Cut-off Date. Because the actual rate and timing of any
accelerated payments of principal, if any, will depend on a number of factors,
including the rate and timing of the payments on the Financed Student Loans,
there can be no assurance of the actual rate or timing of such accelerated
payments of principal or when the aggregate principal amount of the Notes will
be equal to or less
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than the sum of the Pool Balance and the amounts in the other Trust Accounts. As
a result, if an Event of Default should occur under the Indenture or an
Insolvency Event should occur and the Financed Student Loans were liquidated at
a time when the outstanding principal amount of the Notes exceeded the sum of
the Pool Balance and the amounts in the other Trust Accounts, such Financed
Student Loans would likely have to be liquidated at a premium for the Class B
Noteholders and, in some circumstances, the Class A Noteholders, not to suffer a
loss.
Variability of Actual Cash Flows; Inability of Indenture Trustee to
Liquidate Financed Student Loans. Amounts received with respect to the Financed
Student Loans for a particular Collection Period may vary in both timing and
amount from the payments actually due on the Financed Student Loans as of such
Collection Period for a variety of economic, social and other factors, including
both individual factors such as additional periods of deferral or forbearance
prior to or after a borrower's commencement of repayment, and general factors,
such as a general economic downturn which could increase the amount of defaulted
Financed Student Loans. Failures by borrowers to pay timely the principal and
interest on the Financed Student Loans will affect the amount of Available
Funds, which may reduce the amount of principal and interest paid to the
Noteholders. In addition, failures by borrowers of Student Loans generally to
pay timely the principal and interest due on such Student Loans could obligate
the Guarantors to make payments thereon, which could adversely affect the
solvency of the Guarantors and their ability to meet their guarantee obligations
(including with respect to the Financed Student Loans). The inability of any
Guarantor to meet its guarantee obligations could reduce the amount of principal
and interest paid to the Noteholders. The effect of such factors, including the
effect on a Guarantor's ability to meet its guarantee obligations with respect
to the Financed Student Loans or the Trust's ability to pay principal and
interest with respect to the Notes, is impossible to predict. Pursuant to the
1992 Amendments, under Section 432(o) of the Higher Education Act, if the
Department has determined that a Guarantor of a Federal Loan is unable to meet
its insurance obligations, the loan holder may submit claims directly to the
Department and the Department is required to pay the full Guarantee Payment due
with respect thereto in accordance with guarantee claim processing standards no
more stringent than those applied by the Guarantor of such Federal Loans.
However, the Department's obligation to pay guarantee claims directly in this
fashion is contingent upon the Department making the determination referred to
above. There can be no assurance that the Department would ever make such a
determination with respect to a Guarantor or, if such a determination was made,
whether such determination or the ultimate payment of such guarantee claims
would be made in a timely manner.
If an Event of Default occurs under the Indenture, subject to certain
conditions, the Indenture Trustee is authorized, with the consent of the
Noteholders holding 66 2/3% of the outstanding principal balance of the Notes,
to sell the Financed Student Loans. There can be no assurance, however, that the
Indenture Trustee will be able to find a purchaser for the Financed Student
Loans in a timely manner or that the market value of such Financed Student Loans
would, at any time, be equal to the aggregate outstanding principal amount of
the Notes and accrued interest thereon. If the net proceeds of any such sale,
together with amounts then on deposit in the Reserve Account, do not exceed the
aggregate outstanding principal amount of Notes and accrued interest thereon,
the Noteholders will suffer a loss. In addition, the amount of principal
required to be distributed to Noteholders under the Indenture is generally
limited to amounts available to be so distributed. Therefore, the failure to pay
principal on the Notes may not result in the occurrence of an Event of Default
until the Final Maturity Date of the Notes. See "Description of the Transfer and
Servicing Agreements--Credit Enhancement."
Unsecured Nature of Financed Student Loans; Financial Status of
Guarantors. The Higher Education Act requires all Financed Student Loans to be
unsecured. As a result, the only security for payment of the Financed Student
Loans are the Guarantee Agreements between the Eligible Lender Trustee and the
Guarantors. A deterioration in the financial status of the Guarantors and their
ability to honor guarantee claims with respect to the Financed Student Loans
could result in a delay in making or a failure to make Guarantee Payments to the
Eligible Lender Trustee. One of the primary causes of a possible deterioration
in a Guarantor's financial status is directly related to the amount and
percentage of defaulting Financed Student Loans guaranteed by a Guarantor.
Moreover, to the extent that the Department pays reimbursement claims submitted
by a Guarantor for any fiscal year exceeding certain specified levels, the
Department's obligation to
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reimburse the Guarantor for losses will be reduced on a sliding scale from 100%
(98% for loans made on or after October 1, 1993) to a minimum of 80% (78% for
loans made on or after October 1, 1993), except that death, disability,
bankruptcy, closed school and false certification claims are reimbursed 100% by
the Department.
Changes in Law. There can be no assurance that the Higher Education Act or
other relevant federal or state laws, rules and regulations and the programs
implemented thereunder will not be amended or modified in the future in a manner
that will adversely impact the programs described herein and the loans made
thereunder, including the Financed Student Loans, or the Guarantors. In
addition, existing legislation and future measures to reduce the federal budget
deficit may adversely affect the amount and nature of federal financial
assistance available with respect to these programs. In recent years, federal
budget legislation has provided for the recovery of certain funds held by
guarantee agencies in order to achieve reductions in federal spending. There can
be no assurance that future federal budget legislation or administrative actions
will not adversely affect expenditures by the Department, or the financial
condition of the Guarantors.
Under the Omnibus Budget Reconciliation Act of 1993, Congress made a number
of changes that may adversely affect the financial condition of the Guarantors
of Federal Loans, including reducing to 98% the maximum percentage of Guarantee
Payments the Department will reimburse for loans first disbursed on or after
October 1, 1993, reducing substantially the premiums and default collections
that Guarantors of Federal Loans are entitled to receive and/or retain and
giving the Department broad powers over Guarantors of Federal Loans and their
reserves. These powers include the authority to require a Guarantor of Federal
Loans to return all reserve funds to the Department if the Department determines
such action is necessary to ensure an orderly termination of such Guarantor, to
serve the best interests of the Federal Loan Programs or to ensure the proper
maintenance of such Guarantor's funds or assets. The Department is also now
authorized to direct a Guarantor of Federal Loans to return a portion of its
reserve funds which the Department determines is unnecessary to pay the program
expenses and contingent liabilities of such Guarantor and/or to cease any
activities involving the use of such Guarantor's reserve funds or assets which
the Department determines is a misapplication or otherwise improper. The
Department may also terminate the reinsurance agreement of a Guarantor of
Federal Loans if the Department determines that such action is necessary to
protect the federal fiscal interest or to ensure an orderly transition to full
implementation of direct federal lending. In such event, however, the Department
is required to assume the functions of such Guarantor as described herein under
the heading "The Financed Student Loan Pool--Insurance of Student Loans;
Guarantors of Federal Loans." These various changes create a significant risk
that the resources available to the Guarantors of Federal Loans to meet their
guarantee obligations will be significantly reduced. In addition, this
legislation greatly expands the loan volume under the direct lending program by
the Department (the "Federal Direct Student Loan Program") to a target of
approximately 60% of student loan demand in academic year 1998-1999, which could
result in increasing reductions in the volume of loans made under the Federal
Loan Programs. As the Federal Direct Student Loan Program expands, the Servicers
may experience increased costs due to reduced economies of scale to the extent
the volume of new loans serviced by the Servicers is reduced. Such cost
increases could affect the ability of the Servicers to satisfy their obligations
to service the Financed Student Loans. Such volume reductions could further
reduce revenues received by the Guarantors of Federal Loans available to pay
claims on defaulted Federal Loans. Finally, the level of competition currently
in existence in the secondary market for loans made under the Federal Loan
Programs could be reduced, resulting in fewer potential buyers of the Federal
Loans and lower prices available in the secondary market for those loans.
Further, the Department is implementing a direct consolidation loan program. To
the extent that borrowers of Financed Student Loans elect to consolidate their
Student Loans with Financed Student Loans under such direct consolidation loan
program, the Noteholders will receive as a prepayment of principal the aggregate
principal amount of such Financed Student Loan. See "The Financed Student Loan
Pool--Maturity and Prepayment Assumptions."
Proposed federal budget legislation being considered by Congress could
modify many of the provisions of the Higher Education Act. Until final
legislation is adopted, the impact on the Financed Student Loans, if any, is
impossible to determine. During the 105th session of the United States Congress,
the reauthorization of the
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Higher Education Act is expected to be considered. The potential impacts on the
Financed Student Loans resulting from the reauthorization process, if any,
cannot be determined at this time.
Recent Developments--President Clinton's Proposed FY 1998 Budget. In his
proposed FY 1998 Budget, President Clinton has proposed a number of changes to
the Higher Education Act affecting lenders and Guarantors of Federal Loans.
These proposals, would, among other things, increase lender risk-sharing, reduce
the yield on certain Federal Loans while the student is in school, require
certain new payments to be made by lenders to guarantors in connection with
default aversion, eliminate guarantor risksharing, reduce guarantor reserve fund
levels, reduce guarantor retention rates on post-default payments and institute
performancebased contracts for guarantors. These proposals are likely to
encounter strenuous opposition from lenders and guarantors, and their prospects
for enactment by the Congress are uncertain. No assurance can be made that some
or all of these proposals will not be enacted, or that other amendments to the
Higher Education Act adverse to lenders or guarantors will not be included in
the final FY 1998 budget or related legislation.
Subordination; Limited Assets. The rights of the Class B Noteholders to
receive payments of principal will be subordinated to those of the Class A-1
Noteholders and the Class A-2 Noteholders as described herein. If amounts
otherwise allocable to the Class B Notes are used to fund payments of principal
on the Class A-1 Notes or the Class A-2 Notes, distributions with respect to the
Class B Notes may be delayed or reduced. Notwithstanding the foregoing,
distributions to the Class B Noteholders of amounts representing the Class B
Noteholders' Interest Distribution Amount will not be subordinated to the
payment of any Noteholders' Interest Carryover that may exist from time to time.
See "Description of the Notes-- Subordination of the Class B Notes,"
"Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit Enhancement--Subordination of the Class B Notes."
Moreover, the Trust does not have, nor is it permitted to have, any
significant assets or sources of funds other than the Financed Student Loans
(and the related Guarantee Agreements to the extent assigned to the Trust by the
Transferor ("Assigned Rights")), the Collection Account, the Note Distribution
Account, the Reserve Account and the Monthly Advance Account. The Notes
represent obligations solely of the Trust and its assets, and will not be
insured or guaranteed by the Transferor, the Master Servicer, the Guarantors,
the Eligible Lender Trustee, any of their affiliates or the Department.
Consequently, holders of the Notes must rely for repayment upon proceeds
realized upon the sale of, or payments with respect to, the Financed Student
Loans and, if and to the extent available under the circumstances described
herein, amounts on deposit in the Reserve Account. Amounts to be deposited in
the Reserve Account are limited in amount and will be reduced, subject to a
specified minimum, as the Pool Balance is reduced. If the Reserve Account is
exhausted, the Trust will depend solely on payments with respect to the Financed
Student Loans to make payments on the Notes. See "Description of the Transfer
and Servicing Agreements--Distributions" and "--Credit Enhancement."
Maturity and Prepayment Assumptions. Financed Student Loans may be prepaid
by borrowers at any time. (For this purpose the term "prepayments" includes
prepayments in full or in part (including pursuant to Consolidation Loans or
Serial Loans) and liquidations due to default (including receipt of Guarantee
Payments).) The rate of prepayments on the Financed Student Loans may be
influenced by a variety of economic, social and other factors affecting
borrowers, including interest rates, the availability of alternative financing
and the general job market for graduates of institutions of higher education. In
addition, under certain circumstances, the Transferor will be obligated to
purchase, or the Master Servicer will be obligated to purchase, Financed Student
Loans from the Trust pursuant to the Transfer and Servicing Agreement as a
result of breaches of its representations, warranties or covenants. See
"Description of the Transfer and Servicing Agreements--Conveyance of Financed
Student Loans; Representations and Warranties" and "--Master Servicer
Covenants." Moreover, to the extent borrowers of Financed Student Loans elect to
borrow money through Consolidation Loans with respect to such Financed Student
Loans from the Transferor or from another lender, or to the extent the Trust
sells a Financed Student Loan to serialize the ownership of such Financed
Student Loan and other loans to the same borrower (each, a "Serial Loan"),
holders of the Notes will receive as a prepayment of principal the aggregate
principal amount of such Financed Student Loans. There can be no assurance that
borrowers with Financed Student Loans will not seek to obtain Consolidation
Loans with respect to such Financed Student Loans or when Serial Loans will be
sold. See
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"The Student Loan Financing Business" and "The Financed Student Loan
Pool--Maturity and Prepayment Assumptions."
Scheduled payments with respect to, and maturities of, the Financed Student
Loans may be extended, including pursuant to the applicable Deferral Phase
certain other grace periods authorized by the Higher Education Act ("Grace
Periods") and, under certain circumstances, periods of forbearance ("Forbearance
Periods"). See "The Student Loan Financing Business" and "The Financed Student
Loan Pool--Maturity and Prepayment Assumptions." Any reinvestment risks
resulting from a faster or slower incidence of prepayment of Financed Student
Loans will be borne entirely by the Noteholders. See also "Description of the
Transfer and Servicing Agreements--Insolvency Event" regarding the sale of the
Financed Student Loans if a Transferor Insolvency Event occurs and
"--Termination" regarding the Transferor's option to purchase the Financed
Student Loans.
Certain Differences between Classes of Notes. Because the Class A-2 Notes
will receive no payment of principal until the Class A-1 Notes have been paid in
full, and the Class B Notes will receive no payments of principal until the
Class A-1 Notes and the Class A-2 Notes have been paid in full, the Classes of
Notes receiving principal earlier bear relatively greater risk than each Class
receiving principal later of (i) principal repayments with respect to the
Financed Student Loans (whether as a result of voluntary prepayments,
Consolidation Loans or liquidations due to default or breach), or (ii) Financed
Student Loans being sold by the Trust. On the other hand, holders of Notes
receiving principal later would bear a greater risk of loss of principal than do
holders of Notes receiving principal earlier in the event of a shortfall in
Available Funds and amounts on deposit in the Reserve Account.
Basis Risk. The interest rate for the Class B Notes (the "Class B Interest
Rate") will be based generally on One-Month LIBOR. The Financed Student Loans,
however, generally bear interest at an effective rate (taking into account any
Special Allowance Payments) equal to the average bond equivalent rates of weekly
auctions of 91-day Treasury bills for each quarter (the "91-day Treasury Bill
Rate") (or, in certain circumstances, 52-week Treasury bills) plus margins
specified for such Financed Student Loans under "The Student Loan Financing
Business." As a result, if in respect of any Distribution Date, there does not
exist a positive spread between (a) the Net Loan Rate and (b) the Class B
Interest Rate, the Class B Interest Rate for such Distribution Date will be the
Net Loan Rate. See "Description of the Notes--The Notes-- Distributions of
Interest." Any Noteholders' Interest Carryover arising as a result of the
applicable Class B Interest Rate being determined on the basis of the Net Loan
Rate will be paid on the following Distribution Date or on any succeeding
Distribution Date to the extent funds are allocated and available therefor after
making all required prior distributions and deposits with respect to such date.
Payment of such amounts, however, will not be covered by amounts on deposit in
the Reserve Account (other than amounts in excess of the Specified Reserve
Account Balance). See "Description of Transfer and Servicing Agreements--
Distributions."
Although the interest rate on the Class A-1 Notes and the Class A-2 Notes
is generally based on the T-Bill Rate, it is possible that for a Distribution
Date a positive spread may not exist between (a) the Net Loan Rate and (b) the
interest rate on such Classes of Notes based on the T-Bill Rate. In such a case,
the interest rate on one or both Classes of Class A Notes for such Distribution
Date will be the Net Loan Rate. See "Description of the Notes--The
Notes--Distributions of Interest." Any Noteholders' Interest Carryover arising
as a result of the interest rate on one or both Classes of Notes being
determined on the basis of the Note Loan Rate will be paid on the following
Distribution Date or on any succeeding Distribution Date to the extent funds are
allocated and available therefor after making all required prior distributions
and deposits with respect to such date. Payment of such amounts, however, will
not be covered by amounts on deposit in the Reserve Account (other than amounts
in excess of the Specified Reserve Account Balance). See "Description of the
Transfer and Servicing Agreements--Distributions."
Insolvency Risk of Transferor. The Transferor intends that the transfer of
the Financed Student Loans by it to the Eligible Lender Trustee on behalf of the
Trust under the Transfer and Servicing Agreement constitutes a valid
contribution and assignment of such Financed Student Loans. However, a court
could treat the transfer of the Financed Student Loans to the Eligible Lender
Trustee as an assignment of collateral as
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security for the benefit of the Trust. If the transfer of the Financed Student
Loans to the Eligible Lender Trustee is deemed to create a security interest
therein, a tax or government lien on property of the Transferor arising before
the Financed Student Loans came into existence may have priority over the
Eligible Lender Trustee's interest in such Financed Student Loans and, if the
Federal Deposit Insurance Corporation (the "FDIC") were appointed receiver or
conservator of the Transferor, the FDIC's administrative expenses may also have
priority over the Eligible Lender Trustee's interest in such Financed Student
Loans. In the event that the Transferor becomes insolvent, the Federal Deposit
Insurance Act ("FDIA"), as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA"), sets forth certain powers which
the FDIC could exercise if it were appointed as receiver or conservator of the
Transferor. Subject to clarification by FDIC regulations or interpretations, it
would appear from the positions taken by the FDIC that the FDIC, in its capacity
as a receiver or conservator for the Transferor, would not interfere with the
timely transfer to the Trust of collections with respect to the Financed Student
Loans. To the extent that the transfer of the Financed Student Loans is deemed
to create a security interest, and that interest was validly perfected before
the Transferor's insolvency and was not taken in contemplation of insolvency or
with the intent to hinder, delay or defraud the Transferor or its creditors,
based upon opinions and statements of policy issued by the general counsel of
the FDIC addressing the enforceability against the FDIC, as conservator or
receiver for a depository institution, of a security interest in collateral
granted by such depository institution, such security interest should not be
subject to avoidance and payments to the Trust with respect to the Financed
Student Loans should not be subject to recovery by the FDIC as receiver or
conservator of the Transferor. If, however, the FDIC were to assert a contrary
position, certain provisions of the FDIA which, at the request of the FDIC, have
been applied in recent lawsuits to avoid security interests in collateral
granted by depository institutions, would permit the FDIC to avoid such security
interest, thereby resulting in possible delays and reductions in payments on the
Notes. In addition, if the FDIC were to require the Indenture Trustee or the
Eligible Lender Trustee to establish its right to such payments by submitting to
and completing the administrative claims procedure under the FDIA, as amended by
the FIRREA, delays in payments on the Notes and possible reductions in the
amount of those payments could occur. See "Certain Legal Aspects of the Financed
Student Loans."
Changes in Repayment Terms of Financed Student Loans Pursuant to Incentive
Programs. The Transferor currently makes available and may hereafter make
available certain incentive programs to borrowers. See "The Financed Student
Loan Pool--Incentive Programs". Under these programs, the Transferor retains the
option to terminate or change the terms of the incentives with respect to any or
all of the borrower's loans, including loans originated prior to the termination
or change which have been assigned to the Trust. It cannot be predicted with
certainty which borrowers will qualify or decide to participate in these
programs. The effect of these incentive programs may be to reduce the yield on
the Financed Student Loans.
Ratings of the Securities. It is a condition to the issuance and sale of
the Class A-1 Notes and the Class A-2 Notes that they each be rated "AAA" by
Standard & Poor's and "Aaa" by Moody's, and it is a condition to the issuance of
the Class B Notes that they be rated at least "A" by S&P and at least "A2" by
Moody's. A rating is not a recommendation to purchase, hold or sell the Notes,
inasmuch as such rating does not comment as to market price or suitability for a
particular investor. The ratings of the Notes address the likelihood of the
ultimate payment of principal of and interest on the Notes pursuant to their
terms. However, the Rating Agencies do not evaluate, and the ratings of the
Notes do not address, the likelihood of payment of any Noteholders' Interest
Carryover. There can be no assurance that a rating will remain for any given
period of time or that a rating will not be lowered or withdrawn entirely by a
Rating Agency if in its judgment circumstances in the future so warrant.
Book-Entry Registration. The Notes will each be initially represented by
one or more certificates registered in the name of Cede & Co. ("Cede"), the
nominee for DTC, and will not be registered in the names of the holders of such
Notes or their nominees. Because of this, unless and until Definitive Notes are
issued, holders of the Notes will not be recognized by the Indenture Trustee or
the Eligible Lender Trustee as "Noteholders" (as such terms are used in the
Indenture). Hence, until Definitive Notes are issued, holders of the Notes will
only be able to exercise the rights of Noteholders indirectly through DTC and
its participating organizations. See "Description of the Notes--Book-Entry
Registration" and "--Definitive Notes."
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FORMATION OF THE TRUST
THE TRUST
PNC Student Loan Trust I is a statutory business trust that was formed on
March 27, 1997, under the laws of the State of Delaware for the transactions
described in this Prospectus. The Trust will not engage in any activity other
than (i) acquiring, holding, selling and managing the Financed Student Loans and
the other assets of the Trust and proceeds therefrom, (ii) issuing one or more
classes of its certificates and notes, (iii) making payments thereon and (iv)
engaging in other activities that are necessary, suitable or convenient to
accomplish the foregoing or are incidental thereto or connected therewith. For
so long as the Transferor is a Certificateholder, the Trust's activities will be
limited to activities that are part of, or incidental to, the business of
banking as well.
The Trust was initially capitalized with equity equal to $1,000 on the date
of its formation, representing the initial principal balance of the Certificates
issued on such date. Approximately 4.9% of such Certificates were sold to the
Transferor and the remaining Certificates were offered for sale in transactions
exempt from the registration requirements of the Securities Act. On such date,
the Trust also issued its Series 1997-1 notes, which will be repaid in full
immediately prior to the issuance of the Notes. The equity of the Trust,
together with the proceeds from the sale of the Notes, will be used by the
Eligible Lender Trustee in connection with its acquisition, on behalf of the
Trust, of the Financed Student Loans from the Transferor pursuant to the
Transfer and Servicing Agreement. A portion of the net proceeds received from
the transfer of the Financed Student Loans will be used by the Transferor to
make a Reserve Account Deposit in the amount of $ . Upon the
consummation of such transaction, the property of the Trust will consist of (a)
the pool of Financed Student Loans, legal title to which is held by the Eligible
Lender Trustee on behalf of the Trust, (b) all funds collected in respect
thereof after the Cut-off Date and (c) all moneys and investments on deposit in
the Collection Account, the Certificate Distribution Account, the Note
Distribution Account, the Expense Account, the Monthly Advance Account and the
Reserve Account. The Notes will be collateralized by the property of the Trust.
The Collection Account, the Note Distribution Account, the Expense Account, the
Reserve Account and the Monthly Advance Account will be maintained with and in
the name of the Indenture Trustee. The Certificate Distribution Account will be
maintained with and in the name of the Eligible Lender Trustee. To facilitate
servicing and to minimize administrative burden and expense, either the Master
Servicer or the related Servicer will be appointed custodian of the promissory
notes representing the Financed Student Loans by the Eligible Lender Trustee.
The Trust's principal offices are in Chicago, Illinois, in care of The
First National Bank of Chicago, as Eligible Lender Trustee, at the address
listed below.
ELIGIBLE LENDER TRUSTEE
The First National Bank of Chicago, the Eligible Lender Trustee for the
Trust under the Trust Agreement, is a national banking association organized
under the laws of the United States with its chief executive office in Chicago,
Illinois. The office of the Eligible Lender Trustee for purposes of
administering the Trust is located at One First National Plaza, Chicago,
Illinois 60670. The Eligible Lender Trustee will acquire on behalf of the Trust
legal title to all the Financed Student Loans acquired pursuant to the Transfer
and Servicing Agreement. The Eligible Lender Trustee on behalf of the Trust will
enter into a Guarantee Agreement with each of the Guarantors with respect to
such Financed Student Loans. The Eligible Lender Trustee qualifies as an
eligible lender and owner of all Financed Student Loans for all purposes under
the Higher Education Act and the Guarantee Agreements. Failure of the Financed
Student Loans to be owned by an eligible lender would result in the loss of
Guarantee Payments, with respect to such Financed Student Loans. See "The
Financed Student Loan Pool--Insurance of Student Loans; Guarantors of Student
Loans."
The Transferor or its affiliates maintain from time to time other banking
relationships with The First National Bank of Chicago, the Eligible Lender
Trustee, and its affiliates.
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USE OF PROCEEDS
The net proceeds from the sale of the Notes will be paid to the Transferor
on the Closing Date as consideration for the Financed Student Loans being
conveyed on such date. The Transferor will use such proceeds to make the initial
Reserve Account Deposit, deposits into certain other Trust Accounts and for
general corporate purposes.
THE TRANSFEROR
The Transferor is a national banking association that offers a wide range
of domestic and international commercial banking, retail banking and trust and
asset management services to its customers. At December 31, 1996, the Transferor
had total assets of $57.6 billion, total loans (net of unearned income) of $41.3
billion, total deposits of $36.4 billion and total shareholder's equity of $4.6
billion. At March 31, 1997, the corresponding amounts were $ billion, $
billion, $ billion and $ billion. The Transferor had an aggregate
principal amount of Student Loans outstanding of approximately $1.7 billion at
December 31, 1996 and $1.3 billion at March 31, 1997. The Transferor and its
predecessors have been originating Student Loans since the enactment of the
Higher Education Act.
The Transferor's business is subject to examination and regulation by
federal banking authorities. Its primary federal bank regulatory authority is
the Office of the Comptroller of the Currency. The principal executive offices
of the Transferor are located at One PNC Plaza, 249 Fifth Avenue, Pittsburgh,
Pennsylvania 15222-2707. Its telephone number is (412) 762-1553.
The Transferor is a wholly owned indirect subsidiary of PNC Bank Corp. (the
"Holding Company" and together with its subsidiaries, the "Corporation"), a bank
holding company organized under the laws of the Commonwealth of Pennsylvania and
registered under the Bank Holding Company Act of 1956, as amended. The Holding
Company was incorporated in 1983 with the consolidation of Pittsburgh National
Corporation and Provident National Corporation. Since 1983, the Corporation has
diversified its geographical presence and product capabilities through strategic
bank and non-bank acquisitions and the formation of various nonbanking
subsidiaries. The Corporation operates banking subsidiaries in Pennsylvania,
Delaware, Florida, Indiana, Kentucky, Massachusetts, New Jersey and Ohio and
conducts certain non-banking operations throughout the United States. The
Corporation's major businesses include consumer banking, corporate banking, real
estate banking, mortgage banking and asset management. At December 31, 1996, the
Corporation had total assets of $73.3 billion, total loans (net of unearned
income) of $51.8 billion, total deposits of $45.7 billion and total
shareholders' equity of $5.9 billion. At March 31, 1997, the corresponding
amounts were $71.2 billion, $52.6 billion, $44.9 billion and $5.5 billion.
THE NOTES ARE NEITHER OBLIGATIONS OF NOR GUARANTEED BY THE HOLDING COMPANY
OR ANY OF THE HOLDING COMPANY'S SUBSIDIARIES (INCLUDING THE TRANSFEROR).
SERVICERS
PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY
PHEAA is a body corporate and politic constituting a public corporation and
government instrumentality created pursuant to an act of the Pennsylvania
Legislature. PHEAA has approximately 2,300 employees. PHEAA's headquarters is
located in Harrisburg, Pennsylvania, with six regional offices located
throughout Pennsylvania and additional offices located in California, Delaware
and West Virginia.
Under its enabling legislation, PHEAA is authorized to issue bonds or
notes, with the approval of the Governor of the Commonwealth of Pennsylvania for
the purpose of purchasing, making, or guaranteeing loans to students or parents,
or to lending institutions or post secondary institutions to make student or
parent loans. PHEAA's enabling legislation also authorizes PHEAA to undertake
the origination of loans and the servicing of loans made by PHEAA and others.
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As of March 31, 1997 PHEAA has outstanding debt and/or credit facilities
(under which the entire aggregate amount of funds available had not been drawn)
in the amount (including amounts drawn or available under such credit
facilities) of approximately $2.2 billion. As of March 31, 1997, PHEAA owned
approximately $1.6 billion outstanding principal amounts of student loans
financed with the proceeds of its long-term debt, and had funds available for
acquisition of student loans in the amount of approximately $465 million.
PHEAA has been guaranteeing student loans since 1964. PHEAA has guaranteed
a total of approximately $16.5 billion principal amount of Stafford Loans and
approximately $1.6 billion principal amount of PLUS Loans and SLS Loans under
the Higher Education Act. In addition to guaranteeing loans under the Higher
Education Act, PHEAA also operates certain guarantee programs for which its
receives no federal reinsurance. PHEAA has outstanding guarantee obligations of
such loans in the amount of approximately $42 million as of March 31, 1997.
PHEAA's two principal servicing products are its full servicing operation
and its remote servicing operation. As of March 31, 1997 PHEAA was servicing
under its full service program approximately 1.3 million student loan accounts
representing approximately $11.1 billion outstanding principal amounts for more
than 320 customers and under its remote servicing operation, approximately
700,000 student loans representing approximately $3.5 billion outstanding
principal amounts for four customers.
Pursuant to a sub-servicing agreement, PHEAA has agreed to service, and
perform all other related tasks with respect to certain of the Financed Student
Loans. PHEAA is required to perform all services and duties customary to the
servicing of such Financed Student Loans in compliance with all applicable
standards and procedures. See "Description of the Transfer and Servicing
Agreements--Servicing Procedures."
The above information relating to PHEAA has been obtained from PHEAA and
the Transferor has not conducted any independent verification of such
information. The Transferor does not make any representations or warranties with
respect to, or otherwise guarantee the accuracy or completeness of, such
information. PHEAA has agreed that it will provide a copy of its most recent
audited financial statements to Noteholders upon receipt of a written request
directed to Mr. Tim Guenther, Chief Financial Officer(-)Financial Management,
1200 North Seventh Street, Harrisburg, Pennsylvania 17102.
AFSA DATA CORPORATION
AFSA Data Corporation ("AFSA") is a for-profit corporation and wholly owned
subsidiary of Fleet Holding Corporation, a subsidiary of Fleet National Bank,
which in turn is a wholly-owned subsidiary of Fleet Financial Group of Boston,
Massachusetts, a diversified financial services company. AFSA services 4.7
million accounts nationwide and is the largest third-party student loan servicer
in the United States, with over $23 billion in loans serviced. AFSA has its
principal office in Long Beach, California and Regional Processing Centers in
Utica, New York and Lombard, Illinois. AFSA has approximately 1,350 employees.
AFSA's principal office is located at 2277 E. 220th Street, Long Beach,
California 90810-1690.
Pursuant to a sub-servicing agreement, AFSA has agreed to service, and
perform all other related tasks with respect to, certain of Financed Student
Loans. AFSA is required to perform all services and duties customary to the
servicing of such Financed Student Loans in compliance with all applicable
standards and procedures. See "Description of the Transfer and Servicing
Agreements--Servicing Procedures."
The above information relating to AFSA has been obtained from AFSA and the
Transferor has not conducted any independent verification of such information.
The Transferor does not make any representations or warranties with respect to,
or otherwise guarantee the accuracy or completeness of, such information. AFSA
has agreed that it will provide a copy of its most recent audited financial
statements to Noteholders upon receipt of a written request directed to Mr.
Steve Allen, Vice President and Controller, AFSA Data Corporation, 2277 E. 220th
Street, Long Beach, California 90810-1690.
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GREAT LAKES HIGHER EDUCATION CORPORATION
Great Lakes Higher Education Corporation ("Great Lakes") is a private
non-profit corporation doing business in Madison, Wisconsin. As of December 31,
1996, Great Lakes provided loan servicing for over 1,000 lenders and secondary
markets nationwide. The servicing portfolio totaled approximately $5.0 billion,
with over 2 million loans in the portfolio. Great Lakes is located at 2401
International Lanes, Madison, WI 53704. Telephone (609) 246-1404.
Pursuant to a sub-servicing agreement, Great Lakes has agreed to service,
and perform all other related tasks with respect to certain of the Financed
Student Loans. Great Lakes is required to perform all services and duties
customary to the servicing of such Financed Student Loans in compliance with all
applicable standards and procedures. See "Description of the Transfer and
Servicing Agreements--Servicing Procedures."
The above information relating to Great Lakes has been obtained from Great
Lakes and the Transferor has not conducted any independent verification of such
information. The Transferor does not make any representations or warranties with
respect to, or otherwise guarantee the accuracy or completeness of, such
information. Great Lakes has agreed that it will provide a copy of its most
recent audited financial statements to Noteholders upon receipt of a written
request directed to Mr. David Harmon, Executive Vice President and Chief
Operating Officer, Great Lakes Higher Education Corporation, 4689 Hilton
Corporate Drive, Columbus, Ohio 43232.
USA GROUP LOAN SERVICES, INC.
USA Group Loan Services, Inc. ("USAG"), formerly known as Education Loan
Servicing Center, Inc., is a private, non-profit, non-stock membership
corporation which was organized in 1982 under the General Corporation Law of the
State of Delaware. USAG is an affiliate of USA Group, Inc., a non-profit
corporation which is also affiliated with USA Funds, a student loan guarantor
and one of the USAG's guaranty agencies. As of December 31, 1996, USAG provided
loan servicing for in excess of 3 million student and parent loans with
outstanding balances of approximately $10.4 billion for approximately 150
different lenders and secondary market corporations. USAG's principal office is
located in Indianapolis, Indiana, where it currently has nearly 800 full-time
employees. USAG is located at 30 S. Meridian Street, Indianapolis, Indiana,
46206, telephone number (317) 849-6510.
Pursuant to a sub-servicing agreement, USAG has agreed to service, and
perform all other related tasks with respect to certain of the Financed Student
Loans. USAG is required to perform all services and duties customary to the
servicing of such Financed Student Loans in compliance with all applicable
standards and procedures. See "Description of the Transfer and Servicing
Agreements--Servicing Procedures."
The above information relating to USAG has been obtained from USAG and the
Transferor has not conducted any independent verification of such information.
The Transferor does not make any representations or warranties with respect to,
or otherwise guarantee the accuracy or completeness of, such information. USAG
has agreed that it will provide a copy of its most recent audited financial
statements to Noteholders upon receipt of a written request directed to Ms.
Laurie Blackburn, Vice President--Marketing and Contract Administration, USA
Group Loan Services, Inc, 30 S. Meridian Street, Indianapolis, Indiana, 46206.
THE STUDENT LOAN FINANCING BUSINESS
GENERAL
The Student Loans to be contributed by the Transferor to the Eligible
Lender Trustee on behalf of the Trust pursuant to the Transfer and Servicing
Agreement will be selected from Student Loans originated or purchased by the
Transferor and made to students enrolled in or recently graduated from
accredited institutions of higher education within the meaning of the Higher
Education Act. The proceeds of these loans are used by students to finance a
portion of the costs of school. Each of the Financed Student Loans will be
guaranteed by private, non-profit corporations or state agencies, and are and
will be reinsured by the United
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States Department of Education (the "Department") and subject to the limitations
described in this Prospectus.
Payment of principal and interest with respect to the Financed Student
Loans is guaranteed against default, death, bankruptcy, disability, school
closure or false certification by the school with respect to the applicable
borrower by a Guarantor pursuant to a guarantee agreement between the applicable
Guarantor and the Eligible Lender Trustee (such agreements, each as amended or
supplemented from time to time, the "Guarantee Agreements"). Each Guarantor of
Financed Student Loans is entitled, subject to certain conditions, to be
reimbursed for 98% (or 100% for loans made prior to October 1, 1993) and all
loans filed as nondefault claims of all Federal Guarantee Payments it makes by
the Department pursuant to a program of federal reinsurance under the Higher
Education Act of 1965, as amended (such Act, together with all rules and
regulations promulgated thereunder by the Department and/or the Guarantors, the
"Higher Education Act"). In addition, the Eligible Lender Trustee, as a holder
of the Financed Student Loans on behalf of the Trust, is entitled to receive
from the Department certain Interest Subsidy Payments and Special Allowance
Payments with respect to certain of such Financed Student Loans as described
herein. See "--The Federal Loan Program" and "The Financed Student Loan
Pool--Insurance of Student Loans; Guarantors of Student Loans."
Legal title to all the Financed Student Loans that comprise assets of the
Trust will be held by the Eligible Lender Trustee, as trustee on behalf of the
Trust. See "Formation of the Trust--Eligible Lender Trustee."
The description and summaries of the Higher Education Act, the Federal Loan
Programs, the Guarantee Agreements and the other statutes, regulations and
documents referred to in this Prospectus do not purport to be comprehensive, and
are qualified in their entirety by reference to each such statute, regulation or
document. There can be no assurance that future amendments or modifications will
not materially change any of the terms or provisions of the programs described
in this Prospectus or of the statutes and regulations implementing these
programs. See "Risk Factors--Changes in Law" and "--Recent Developments--
President Clinton's Proposed FY 1998 Budget."
THE FEDERAL LOAN PROGRAM
General. The Transferor's loan program for Federal Loans (the "Program")
provides educational financing to students (or their parents) enrolled in or
recently graduated from accredited institutions of higher education. The
Transferor has been originating loans under the Program since the enactment of
the Higher Education Act and had, as of March 31, 1997, Student Loan assets
under management in an aggregate principal amount of approximately $1.8 billion.
The Program consists of certain Federal Loans, each of which is guaranteed by a
Guarantor and reinsured by the Department. As described below, Federal Loans
include "Stafford Loans," "SLS Loans," "PLUS Loans," "Unsubsidized Stafford
Loans" and "Consolidation Loans"
Eligibility. To be eligible to obtain a loan under the Program, a student
must, among other things, (i)(a) be enrolled in, or be admitted for enrollment
in, a school that is an accredited and licensed State or nonprofit institution
of higher education and be enrolled in, or enroll in, an eligible undergraduate
or graduate degree or certificate program, be attending at least half-time and
be making satisfactory progress toward the completion of such program according
to the standards of the school, or (b) be enrolled in, or admitted for
enrollment in, an eligible degree or certificate program at an accredited and
licensed Proprietary School (i.e., a privately owned school offering
post-secondary education and operating on a for profit basis), (ii) be a U.S.
citizen, U.S. national or eligible noncitizen, (iii) not have borrowed, together
with the loan being requested, more than the applicable annual and aggregate
limits specified from time to time under the Program, (iv) meet the applicable
"needs" requirements and agree to notify promptly the holder of the loan of any
address change and (v) not be in default on any Federal education loan or owe a
refund on a Federal educational grant (each such student, an "Eligible
Student").
Origination Process. The Higher Education Act specifies rules regarding
loan origination practices, which lenders must comply with in order for their
loans to be guaranteed and to be eligible to receive Federal assistance. Lenders
are prohibited from offering points, premiums, payments or other inducements,
directly or indirectly, to any educational institution, guarantee agency or
individual in order to secure loan applications,
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and no lender may conduct unsolicited mailings of student loan applications to
students who have not previously received student loans from that lender.
With respect to all Federal Loans made under the Program (other than
Consolidation Loans discussed below), the Transferor or its agent receives from
a borrower an application for a Federal Loan (which includes an executed
promissory note). The Transferor reviews or causes to be reviewed each
application to confirm its completeness, to confirm that the applicant is an
Eligible Student and that such loan complies with certain other conditions of
the Program. The Transferor forwards or causes to be forwarded a copy of each
application (or electronically transmits the data from such application) that
satisfies the foregoing reviews to the respective Guarantor, who reviews such
application to determine that such application satisfies all applicable
conditions, including the foregoing, for the loan to be eligible to receive
Guarantee Payments, subject to compliance with the terms of the respective
Guarantee Agreements, including the proper servicing of the loan. Upon approval
of an application by both the Transferor and the respective Guarantor and
receipt of evidence from such Guarantor that the applicable loan is guaranteed,
the Transferor causes the proceeds of such loan to be disbursed in one or more
installments. For each loan that is made, the Transferor forwards or causes to
be forwarded the completed loan application and executed promissory note to the
Master Servicer, which serves as custodian for such materials.
With respect to borrower inquiries concerning Consolidation Loans, the
applicable Servicer will contact the borrower and prepare and send to the
borrower an application (which includes a promissory note) for a Consolidation
Loan for the borrower's review and signature. Although the borrower is permitted
to choose any lender from whom he or she currently has federally guaranteed
education loans (including undergraduate loans) to make such Consolidation Loan,
borrowers typically express no preference as to the identity of the lender. In
that event, the Servicer will choose a lender based on various considerations,
which may include the lender that has the highest balance of the loans to be
consolidated or, if there is no such lender, the lender that has made the most
recent loan to the borrower to be consolidated. Pursuant to the Program, the
applicable Servicer will be required to obtain certifications from the lenders
of the loans to be consolidated and to review the loan application and the
certifications to confirm that the borrower is eligible for a Consolidation
Loan. Upon approval of an application for a Consolidation Loan, the applicable
lender will cause the proceeds of such Consolidation Loan to be disbursed to
each lender of the loans being consolidated in amounts sufficient to retire each
of such loans. For each Consolidation Loan that is made by the Transferor, the
Servicer will retain the completed loan application and executed promissory note
as custodian.
Servicing and Collections Process. The Higher Education Act, the Federal
Loan Program and the applicable Guarantee Agreements require the holder of
Federal Loans to cause specified procedures, including due diligence procedures
and the taking of specific steps at specific intervals, to be performed with
respect to the servicing of the Federal Loans that are designed to ensure that
such Federal Loans are repaid on a timely basis by or on behalf of borrowers.
The Master Servicer will perform such procedures and has agreed, pursuant to the
Transfer and Servicing Agreement, to perform, or cause to be performed,
specified and detailed servicing and collection procedures with respect to the
Financed Student Loans on behalf of the Trust. Such procedures generally include
periodic attempts to contact any delinquent borrower by telephone and by mail,
commencing with a written notice at the tenth day of delinquency and including
multiple written notices and telephone calls to the borrower thereafter at
specified times during any such delinquency. All telephone calls and letters are
automatically registered, and a synopsis of each call or the mailing of each
letter is noted in the Master Servicer's loan file for the borrower. The Master
Servicer is also required to perform, or cause to be performed, skip tracing
procedures on delinquent borrowers whose current location is unknown, including
contacting such borrowers' schools and references. Failure to comply with the
established procedures could adversely affect the ability of the Eligible Lender
Trustee, as holder of legal title to the Financed Student Loans on behalf of the
Trust, to realize the benefits of any Guarantee Agreement or to receive the
benefits of Federal assistance from the Department with respect thereto. Failure
to comply with certain of the established procedures with respect to a Federal
Loan may also result in the denial of coverage under a Guarantee Agreement for
certain accrued interest amounts, in circumstances where such failure has not
caused the loss of the guarantee of the principal of such Federal Loan. See
"Risk Factors--Failure to Comply with Loan Origination and Servicing Procedures
for Financed Student Loans."
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At prescribed times prior to submitting a claim for payment under a
Guarantee Agreement for a delinquent Financed Student Loan, the Master Servicer
is required to notify the applicable Guarantor of the existence of such
delinquency. These requests notify the Guarantors of seriously delinquent
accounts and allow the Guarantors to make additional attempts to collect on such
loans prior to the filing of claims. If a loan is delinquent for 180 days, the
Master Servicer is required to file a default claim with the respective
Guarantor. Failure to file a claim within 240 days of delinquency may result in
denial of the guarantee claim with respect to such Financial Student Loan, and
failure to file within 210 days may result in a reduction in the accrued
interest included in the claim payment. The failure by the Master Servicer to
file a guarantee claim in a timely fashion would constitute a breach of its
covenants and create an obligation of the Master Servicer to purchase the
applicable Federal Loan. See "Description of the Transfer and Servicing
Agreements--Master Servicer Covenants."
TYPES OF FEDERAL LOANS UNDER THE PROGRAM
General. The following descriptions of the Stafford Student Loan Program,
the Unsubsidized Stafford Loan Program, the Supplemental Loans for Students
Program, the Parental Loans for Undergraduate Students Program and the
Consolidation Loan Program as authorized under the Higher Education Act are
qualified in their entirety by reference to the Higher Education Act. Since its
original enactment in 1965, the Higher Education Act has been amended and
reauthorized several times, including by the Higher Education Amendments of 1992
(the "1992 Amendments"), the Student Loan Reform Act of 1993 (the "1993
Amendments") and the Higher Education Technical Amendments Act of 1993 (the
"1993 Technical Amendments"). The 1992 Amendments extended the principal
provisions of the Federal Loan Programs through October 1, 1998 (or, in the case
of borrowers who have received Federal Loans prior to that date, September 30,
2002).
There can be no assurance that the Higher Education Act or other relevant
federal or state laws, rules and regulations and the programs implemented
thereunder will not be amended or modified in the future in a manner that will
adversely impact the programs described in this Prospectus and the Federal Loans
made thereunder, or the Guarantors. In addition, existing legislation and future
measures to reduce the federal budget deficit may adversely affect the amount
and nature of federal financial assistance available with respect to these
programs. In recent years, federal budget legislation has provided for the
recovery of certain funds held by guarantee agencies in order to achieve
reductions in federal spending. There can be no assurance that future federal
budget legislation or administrative actions will not adversely affect
expenditures by the Department or the financial condition of the Guarantors.
Also, effective for student loans first disbursed after October 1, 1993,
Lenders will be assessed an up-front, user/origination fee equal to .5% of the
principal amount of the student loan.
Stafford Loans. "Stafford Loans" are loans made by eligible lenders in
accordance with the Higher Education Act to Eligible Students, based on
financial need, to finance a portion of the costs of attending an eligible
institution of higher education or a vocational school. The Higher Education Act
limits the amount of Stafford Loans that may be made to a student in any given
academic year and the amount of Stafford Loans that a student may have
outstanding in the aggregate and specifies certain payment terms, including the
interest rates that may be charged on Stafford Loans. Holders of Stafford Loans
complying with these limitations and the other conditions specified in the
Higher Education Act will be entitled to the benefits of: (i) a guarantee of the
payment of principal and interest with respect to such Stafford Loans by a
guarantee agency, which guarantee will be supported by federal reinsurance of
all or most of such guaranteed amounts as described herein; (ii) federal
interest subsidy payments equal to the interest payable on such Stafford Loans
prior to the time the borrower begins repayment of such Stafford Loans and
during any applicable Deferral Periods, together with interest on any such
amounts not paid by the Department when due ("Interest Subsidy Payments"), and
(iii) federal special allowance payments, together with interest on any such
amounts not paid by the Department when due ("Special Allowance Payments"),
during the term of such Stafford Loans in varying amounts to ensure that
interest payable by the borrowers on such Stafford Loans, together with these
payments, approximates current market interest rates (such federal reinsurance
obligations, together
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with those obligations referred to in clauses (ii) and (iii) above, being
collectively referred to herein as "Federal Assistance").
(1) Eligibility Requirements. Subject to the annual and aggregate limits on
the amount of Stafford Loans that a student can borrow discussed below, Stafford
Loans are available to eligible students in amounts not exceeding their unmet
need for financing as determined in accordance with the provisions of the Higher
Education Act.
In addition to complying with the borrower's eligibility requirements set
forth above under the caption "--The Loan Program," each Stafford Loan (i) must
be unsecured, (ii) must provide for deferral of the obligation of the borrower
to make (x) interest payments for as long as the Department makes Interest
Subsidy Payments and (y) principal payments so long as the borrower remains an
Eligible Student and thereafter during any applicable Grace Periods, Deferral
Periods or Forbearance Periods and (iii) must provide for repayment over a
period generally not to exceed 10 years (excluding any Deferral Periods or
Forbearance Periods) from the date repayment commences.
(2) Loan Limits. In order to qualify for Federal Assistance under the
Stafford Federal Student Loan Program, the Higher Education Act imposes an
annual limit on the amount of Stafford Loans and other Federal Loans that may be
made to any single student and an aggregate limit on the amount of such Federal
Loans such student may have outstanding. Under the 1992 Amendments, the annual
Stafford limit for first year students is $2,625 (except that lower limits apply
to certain short-term courses of study), increasing to $3,500 for second year
students, $5,500 for third and fourth year students, and $8,500 for graduate and
professional students. The aggregate limit is $23,000 for undergraduates and
$65,500 for graduate and professional students.
(3) Interest. Stafford Loans made to students with respect to periods of
enrollment in school commencing prior to July 1, 1988 (or thereafter to students
who had Federal Loans outstanding on such date), bear interest at either 7%, 8%
or 9% per annum, depending on the date of issuance and the interest rate
applicable to such student's outstanding Federal Loans. For the time periods
applicable to the Financed Student Loans, Stafford Loans made on or after July
l, 1988, to students with no outstanding Federal Loans on the date such Stafford
Loan is made ("new borrowers"), bear interest at rates of 8% per annum from
disbursement through four years after repayment commences and 10% per annum
thereafter, subject to a provision requiring annual discharge of principal or
rebate to the borrower to the extent that, for each quarter, the interest due at
the 10% rate (or, for Stafford Loans to such borrowers which are first disbursed
after July 23, 1992, the interest rate then applicable thereto) exceeds the
interest that would be payable at a rate per annum equal to the sum of the
91-day Treasury Bill Rate plus 3.25% (or, for Stafford Loans to such borrowers
which are first disbursed after July 23, 1992, and from the date of
disbursement, 3.10%). Notwithstanding the foregoing, no such discharge of
principal or rebate to a borrower will be payable if such borrower is more than
30 days delinquent in making payments on such Stafford Loan. However, under the
1993 Technical Amendments, by January 1, 1995 lenders had to convert all loans
subject to this provision to a variable rate equal to the 91-day Treasury Bill
Rate plus 3.25% or, in the case of a loan made to a borrower with outstanding
Federal Loans under the Federal Loan Programs after October 1, 1993, the 91-day
Treasury Bill Rate plus 3.1%. The converted loans will not thereafter be subject
to the rebate requirements described above.
A Stafford Loan made on or after October 1, 1992 to a student with no
outstanding Federal Loans on the date such Stafford Loan is made, bears interest
at a variable rate, based on the 91-day Treasury Bills Rate plus 3.10% or 9%,
whichever is less. A Stafford Loan made on or after October 1, 1992, to a
student with prior outstanding Federal Loans on the date such Stafford Loan is
made, bears interest at a variable rate, equal to the 91-day Treasury Bill Rate
plus 3.10%, with a maximum rate ranging from 7% to 10% based upon the borrower's
outstanding loans and how long the new Stafford Loan has been in repayment.
Stafford Loans first disbursed on or after July 1, 1995 and prior to July 1,
1998 bear interest at a rate equal to the 91-day Treasury Bill Rate plus 2.50%
while the borrowers are in in-school, grace, or deferment status, and at a rate
equal to the 91-day Treasury Bill Rate plus 3.10% during periods in which the
loan does not qualify for Interest Subsidy Payments. Stafford Loans made on or
after July 1, 1998 will bear interest at a rate equal to the bond equivalent
rate of U.S Treasury securities with a comparable maturity plus 1.0% with a
8.25% cap.
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Interest is payable on each Stafford Loan monthly in arrears until the
principal amount thereof is paid in full. However, prior to the date the
borrower begins repaying the principal of such Stafford Loan and during any
applicable Deferral Period or Grace Period, the borrower has no obligation to
make interest payments. Instead, the Department makes quarterly Interest Subsidy
Payments to the holder of the Stafford Loan on behalf of the borrower during
such periods, in amounts equal to the accrued and unpaid interest for the
previous quarter with respect to such Stafford Loan. During a Forbearance
Period, the Department will not make any Interest Subsidy Payments; instead, at
the borrower's option, interest on each Stafford Loan may be paid currently or
accrue and be capitalized and added to the outstanding principal balance of such
Stafford Loan at the end of such Forbearance Period. See "--(6) Interest Subsidy
Payments."
(4) Repayment. No principal and/or interest payments with respect to a
Stafford Loan are required to be made during the time a borrower remains an
Eligible Student and during the existence of an applicable Grace Period,
Deferral Period or Forbearance Period. In general, a borrower must repay each
Stafford Loan in monthly installments over a period generally not to exceed 10
years (excluding any Deferral Period or Forbearance Period) after commencement
of repayment. Any borrower may voluntarily prepay without premium or penalty any
Federal Loan and in connection therewith may waive any Grace Period or Deferral
Period. The Higher Education Act presently requires a minimum annual principal
and interest payment with respect to a Stafford Loan of $600 in the aggregate
(but in no event less than accrued interest), unless the borrower and the lender
agree to a lesser amount. The 1992 Amendments adopted several provisions that
affect loan repayment terms. These include, among others, provisions to grant
new borrowers with respect to loans for which the first disbursement is on or
after July 1, 1993, the right to choose a graduated or income-sensitive
repayment schedule.
(5) Grace Periods, Deferral Periods, Forbearance Periods. Borrowers of
Stafford Loans must generally commence repaying the loans following a period of
(a) not less than 9 months nor more than 12 months (with respect to loans for
which the applicable interest rate is 7% per annum) and (b) not more than 6
months (with respect to loans for which the applicable interest rate is in
excess of 7% per annum and for loans to first time borrowers on or after July 1,
1988) (a "Grace Period") after the borrower ceases to be an Eligible Student.
However, subject to certain conditions, no principal repayments need be made
with respect to Stafford Loans during periods when the borrower has returned to
an eligible educational institution on at least a half-time basis or is pursuing
studies pursuant to an approved graduate fellowship program and during certain
other periods (varying from six months to three years) when the borrower has
joined the military or certain volunteer organizations (for all loans made after
July 1, 1993, or loans made after such date to borrowers with loans already
outstanding on such date), for periods when the borrower is unable to secure
employment (up to three years) or for periods during which the borrower is
experiencing economic hardship (for loans made after July 1, 1993, to borrowers
with no outstanding loans on such date) (each a "Deferral Period"). The lender
may also allow, in accordance with standards and guidelines approved by the
applicable guarantor and the Department, periods of forbearance during which the
borrower may defer principal and/or interest payments because of temporary
financial hardship (a "Forbearance Period").
(6) Interest Subsidy Payments. Interest Subsidy Payments are payments made
quarterly to the holder of a qualifying Stafford Loan by the Department with
respect to those Stafford Loans as to which the applicable conditions of the
Higher Education Act have been satisfied, in an amount equal to the accrued and
unpaid interest on the outstanding principal amount of each Stafford Loan for
such quarter, commencing from the date such Stafford Loan is made until the end
of the applicable Grace Period after the borrower ceases to be an eligible
student and during any applicable Deferral Period. The Department will not make
Interest Subsidy Payments during any Forbearance Period. The Higher Education
Act provides that the holder of such a qualifying Stafford Loan has a
contractual right, as against the United States, to receive Interest Subsidy
Payments from the Department (including the right to receive interest on any
Interest Subsidy Payments not timely paid). Receipt of Interest Subsidy Payments
is conditioned on compliance with the requirements of the Higher Education Act,
including satisfaction of certain need-based criteria (and the delivery of
sufficient information by the borrower and the lender to the Department to
confirm the foregoing) and continued eligibility of the Stafford Loan for
federal reinsurance. Such eligibility may be lost, however, if the loans are not
originated and serviced, or are not held by an eligible lender, in accordance
with the requirements of the
34
<PAGE> 37
Higher Education Act and the applicable guarantee agreements. See "--(1)
Eligibility Requirements"; "Risk Factors--Failure to Comply With Loan
Origination and Servicing Procedures for Financed Student Loans"; "Formation of
the Trust--Eligible Lender Trustee" and "Description of the Transfer and
Servicing Agreements--Servicing Procedures." The Transferor expects that each of
the Stafford Loans that are part of the pool of Financed Student Loans will be
eligible to receive Interest Subsidy Payments.
(7) Special Allowance Payments. The Higher Education Act requires, subject
to certain conditions, the Department to make quarterly Special Allowance
Payments to holders of qualifying Federal Loans (including Stafford Loans) in an
amount equal to a specified percentage of the average outstanding principal
amount of each such Federal Loan during each quarter.
The percentage or rate used to determine the Special Allowance Payments for
a particular loan varies based on a number of factors, including when the loan
was disbursed and the period of enrollment with respect to which it was made.
Generally, the Special Allowance Payment with respect to a loan such as any
Federal Loan for a quarter will be equal to the excess, if any, of (i) the
amount of interest that would be payable on such loan at a rate per annum equal
to the 91-day Treasury Bill Rate plus 3.10% (3.25% for loans first disbursed
before October 1, 1992 and 2.50% while the borrower is in school, grace or
deferment status for loans made on or after July 1, 1995) over (ii) the stated
amount of interest payable on such loan.
The Higher Education Act provides that a holder of a qualifying loan who is
entitled to receive Special Allowance Payments has a contractual right against
the United States to receive those Special Allowance Payments (including the
right to receive interest on any Special Allowance Payments not timely paid).
Receipt of Special Allowance Payments, however, is conditioned on compliance
with the requirements of the Higher Education Act, including satisfaction of
certain need-based criteria (and the delivery of sufficient information by the
borrower and the lender to the Department to confirm the foregoing) and
continued eligibility for federal reinsurance. Such eligibility may be lost,
however, if the loans are not originated and serviced, or are not held by an
eligible lender, in accordance with the requirements of the Higher Education Act
and the applicable guarantee agreement. See "--(1) Eligibility Requirements";
"Risk Factors--Failure to Comply With Loan Origination and Servicing Procedures
for Financed Student Loans"; "Formation of the Trust--Eligible Lender Trustee"
and "Description of the Transfer and Servicing Agreements--Servicing
Procedures." The Transferor expects that each of the Stafford Loans that are
part of the pool of Financed Student Loans will be eligible to receive Special
Allowance Payments, if any are payable from time to time.
Interest Subsidy Payments and Special Allowance Payments are generally
received within 45 to 60 days after submission to the Department of the
applicable claims forms for any given calendar quarter, although there can be no
assurance that such payments will in fact be received from the Department within
that period. See "Risk Factors--Variability of Actual Cash Flows; Inability of
Indenture Trustee to Liquidate Financed Student Loans." The Master Servicer has
agreed to prepare and file with the Department all such claims forms and any
other required documents or filings on behalf of the Eligible Lender Trustee as
owner of the Financed Student Loans on behalf of the Trust. The Master Servicer
has also agreed to assist the Eligible Lender Trustee in monitoring, pursuing
and obtaining such Interest Subsidy Payments and Special Allowance Payments, if
any, with respect to such Federal Loans. The Eligible Lender Trustee will be
required to remit to the Indenture Trustee, for deposit in the Collection
Account, Interest Subsidy Payments and Special Allowance Payments it receives
with respect to the Federal Loans within two Business Days of receipt thereof.
Unsubsidized Stafford Loans. The Federal Loans also may include Stafford
Loans that do not qualify for Interest Subsidy Payments but otherwise qualify
for all other forms of Federal Assistance ("Unsubsidized Stafford Loans"). These
loans are identical to Stafford Loans in all material respects, except that
interest accruing thereon during periods when the borrower is in school or in a
Deferral Period or Grace Period is either paid periodically by the borrower
during such periods or added periodically to the principal balance of the loan
by the holder thereof. A borrower qualifies for an Unsubsidized Stafford Loan
if, and to the extent that, the borrower's need for a Stafford Loan, as
calculated pursuant to the Higher Education Act, is less than the maximum
Stafford Loan authorized by statute due to the borrower's expected family
contribution as calculated thereunder. As discussed below, no SLS Loans may be
made on or after July 1, 1994. As a result of this change, on July 1, 1994, the
maximum amount a single borrower may receive under the Unsubsidized
35
<PAGE> 38
Stafford Loan program was increased by the amount such borrower could formerly
have obtained under the SLS Program.
SLS Loans. In addition to the Stafford Student Loan Program, the Higher
Education Act provides a separate program to facilitate additional loans to
graduate and professional students and independent undergraduate students. This
program is referred to as the "Supplemental Loans for Students Program" (the
"SLS Program"). The basic framework and principal provisions of the Stafford
Student Loan Program as described above are similar in many respects to those
that are applicable to loans under the SLS Program ("SLS Loans"). In particular,
SLS Loans are subject to similar eligibility requirements and, provided that
such requirements are satisfied, are entitled to the same guarantee and federal
reinsurance arrangements. SLS Loans differ significantly from Stafford Loans,
however, in the context of the Interest Subsidy Payments and Special Allowance
Payments discussed above.
The annual and aggregate limitations that are applicable to SLS Loans are
as follows: SLS Loans to a single borrower cannot exceed $4,000 per academic
year for first year and second year students, increasing to $5,000 for third
year and fourth year students, and to $10,000 for graduate and professional
students, with aggregate limits of $23,000 for undergraduate students ($20,000
for loans first disbursed on or before July 1, 1993) and $73,000 for graduate
and professional students (exclusive of any capitalized interest) at any one
time outstanding. SLS Loans are also limited, generally, to the cost of
attendance minus other financial aid for which the borrower is eligible. A
determination of a borrower's eligibility for the Stafford Student Loan Program,
among other programs, is a condition to the making of an SLS Loan.
As specified by the Higher Education Act, the applicable interest rate for
an SLS Loan depends upon the date of issuance of the loan and the period of
enrollment for which the loan is made. The interest rate per annum for SLS Loans
made and disbursed on or after July 1, 1987 is fixed each July 1 for each
succeeding 12-month period at a rate equal to the sum of (i) the bond equivalent
rate of 52-week Treasury bills auctioned at the final auction held prior to the
preceding June 1 and (ii) 3.10% (3.25% for loans first disbursed before October
1, 1992), with a maximum rate of 11% per annum (12% for loans first disbursed
before October 1, 1992).
Although holders of SLS Loans are not entitled to receive Interest Subsidy
Payments with respect thereto, interest on such SLS Loans accrues from the date
each such SLS Loan is made and may either be paid currently by a borrower or may
be capitalized and added to the outstanding principal amount of such SLS Loan at
the time the borrower begins repayment. SLS Loans are eligible for Special
Allowance Payments only if and to the extent that the interest rate for such SLS
Loans calculated based on the 52-week Treasury bill rate referred to above would
exceed the applicable per annum maximum interest rate. Because the basis for
determining the amount, if any, of Special Allowance Payments due to lenders is
based on the 91-day Treasury Bill Rate while the interest rate for SLS Loans is
based on the 52-week Treasury bill rate (which may differ from the 91-day
Treasury Bill Rate), there can be no assurance that any Special Allowance
Payments will be due and payable with respect to SLS Loans even though such SLS
Loans are deemed to be eligible therefor. See "--(7) Special Allowance
Payments."
A borrower of an SLS Loan is required to begin repayment of the principal
of such SLS Loan within 60 days after the date the last installment of such SLS
Loan is advanced, subject to deferral so long as such borrower remains an
Eligible Student or as a result of any applicable Deferral Period or Forbearance
Period. In addition, any borrower of an SLS Loan made and advanced after July
23, 1992, who also has Stafford Loans outstanding may defer commencing repayment
of such SLS Loan for the Grace Period applicable to such Stafford Loans.
Pursuant to the Omnibus Budget Reconciliation Act of 1993, no SLS Loans may be
made on or after July 1, 1994.
PLUS Loans. The Higher Education Act authorizes Parental Loans for
Undergraduate Students ("PLUS Loans") to be made to parents of eligible
dependent undergraduate students. The basic provisions applicable to PLUS Loans
are similar to those of Stafford Loans with respect to the involvement of
guaranty agencies and the Department in providing guarantees and federal
reinsurance on the loans. However, PLUS Loans differ significantly from Stafford
Loans, particularly because Interest Subsidy Payments are not available and in
some instances Special Allowance Payments are more restricted.
36
<PAGE> 39
Pursuant to the 1992 Amendments, with respect to PLUS Loans originated
after July 1, 1993, there are no annual loan limits for PLUS Loans. PLUS Loans,
however, are limited by a formula whereby the amount borrowed annually, when
combined with the student's other loans and grants for that year, may not exceed
the student's estimated educational costs. The 1992 Amendments prohibit
origination of PLUS Loans to borrowers determined, pursuant to regulations of
the Department, to have adverse credit histories for loans with first
disbursement on or after July 1, 1993.
The interest rates on a PLUS Loan depend upon the date of issuance of the
loan and the period of enrollment for which the loan is to apply. PLUS Loans
disbursed or refinanced on or after July 1, 1987 bear interest at a variable
rate which is in effect from each July 1 through June 30, which is determined on
the June 1 preceding the commencement of the interest rate period, and which is
equal to the bond equivalent rate of 52-week Treasury bills auctioned at the
final auction held prior to such June 1 plus 3.10% (3.25% for PLUS Loans
disbursed before October 1, 1992), except that such rate cannot exceed 10% (or
12% for PLUS Loans disbursed before October 1, 1992). The 1993 Amendments reduce
this interest rate ceiling to 9% for PLUS Loans made to new borrowers on or
after July 1, 1994. PLUS Loans made on or after July 1, 1998 are to bear a rate
equal to the bond equivalent rate of the U.S. Treasury security with a
comparable maturity, as established by the Department, plus 2.1% (not to exceed
9%).
Lenders are required to charge a 5% origination fee, payable to the
Department, to any borrower of a PLUS Loan made on or after October 1, 1992,
except that such fee is 3% for PLUS Loans first disbursed on or after July 1,
1994.
Repayment of the principal of PLUS Loans is required to commence no later
than 60 days after the date of final disbursement of such loan, subject to
certain deferment provisions. A parent borrower may defer principal payments for
periods during which the borrower has a dependent student for whom the parent
borrowed a PLUS Loan, if such student is engaged in a qualifying educational
program, graduate fellowship program or rehabilitation training program and the
PLUS Loan was originated before July 1, 1993; a parent borrower of a PLUS Loan
made thereafter may defer principal payments only if such parent borrower is
engaged in a qualifying educational program, graduate fellowship program or
rehabilitation training program.
Interest Subsidy Payments are not available with respect to PLUS Loans.
However, the capitalization of interest is allowed during deferral periods.
Thus, the borrower and lender may agree either to capitalize interest or to have
the borrower make the interest payments during an authorized period. The annual
loan limits are not violated by any decision to capitalize interest.
PLUS Loans are eligible for Special Allowance Payments only if and to the
extent that the interest rate for such PLUS Loans calculated based on the
52-week Treasury bill rate referred to above would exceed the applicable per
annum maximum interest rate. Because the basis for determining the amount, if
any, of Special Allowance Payments due to lenders is based on the 91-day
Treasury Bill Rate while the interest rate for PLUS Loans is based on the
52-week Treasury bill rate (which may differ from the 91-day Treasury Bill
Rate), there can be no assurance that any Special Allowance Payments will be due
and payable with respect to PLUS Loans even though such PLUS Loans are deemed to
be eligible therefor. See "-- (7) Special Allowance Payments".
Consolidation Loans. The Higher Education Act established a program to
facilitate the ability of eligible borrowers of Stafford Loans, SLS Loans and
PLUS Loans (each an "Underlying Federal Loan") to consolidate such Federal
Loans, together with such borrowers' other education loans that are made or
guaranteed by the federal government, into a single loan (a "Consolidation
Loan"). Subject to the satisfaction of certain conditions set forth in the
Higher Education Act, including limitations on the timing and payment of
principal and interest with respect to Consolidation Loans and a requirement
that the proceeds of Consolidation Loans are to be used to repay the respective
Underlying Federal Loans (and any other loans consolidated thereunder) of any
borrower, each holder of a Consolidation Loan will be entitled to the same
guarantee and federal reinsurance arrangements as are available on Stafford
Loans, SLS Loans and PLUS Loans. Consolidation Loans, like Stafford Loans, are
also eligible for Interest Subsidy Payments and Special Allowance Payments;
however, for Consolidation Loan applications received by lenders on or after
August 10, 1993, the Department will no longer make Interest Subsidy Payments on
Consolidation Loans other than
37
<PAGE> 40
those loans which consolidate only subsidized Stafford Loans. Under this
program, an eligible borrower of Consolidation Loans means a borrower who has
begun repaying, who is in a grace period preceding repayment of, or who is a
delinquent or defaulted borrower who will, through such loan consolidation,
recommence repayment of such Underlying Federal Loans. A married couple, each of
whom has outstanding Underlying Federal Loans, may apply for and obtain a single
Consolidation Loan so long as both individuals agree to be held jointly and
severally liable on such Consolidation Loan.
Under this program, a lender may make a Consolidation Loan to an eligible
borrower at the request of the borrower if the lender holds an outstanding
Underlying Federal Loan of the borrower or the borrower certifies that he or she
has been unable to obtain a Consolidation Loan from any of the holders of the
outstanding Underlying Federal Loans of the borrower. The lender making any
Consolidation Loan will pay the amount thereof to the various lenders of the
respective Underlying Federal Loans and other loans being consolidated thereby.
The Trust may be affected by Consolidation Loans in the following way. The
Trust may own Underlying Federal Loans with respect to which an institution
other than the Transferor, or the Department pursuant to the Federal Direct
Student Loan Program, makes the Consolidation Loan, in which case such
Underlying Federal Loans will be prepaid in full and such prepayment amount will
constitute Available Funds for the applicable Collection Period. See
"Description of the Transfer and Servicing Agreements--Distributions."
In accordance with the Higher Education Act, Consolidation Loans may bear
interest at a rate per annum equal to the weighted average of the interest rates
on the Underlying Federal Loans (rounded up to the nearest whole percent). In
general, a borrower must repay each Consolidation Loan in scheduled monthly
installments over a period of not more than 10 to 30 years (excluding any
Deferral Period and any Forbearance Period), depending on the original principal
amount of such Consolidation Loan. The repayment schedules for Consolidation
Loans will not exceed: 12 years for loans greater than or equal to $7,500, but
less than $10,000; 15 years for loans greater than or equal to $10,000, but less
than $20,000; 20 years for loans greater than or equal to $20,000, but less than
$40,000; 25 years for loans greater than or equal to $40,000, but less than
$60,000; and not more than 30 years for loans in excess of $60,000. Effective
July 1, 1994, Consolidation Loans for less than $7,500 will have a repayment
schedule of not more than 10 years. Borrowers may voluntarily prepay all or a
portion of any Consolidation Loan without premium or penalty. Repayment of a
Consolidation Loan must commence within 60 days after all holders of Underlying
Federal Loans have discharged the liability of the borrower thereon; provided,
however, that such repayment obligation is deferred for as long as the borrower
remains an Eligible Student and during any applicable Deferral Phase and
Forbearance Phase.
The 1993 Amendments made a number of changes to the Consolidation Loan
Program, including requiring holders of Consolidation Loans made on or after
October 1, 1993, to pay to the Department a monthly fee equal to 1.05% per annum
of the outstanding principal amount of the Consolidation Loan.
The Federal Direct Consolidation Loan Program provides borrowers with the
opportunity to consolidate outstanding student loans at interest rates below,
and income contingent repayment terms that some borrowers may find preferable
to, those that would be available from the Transferor on a Consolidation Loan
originated by the Transferor under the Federal Loan Program. The availability of
such lower rate, income contingent loans may decrease the likelihood that the
Transferor would be the originator of a Consolidation Loan with respect to
borrowers with Federal Loans, as well as increase the likelihood that a Federal
Loan in a Trust will be prepaid through the issuance of a Federal Direct
Consolidation Loan.
Proposed federal budget legislation being considered by Congress could
modify many of the provisions of the Higher Education Act. Until final
legislation is adopted, the impact on the Financed Student Loans, if any, is
impossible to determine.
38
<PAGE> 41
THE FINANCED STUDENT LOAN POOL
The Financed Student Loans were selected from the Transferor's portfolio of
Federal Loans by several criteria, including the following: each Financed
Student Loan (i) was or will be originated in the United States or its
territories or possessions under and in accordance with the Federal Loan Program
to or on behalf of a student who has graduated or is expected to graduate from
an accredited institution of higher education within the meaning of the Higher
Education Act, (ii) contains terms in accordance with those required by the
Program, the Guarantee Agreements and other applicable requirements and (iii) is
not more than 120 days past due as of the Cut-off Date. No selection procedures
believed by the Transferor to be adverse to the Noteholders will be used in
selecting the Financed Student Loans.
Each of the Financed Student Loans provides for the amortization of the
outstanding principal balance of such Financed Student Loan over a series of
regular payments. Each regular payment consists of an installment of interest
which is calculated on the basis of the outstanding principal balance of such
Financed Student Loan multiplied by the applicable interest rate and further
multiplied by the period elapsed (as a fraction of a calendar year) since the
preceding payment of interest was made. As payments are received in respect of
such Financed Student Loan, the amount received is applied first to outstanding
late fees, if any, then to interest accrued to the date of payment and the
balance is applied to reduce the unpaid principal balance. Accordingly, if a
borrower pays a regular installment before its scheduled due date, the portion
of the payment allocable to interest for the period since the preceding payment
was made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly greater. Conversely, if a borrower pays a
monthly installment after its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be greater than it would have been had the payment been made as scheduled, and
the portion of the payment applied to reduce the unpaid principal balance will
be correspondingly less. In either case, subject to any applicable Deferral
Periods or Forbearance Periods, the borrower pays a regular installment until
the final scheduled payment date, at which time the amount of the final
installment is increased or decreased as necessary to repay the then outstanding
principal balance of such Financed Student Loan.
Set forth below in the following tables is a description of certain
additional characteristics of the Financed Student Loans as of the Cut-Off Date:
COMPOSITION OF THE FINANCED STUDENT LOANS AS OF THE CUT-OFF DATE
<TABLE>
<S> <C>
Aggregate Outstanding Principal Balance......................................... $
Number of Borrowers.............................................................
Average Outstanding Principal Balance Per Borrower.............................. $
Number of Loans.................................................................
Average Outstanding Principal Balance Per Loan.................................. $
Weighted Average Annual Interest Rate........................................... %
Weighted Average Annual Effective Rate.......................................... %
Weighted Average Remaining Term (months) [(does not include the months remaining
for the in-school, grace, deferment or forbearance periods)]..................
[Weighted Average Remaining Term (months) (including the months remaining for
the in-school, grace, deferment or forbearance periods)]......................
</TABLE>
39
<PAGE> 42
DISTRIBUTION OF THE FINANCED STUDENT LOANS BY LOAN TYPE
<TABLE>
<CAPTION>
PERCENT OF
LOANS BY
NUMBER OF OUTSTANDING OUTSTANDING
LOAN TYPES LOANS BALANCE BALANCE
- -------------------------------------------------------- --------- ----------- -----------
<S> <C> <C> <C>
Consolidated............................................ $ %
PLUS.................................................... %
SLS..................................................... %
Stafford--Subsidized.................................... %
Stafford--Unsubsidized.................................. %
----- ----------- ------
Total................................................. $ %
===== =========== ======
</TABLE>
DISTRIBUTION OF THE FINANCED STUDENT LOANS BY INTEREST RATE
<TABLE>
<CAPTION>
PERCENT OF
LOANS BY
NUMBER OF OUTSTANDING OUTSTANDING
INTEREST RATE LOANS BALANCE BALANCE
- -------------------------------------------------------- --------- ----------- -----------
<S> <C> <C> <C>
Less than 7.50%......................................... $ %
7.50% to 8.49%.......................................... %
8.50% to 9.49%.......................................... %
9.50% to greater........................................ 0 0 0.00%
----- ----------- ------
Total................................................. $ %
===== =========== ======
</TABLE>
COMPOSITION OF THE FINANCED STUDENT LOANS AS OF THE CUT-OFF DATE
DISTRIBUTION OF THE FINANCED STUDENT LOANS BY OUTSTANDING BALANCE
<TABLE>
<CAPTION>
PERCENT OF
LOANS BY
NUMBER OF OUTSTANDING OUTSTANDING
OUTSTANDING BALANCE BORROWERS BALANCE BALANCE
- -------------------------------------------------------- --------- ----------- -----------
<S> <C> <C> <C>
Less than $1,000........................................ $ %
$1,000-$1,999........................................... %
$2,000-$2,999........................................... %
$3,000-$3,999........................................... %
$4,000-$4,999........................................... %
$5,000-$5,999........................................... %
$6,000-$6,999........................................... %
$7,000-$7,999........................................... %
$8,000-$8,999........................................... %
$9,000-$9,999........................................... %
$10,000-$10,999......................................... $ %
$11,000-$11,999......................................... %
$12,000-$12,999......................................... %
$13,000-$13,999......................................... %
$14,000-$14,999......................................... %
15,000 or greater....................................... %
----- ----------- ------
Total................................................... $ %
===== =========== ======
</TABLE>
40
<PAGE> 43
DISTRIBUTION OF THE FINANCED STUDENT LOANS BY BORROWER PAYMENT STATUS
<TABLE>
<CAPTION>
PERCENT OF
LOANS BY
NUMBER OF OUTSTANDING OUTSTANDING
BORROWER PAYMENT STATUS LOANS BALANCE BALANCE
- -------------------------------------------------------- --------- ----------- -----------
<S> <C> <C> <C>
Claim................................................... $ %
Deferment............................................... %
Forbearance............................................. %
Grace................................................... %
In School............................................... %
Repayment
First Year Repayment.................................. %
Second Year Repayment................................. %
Third Year Repayment.................................. %
Fourth Year Repayment................................. %
----- ----------- ------
Total................................................. $ %
===== =========== ======
</TABLE>
41
<PAGE> 44
COMPOSITION OF THE FINANCED STUDENT LOANS AS OF THE CUT-OFF DATE
GEOGRAPHIC DISTRIBUTION OF THE FINANCED STUDENT LOANS
<TABLE>
<CAPTION>
PERCENT OF
LOANS BY
NUMBER OF OUTSTANDING OUTSTANDING
LOCATION (1) LOANS BALANCE BALANCE
- -------------------------------------------------------- --------- ----------- -----------
<S> <C> <C> <C>
$ %
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
----- ----------- ------
TOTAL................................................... $ %
===== =========== ======
</TABLE>
- ---------
(1) Based on the permanent billing addresses of the borrowers of the Financed
Student Loans shown on the Servicer's records.
42
<PAGE> 45
DISTRIBUTION OF THE FINANCED STUDENT LOANS BY DATE OF DISBURSEMENT
<TABLE>
<CAPTION>
PERCENT OF
LOANS BY
NUMBER OF OUTSTANDING OUTSTANDING
DISBURSEMENT DATE LOANS BALANCE BALANCE
- -------------------------------------------------------- --------- ----------- -----------
<S> <C> <C> <C>
Pre-October 1, 1993..................................... $ %
October 1, 1993 and thereafter.......................... %
----- ----------- ------
Total................................................. $ %
===== =========== ======
</TABLE>
COMPOSITION OF THE FINANCED STUDENT LOANS AS OF THE CUT-OFF DATE
DISTRIBUTION OF THE FINANCED STUDENT LOANS BY GUARANTOR
<TABLE>
<CAPTION>
PERCENT OF
LOANS BY
NUMBER OF OUTSTANDING OUTSTANDING
GUARANTORS LOANS BALANCE BALANCE
- -------------------------------------------------------- --------- ----------- -----------
<S> <C> <C> <C>
California Student Aid Commission....................... %
Florida Department of Education.........................
Georgia Higher Education Assistance Corporation.........
Great Lakes Higher Education Corporation................ %
Illinois Student Assistance Commission.................. %
Kentucky Higher Education Assistance Authority.......... %
Michigan Higher Education Assistance Authority..........
New Jersey Higher Education Assistance Authority........ %
Pennsylvania Higher Education Assistance Authority...... %
United Student Aid Funds................................ %
Other................................................... %
----- ----------- ------
Total................................................. $ %
===== =========== ======
</TABLE>
43
<PAGE> 46
INCENTIVE PROGRAMS
The Transferor currently makes available and may hereafter make available
certain incentive programs to borrowers. As of the Cut-off Date, Financed
Student Loans in the aggregate principal amount[s] of [$ and]
$ are subject to [the PNC Bank Discount Loan Program (the "DLP Program"
and] the PNC Bank Preferred Payment Program (the "PP Program") [, respectively].
[The DLP Program applies to Stafford Loans and Unsubsidized Stafford Loans
guaranteed by PHEAA and made by the Transferor to Pennsylvania residents or to
students attending Pennsylvania institutions ("DLP Loans"). Under the DLP
Program, if the borrower makes the first 36 consecutive monthly payments of a
DLP Loan on time, the applicable interest rate on such DLP Loan is reduced by
1%.
The PP Program applies to all Stafford Loans and Unsubsidized Stafford
Loans (other than DLP Loans) with a first disbursement made by Transferor on or
after July 1, 1996 ("PP Loans"). Under the PP Program, if the borrower makes the
first 48 consecutive monthly payments of a PP Loan on time, the applicable
interest rate on such PP Loan is reduced by 2%.
MATURITY AND PREPAYMENT ASSUMPTIONS
The rate of payment of principal of the Notes and the yield on the Notes
will be affected by (i) prepayments of the Financed Student Loans that may occur
as described below, (ii) the sale by the Trust of Financed Student Loans and
(iii) Parity Percentage Payments. All the Financed Student Loans are prepayable
in whole or in part by the borrowers at any time (including by means of
Consolidation Loans as discussed below) and may be prepaid as a result of a
borrower default, death, disability or bankruptcy and subsequent liquidation or
collection of Guarantee Payments with respect thereto. The rate of such
prepayments cannot be predicted and may be influenced by a variety of economic,
social and other factors, including those described below. In general, the rate
of prepayments may tend to increase to the extent that alternative financing
becomes available at prevailing interest rates which fall significantly below
the interest rates applicable to the Financed Student Loans. However, because
many of the Financed Student Loans bear interest at a rate that either actually
or effectively is floating, it is impossible to determine whether changes in
prevailing interest rates will be similar to or vary from changes in the
interest rates on the Financed Student Loans. To the extent borrowers of
Financed Student Loans elect to borrow Consolidation Loans, or the Trust sells
Serial Loans, such Financed Student Loans will be prepaid. See "The Student Loan
Financing Business--The Federal Loan Program--Consolidation Loans." In addition,
the Transferor is obligated to purchase any Financed Student Loan pursuant to
the Transfer and Servicing Agreement as a result of a breach of any of its
representations and warranties, and the Master Servicer is obligated to purchase
any Financed Student Loan pursuant to the Transfer and Servicing Agreement as a
result of a breach of certain covenants with respect to such Financed Student
Loan, in each case where such breach materially and adversely affects the
interests of the Certificateholders or the Noteholders in that Financed Student
Loan and is not cured within the applicable cure period (it being understood
that any such breach that does not affect any Guarantor's obligation to
guarantee payment of such Financed Student Loan will not be considered to have a
material adverse effect for this purpose). See "Description of the Transfer and
Servicing Agreements--Sale of Financed Student Loans; Representations and
Warranties" and "--Master Servicer Covenants." See also "Description of the
Transfer and Servicing Agreements --Termination" regarding the Transferor's
option to purchase the Financed Student Loans when the aggregate Pool Balance is
less than or equal to 5% of the Initial Pool Balance and "--Insolvency Event"
regarding the sale of Financed Student Loans if a Transferor Insolvency Event
occurs.
Scheduled payments with respect to, and maturities of, the Financed Student
Loans may be extended, including pursuant to Grace Periods, Deferral Periods
and, under certain circumstances, Forbearance Periods. The rate of payment of
principal of the Notes and the yield on the Notes may also be affected by the
rate of defaults resulting in losses on Financed Student Loans, by the severity
of those losses and by the timing of those losses, which may affect the ability
of the Guarantors to make Guarantee Payments with respect thereto.
The rate of prepayment on the Financed Student Loans cannot be predicted,
and any reinvestment risks resulting from a faster or slower incidence of
prepayment of Financed Student Loans or a faster or slower
44
<PAGE> 47
incidence of sales by the Trust will be borne entirely by the Noteholders. Such
reinvestment risks may include the risk that interest rates and the relevant
spreads above particular interest rate bases are lower at the time Noteholders
receive payments from the Trust than such interest rates and such spreads would
otherwise have been had such prepayments not been made or had such prepayments
been made at a different time.
INSURANCE OF STUDENT LOANS; GUARANTORS OF FEDERAL LOANS
General. Each Financed Student Loan is required to be guaranteed as to
principal and interest by a Guarantor and reinsured by the Department under the
Higher Education Act and must be eligible for Special Allowance Payments and,
with respect to each Financed Student Loan that is not an SLS Loan, PLUS Loan or
Unsubsidized Stafford Loan, Interest Subsidy Payments paid by the Department.
Federal Reinsurance. Under the Higher Education Act, each Guarantor is
reimbursed by the Department pursuant to certain agreements between the
Department and such Guarantor for amounts paid under its Guarantee Agreement.
The amount of reimbursement by the Department for Federal Loans for each fiscal
year commencing October 1 varies for each Guarantor depending on the annual
claims rate for that Guarantor (i.e., the dollar amount of reimbursement claims
filed by that Guarantor during that fiscal year as a percentage of the
outstanding aggregate principal amount at the end of the preceding fiscal year
of those Federal Loans it guarantees whose borrowers were repaying such Federal
Loans at the end of the preceding fiscal year) as follows:
<TABLE>
<CAPTION>
CLAIMS RATE REIMBURSEMENT TO GUARANTOR BY THE
OF GUARANTOR DEPARTMENT OF EDUCATION (1)
- ------------------------------ ------------------------------------------------------------
<S> <C>
0% to and including 5%........ 100%
Greater than 5% to and 100% of claims to and including 5%; 90% of claims greater
including 9%................ than 5%
Greater than 9%............... 100% of claims to and including 5%; 90% of claims greater
than 5% to and including 9%; and 80% of claims greater than
9%
</TABLE>
- ---------
(1) Each of the reimbursement percentages listed above is reduced by two
percentage points for a loan made on or after October 1, 1993.
The claims experience for any Guarantor is not accumulated from year to
year for purposes of this test but is determined solely on the basis of claims
filed in any one federal fiscal year. The Higher Education Act provides that the
obligation of the Department to reimburse each such Guarantor as described above
is, subject to compliance with the Higher Education Act, supported by the full
faith and credit of the United States and that Guarantors are deemed to have a
contractual right against the United States to receive reinsurance in accordance
with its provisions.
Under the 1993 Amendments, Congress made a number of changes that may
adversely affect the financial condition of the Guarantors, including reducing
to 98% the maximum percentage of Guarantee Payments the Department will
reimburse for loans first disbursed on or after October 1, 1993, reducing
substantially the premiums and default collections that Guarantors are entitled
to receive and/or retain and giving the Department broad powers over Guarantors
and their reserves. The 1993 Amendments also reduced Guarantors' default
collection retention rate from 30% to 27%, reduced the maximum insurance premium
charged by a Guarantor from 3% to 1% and authorized the Secretary to terminate a
Guarantor's reinsurance agreement if the Secretary determines such action is
necessary to protect federal fiscal interests or ensure an orderly transition to
full implementation of the Federal Direct Student Loan Program. The
Administrative Cost Allowance ("ACA") was eliminated; however, legislative
history and recent Department actions suggest that Congress intended that
Guarantors will continue to receive a substantial ACA. For Stafford Loans
disbursed on or after July 1, 1995, the Lender yield on student loans during in
school, grace and deferment periods is reduced from the 91-day Treasury Bill
Rate plus 3.1% to the 91-day Treasury Bill Rate plus 2.5% (not to exceed 8.25%,
before giving effect to any applicable Special Allowance Payments). Lenders will
also be required to pay a 1.05% annual fee to the Secretary on the principal
plus accrued but unpaid interest of all
45
<PAGE> 48
Consolidation Loans made on or after October 1, 1993 and such loans bear
interest at the 91-day Treasury Bill Rate plus 3.1% with no floor applicable.
Also, effective for student loans first disbursed after October 1, 1993, lenders
will be assessed an up-front, user/origination fee equal to .5% of the principal
amount of the student loan. The Department's powers over Guarantors include the
authority to require a Guarantor to return all reserve funds to the Department
if the Department determines such action is necessary to ensure an orderly
termination of the Guarantor, to serve the best interests of the Federal Loan
Programs or to ensure the proper maintenance of such Guarantor's funds or
assets. The Department is also now authorized to direct a Guarantor to return a
portion of its reserve funds which the Department determines is unnecessary to
pay the program expenses and contingent liabilities of the Guarantor and/or to
cease any activities involving the use of the Guarantor's reserve funds or
assets which the Department determines is a misapplication or otherwise
improper. Subject to the requirements described in the following paragraphs, the
Department may also terminate a Guarantor's reinsurance agreement if the
Department determines that such action is necessary to protect the federal
fiscal interest or to ensure an orderly transition to full implementation of
direct federal lending. These various changes create a significant risk that the
resources available to the Guarantors to meet their guarantee obligations will
be significantly reduced. In addition, this legislation greatly expands the
Federal Direct Student Loan Program volume to a target of approximately 60% of
student loan demand in academic year 1998-1999, which could result in increasing
reductions in the volume of loans made under the Program. Such changes could
have an adverse effect on the financial condition of the Guarantors and on the
ability of a Guarantor to satisfy its obligations under its Guarantee Agreement
with respect to the Federal Loans. See "Risk Factors--Changes in Law."
In issuing guarantees with respect to Federal Loans, each Guarantor is
required by the Higher Education Act to review loan applications to verify the
completion of required information and to make a determination that the
applicant has not borrowed amounts in excess of any applicable annual and
aggregate limits imposed by the Higher Education Act.
Pursuant to the 1992 Amendments, each Guarantor is required to maintain a
current minimum reserve level of at least 0.5% of the aggregate principal amount
of all outstanding Federal Loans guaranteed by such Guarantor for the fiscal
year that begins in 1993, with such minimum increasing to 0.7% and 0.9% for
fiscal years beginning in 1994 and 1995, respectively, and 1.1% for fiscal years
beginning on or after January 1, 1996. Annually, the Department will collect
information from each Guarantor to determine the amount of such Guarantor's
reserves and other information regarding its solvency. If a Guarantor's current
reserve level falls below the required minimum for any two consecutive years,
that Guarantor's annual claims rate exceeds 9% or the Department determines that
a Guarantor's administrative or financial condition jeopardizes that Guarantor's
continued ability to perform its responsibilities, then that Guarantor must
submit and implement a management plan acceptable to the Department. The 1992
Amendments also provide that under certain circumstances the Department is
authorized, on terms and conditions satisfactory to the Department, but is not
obligated, to terminate its reimbursement agreement with any Guarantor. In that
event, however, the Department is required to assume the functions of such
Guarantor and in connection therewith is authorized to do one or more of the
following: to assume the guarantee obligations of, to assign to other guarantors
the guarantee obligations of, or to make advances to, a Guarantor in order to
assist such Guarantor in meeting its immediate cash needs and to ensure
uninterrupted payment of default claims to lenders or to take any other action
the Department deems necessary to ensure the continued availability of student
loans and the full honoring of guarantee claims thereunder. In addition, the
1992 Amendments provide that if the Department determines that a Guarantor is
unable to meet its guarantee obligations, holders of Federal Loans covered
thereby may submit guarantee claims directly to the Department until such time
as such guarantee obligations are transferred to a new guarantor capable of
meeting such obligations or until a successor guarantor assumes such
obligations. There can be no assurance, however, that the Department would under
any given circumstances assume such obligation to ensure satisfaction of a
guarantee obligation by exercising its right to terminate a reimbursement
agreement with a Guarantor or by making a determination that such Guarantor is
unable to meet its guarantee obligations.
46
<PAGE> 49
Amounts received or receivable from the Department for reimbursement for
claims paid are subject to periodic audit and adjustment by the Department. Any
disallowed claims, including amounts already collected, may constitute a
liability of the respective Guarantor.
Guarantors for the Financed Student Loans. The Higher Education Act
requires every state to designate a guarantee agency, either by establishing its
own or by designating another guarantee agency. A Guarantor who has been
designated by a particular state is obligated to guarantee loans for students
who reside or attend school in such state and must agree to provide loans to any
such students who are otherwise unable to obtain a loan from any other lender.
Guarantee agencies may guarantee a loan made to any eligible borrower and are
generally not limited to guaranteeing loans for students attending institutions
in their particular state or region or for their residents attending schools in
another state or region. The Eligible Lender Trustee has entered, or will enter,
into a Guarantee Agreement with each Guarantor guaranteeing the Finance Student
Loans acquired, or to be acquired, by the Trust.
Pursuant to its respective Guarantee Agreement, each Guarantor guarantees
payment of 98% (except that such guarantee against defaults will be 100% of
principal and accrued interest for loans first disbursed prior to October 1,
1993) of the principal (including any interest capitalized from time to time)
and accrued interest for each Federal Loan guaranteed by it as to which any one
of the following events has occurred:
(a) failure by the borrower thereof to make monthly principal or
interest payments on such Federal Loan when due, provided such failure continues
for a period of 180 days;
(b) any filing by or against the borrower thereof of a petition in
bankruptcy pursuant to any chapter of the Federal bankruptcy code, as amended;
(c) the death of the borrower thereof; or
(d) the total and permanent disability of the borrower thereof to work
and earn money or attend school, as certified by a qualified physician.
When these conditions are satisfied, the Higher Education Act requires the
Guarantor generally to pay the claim within 90 days of its submission by the
lender. The obligations of the Guarantors pursuant to their respective Guarantee
Agreements are obligations solely of the applicable Guarantor, and are not
supported by the full faith and credit of any state government.
Each Guarantor's guarantee obligations with respect to any Financed Student
Loan are conditioned upon the satisfaction of all the conditions set forth in
the applicable Guarantee Agreement. These conditions include, but are not
limited to, the following: (i) the origination and servicing of such Financed
Student Loan being performed in accordance with the Program, the Higher
Education Act and other applicable requirements, (ii) the timely payment to the
applicable Guarantor of the guarantee fee payable with respect to such Financed
Student Loan, (iii) the timely submission to the applicable Guarantor of all
required preclaim delinquency status notifications and of the claim with respect
to such Financed Student Loan and (iv) the transfer and endorsement of the
promissory note evidencing such Financed Student Loan to the applicable
Guarantor upon and in connection with making a claim to receive Guarantee
Payments thereon. Failure to comply with any of the applicable conditions,
including the foregoing, may result in the refusal of the applicable Guarantor
to honor its Guarantee Agreement with respect to such Financed Student Loan, in
the denial of guarantee coverage with respect to certain accrued interest
amounts with respect thereto or in the loss of certain Interest Subsidy Payments
and Special Allowance Payments with respect thereto. Under the Transfer and
Servicing Agreement, such failure to comply would constitute a breach of the
Master Servicer's covenants or the Transferor's representations and warranties,
as the case may be, and would create an obligation of the Transferor or the
Master Servicer, as the case may be, to repurchase or purchase such Financed
Student Loan or to reimburse the Trust for such non-guaranteed interest amounts
or such lost Interest Subsidy Payments and Special Allowance Payments with
respect thereto. See "Description of the Transfer and Servicing
Agreements--Conveyance of Financed Student Loans; Representations and
Warranties" and "--Master Servicer Covenants."
47
<PAGE> 50
GUARANTORS FOR THE FEDERAL LOANS
Set forth below is certain historical information with respect to each
Guarantor of the Financed Student Loans that is expected to guaranty 5% or more
of the Financed Student Loans as of the Cut-off Date. Except as otherwise
indicated below, the information regarding each Guarantor has been obtained from
the Department of Education's Federal Fiscal Year 1993 Loan Programs Data Book
(a "DOE Data Book"). No independent verification has been or will be made by the
Transferor of such information.
Guarantee Volume. The following table sets forth the approximate aggregate
principal amount of federally reinsured education loans [(excluding refinanced
PLUS and SLS Loans)] that have first become committed to be guaranteed by each
of the Guarantors and by all guarantors of Federal Loans in each of the five
Federal Fiscal Years 1992 through 1996.*
<TABLE>
<CAPTION>
STAFFORD, UNSUBSIDIZED STAFFORD, SLS, PLUS AND CONSOLIDATED LOANS GUARANTEED
-----------------------------------------------------------------------------------------------------
FEDERAL
FISCAL DOLLARS IN MILLIONS ALL
YEAR CSAC FDOE NJHEAA PHEAA USAF GUARANTORS
- ------- -------- ------ ------- ------ ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $1,333.7 $314.1 $268.0 $ $ $ $ $ $
1993 1,507.4 437.9 289.3
1994 2,077.6 424.3 369.5 **
1995 1,805.6 631.0 314.7 **
1996 1,634.1 569.9 310.7 ** **
</TABLE>
- ---------
* The information set forth in the table above has been obtained from the
Federal Fiscal Year 1993 DOE Data Book (with respect to fiscal years 1992 and
1993) [and from the Department (with respect to fiscal years 1994, 1995 and
1996)].
** Not available.
Reserve Ratio. Each Guarantor's reserve ratio is determined by dividing its
cumulative cash reserves by the original principal amount of the outstanding
loans it has agreed to guarantee. The term "cumulative cash reserves" refers to
cash reserves plus (i) sources of funds (including insurance premiums, state
appropriations, federal advances, federal reinsurance payments, administrative
cost allowances, collections on claims paid and investment earnings) minus (ii)
uses of funds (including claims paid to lenders, operating expenses, lender
fees, the Department's share of collections on claims paid, returned advances
and reinsurance fees). The "original principal amount of outstanding loans"
consists of the original principal amount of loans guaranteed by such Guarantor
minus (i) the original principal amount of loans canceled, claims paid, loans
paid in full and loan guarantees transferred from such Guarantor to other
guarantors, plus (ii) the original principal amount of loan guarantees
transferred to such Guarantor from other guarantors. The following table sets
forth
48
<PAGE> 51
each Guarantor's cumulative cash reserves and their corresponding reserve ratios
and the national average reserve ratio for all guarantors for the five Federal
Fiscal Years 1992 through 1996:*
<TABLE>
<CAPTION>
CSAC FDOE NJHEAA
---------------------- ---------------------- ---------------------- ----------------------
FEDERAL CUMULATIVE CUMULATIVE CUMULATIVE CUMULATIVE
FISCAL CASH RESERVE CASH RESERVE CASH RESERVE CASH RESERVE
YEAR RESERVES** RATIO RESERVES** RATIO RESERVES** RATIO RESERVES** RATIO
- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $183.4 2.5% $ 27.8 1.6% $ 28.7 1.1%
1993 185.5 2.3 44.1 2.2 18.3 0.7
1994 192.7 2.1 64.8 3.0 42.0 1.5
1995 237.0 2.3 66.6 2.6 40.2 1.5
1996 265.7 2.5 74.7 2.7 40.4 1.5
</TABLE>
<TABLE>
<CAPTION>
PHEAA USAF
---------------------- ---------------------- ---------------------- ---------------------- NATIONAL
FEDERAL CUMULATIVE CUMULATIVE CUMULATIVE CUMULATIVE AVERAGE
FISCAL CASH RESERVE CASH RESERVE CASH RESERVE CASH RESERVE RESERVE
YEAR RESERVES** RATIO RESERVES** RATIO RESERVES** RATIO RESERVES** RATIO RATIO
- ------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 162.6 2.1% 100.1 1.0%
1993 113.4 1.3 169.9 1.3
1994 133.6 1.4 215.8 1.2
1995 166.3 1.5 377.9 1.5
1996 210.6 1.7 423.9 1.5 *** ***
</TABLE>
- ---------
* The information set forth in the table above has been obtained from the
Federal Fiscal Year 1993 DOE Data Book (with respect to fiscal years 1992
and 1993) and from the Department (with respect to fiscal years 1994, 1995
and 1996). The cash reserves and the reserve ratio increased substantially
between Federal Fiscal Years 1992 and 1993. As described in the Federal
Fiscal Year 1993 DOE Data Book, this difference was caused, in part, because
default costs were decreasing, while insurance premiums, administrative
costs allowances and investment income were increasing. According to the
Department, available cash reserves may not always be an accurate barometer
of a guarantor's financial health.
** Dollars in millions.
*** Not available.
Recovery Rates. A Guarantor's recovery rate, which provides a measure of
the effectiveness of the collection efforts against defaulting borrowers after
the guarantee claim has been satisfied, is determined by dividing the amount
recovered from borrowers by such Guarantor by the aggregate amount of default
claims paid by such Guarantor during the applicable Federal Fiscal Year with
respect to borrowers. The table below sets forth the recovery rates for each
Guarantor and the national average recovery rates for all guarantors with
respect to Stafford Loans (the only type of Student Loan for which the DOE Data
Book discloses recovery rates) for the five Federal Fiscal Years 1992 through
1996:*
<TABLE>
<CAPTION>
FEDERAL RECOVERY RATE
FISCAL ------------------------------------------------- NATIONAL
YEAR CSAC FDOE NJHEAA PHEAA USAF AVERAGE
- ------- ----- ----- ------ ------ ------ ------ ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 32.2 % 33.1 % 54.3 % 46.5 % 28.1 % 35.1%
1993 33.3 39.0 56.0 49.5 30.7 38.1
1994 33.59 41.79 56.11 52.90 29.28 39.38
1995 35.60 43.03 58.54 53.29 34.90 40.67
1996 37.61 45.50 60.54 55.03 39.21 43.20**
</TABLE>
- ---------
* The information set forth in the table above has been obtained from the
Department.
** 1996 national average does not include all guarantor data, as all guarantors
have not been processed.
Loan Loss Reserve. The DOE Data Book does not disclose whether any
Guarantor has established a segregated loan loss reserve with respect to its
student loan guarantee obligations. Accordingly, to the extent that a Guarantor
has not established such a segregated loan loss reserve, in the event that a
Guarantor receives less than full reimbursement of its guarantee obligations
from the Department, the Guarantor would be forced to look to its existing
assets to satisfy any such guarantee obligations not so reimbursed.
49
<PAGE> 52
Claims Rate. For at least one of the five Federal Fiscal Years 1992 through
1996, CSAC, FOSFA and USAF experienced a claims rate in excess of 5%. For each
Federal Fiscal Year that such Guarantors' claims rate exceeded 5%, the claims of
such Guarantors were not fully reimbursed by the Department. No assurance can be
made that any of the Guarantors will receive full reimbursement for reinsurance
claims (or the full 98% maximum reimbursement for loans first disbursed on or
after October 1, 1993). The following table sets forth the claims rate of each
Guarantor and the national average for all guarantors of Federal Loans for the
last five Federal Fiscal Years 1992 through 1996:*
<TABLE>
<CAPTION>
FEDERAL RECOVERY RATE
FISCAL ------------------------------------------------- NATIONAL
YEAR CSAC FDOE NJHEAA PHEAA USAF AVERAGE
- ------- ----- ----- ------ ------ ------ ------ ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 5.93% 4.93% 2.01 % 2.8 % 5.00% 6.3% 4.15%
1993 5.38 4.49 2.11 2.3 7.30 4.5 3.83
1994 4.12 3.88 2.27 2.2 4.99 3.1 3.44
1995 3.41 3.05 1.86 1.97 4.69 2.8 3.21
1996 4.45 4.17 2.24 1.58 4.65 2.3 3.25
</TABLE>
- ---------
* The information set forth in the table above has been obtained from the
Department.
[Each Guarantor has agreed that it will provide a copy of its most recent
financial statements to Noteholders, upon receipt of a written request,
directed: if to CSAC, to California Student Aid Commission, 1515 S Street,
Sacramento, CA 95814; if to FOSFA, to Florida Office of Student Financial
Assistance, 1344 Florida Education Center, Tallahassee, FL 32399; if to NJHEAA,
to New Jersey Higher Education Assistance Authority, 4 Quakerbridge Plaza,
Trenton, NJ 08625; if to , , ,
; if to PHEAA, to Pennsylvania Higher Education Assistance
Agency, 1200 N. 7th Street, Harrisburg, PA 17102; if to ,
, , ; if to USAF, to United Student
Aid Funds, P.O. Box 6180, Indianapolis, IN 46206; and if
to , ,]
, .
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to the terms of the Indenture. The
following summary describes certain terms of the Notes, the Indenture, the Terms
Supplement and the Trust Agreement. The summary does not purport to be complete
and is qualified in its entirety by reference to the provisions of the Notes,
the Indenture, the Terms Supplement and the Trust Agreement.
The Notes will initially be represented by one or more Notes registered in
the name of the nominee of DTC (together with any successor depository selected
by the Administrator, the "Depository") except as set forth below. The Notes
will be available for purchase in denominations of $50,000 and integral
multiples of $50,000 in excess thereof in book-entry form only. The Trust has
been informed by DTC that DTC's nominee will be Cede. Accordingly, Cede is
expected to be the holder of record of the Notes. Unless and until Definitive
Notes are issued under the limited circumstances described herein, no Noteholder
will be entitled to receive a physical certificate representing a Note. All
references herein to actions by Noteholders refer to actions taken by DTC upon
instructions from its participating organizations (the "Participants") and all
references herein to distributions, notices, reports and statements to
Noteholders refer to distributions, notices, reports and statements to DTC or
Cede, as the registered holder of the Notes, for distribution to Noteholders in
accordance with DTC's procedures with respect thereto. See "--Book-Entry
Registration" and "Definitive Notes."
THE NOTES
Distributions of Interest. Interest will accrue on the principal balance of
each Class of Notes at a rate per annum equal to the related Class Interest Rate
(calculated as provided below). Interest will accrue from the
50
<PAGE> 53
15th day of each month (or from the Closing Date with respect to the first
Interest Period) to (and including) the 14th day of the next month (each, an
"Interest Period") and will be payable on each Distribution Date to the
Noteholders of the related Record Date. Interest distributions due on any Class
of Notes for any Distribution Date but not distributed on such Distribution Date
will be due on the next Distribution Date increased by an amount equal to
interest on such amount at the applicable Class Interest Rate for the period
from the Distribution Date for which such interest was first due until the
Distribution Date such interest is paid. Interest payments on the Notes will
generally be funded from Available Funds, Monthly Advances and amounts, if any,
on deposit in the Reserve Account remaining after the deposit of the Transaction
Fees in the Expense Account. Interest will be paid pro rata to the holders of
each such Class of Notes outstanding. See "Description of the Transfer and
Servicing Agreements--Distributions" and "--Credit Enhancement."
The initial Class Interest Rates during the initial Interest Period are as
follows:
% per annum with respect to the Class A-1 Notes;
% per annum with respect to the Class A-2 Notes; and
% per annum with respect to the Class B Notes.
Except as otherwise described in the following paragraph, the Class
Interest Rate for each subsequent Interest Period for each Class of Notes will
equal (i) in the case of the Class A-1 Notes and the Class A-2 Notes, the daily
weighted average of the T-Bill Rates within such Interest Period (determined as
described below) plus the applicable Margin for such Class, and (ii) in the case
of the Class B Notes, One-Month LIBOR as of the LIBOR Determination Date for
such Interest Period plus the applicable Margin for such Class. See "--The
Notes--Distributions of Interest." The "Margin" will be [ ]% for the Class A-1
Notes, [ ]% for the Class A-2 Notes and [ %] for the Class B Notes. Interest
on the Class A-1 Notes and the Class A-2 Notes will be calculated on the basis
of the actual number of days elapsed in each Interest Period divided by 365 (or
366 in the case of a leap year), and interest on the Class B Notes will be
calculated on the basis of the actual number of days elapsed in each Interest
Period divided by 360.
Notwithstanding the foregoing, if the Class Interest Rate with respect to
any Class of Notes for any Interest Period is greater than the Net Loan Rate (as
defined below), then such Class Interest Rate for such Interest Period will be
the Net Loan Rate. However, in no event will the Class Interest Rate for any
Class of Notes exceed % per annum. See "--The Notes--Distributions of
Interest."
Noteholders' Interest Carryover. If the Class Interest Rate for any Class
of Notes for any Interest Period is based on the Net Loan Rate, the excess of
(a) the amount of interest on such Class of Notes that would have accrued in
respect of the related Interest Period had interest been calculated based on the
applicable Class Interest Rate (without giving effect to the Net Loan Rate) over
(b) the amount of interest such Class of Notes actually accrued in respect of
such Interest Period based on the Net Loan Rate (such excess, together with the
unpaid portion of any such excess from prior Interest Periods (and interest
accrued thereon calculated based on T-Bill Rate or One-Month LIBOR, as
applicable), is referred to as the "Noteholders' Interest Carryover") will be
paid on the dates and in the priority as described herein under "Description of
the Transfer and Servicing Agreements--Distributions."
Distributions of Principal. Principal of the Notes will be payable
quarterly on each Distribution Date, first to the principal balance of the Class
A-1 Notes until such principal balance is reduced to zero, then to the principal
balance of the Class A-2 Notes until such principal balance is reduced to zero
and then to the principal balance of the Class B Notes until such principal
balance is reduced to zero. Principal payments on a Class of Notes will
generally be derived from Available Funds and amounts, if any, on deposit in the
Reserve Account remaining after the Indenture Trustee has deposited in the
Expense Account the Transaction Fees and all overdue Transaction Fees required
and deposited in the Note Distribution Account and the Noteholders' Interest
Distribution Amount. Additionally, until the Parity Percentage equals 102.5%,
amounts otherwise required to be distributed to the Transferor will be applied
as additional principal payments. See "Description of the Transfer and Servicing
Agreements--Distributions" and "--Credit Enhancement." If such sources are
insufficient to pay the Noteholders' Principal Distribution Amount for such Note
Distribu-
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tion Date, such shortfall will be added to the principal payable to the
Noteholders on subsequent Note Distribution Dates.
The aggregate outstanding principal amount of each Class of Notes will be
payable in full on the Distribution Date identified in the Summary of Terms
under "Final Maturity Date" (the "Final Maturity Date"). The actual date on
which the aggregate outstanding principal and accrued interest of any Class of
Notes are paid may be earlier than its respective Final Maturity Date, based on
a variety of factors, including those described above under "Risk
Factors--Maturity and Prepayment Assumptions" and "The Financed Student Loan
Pool--Maturity and Prepayment Assumptions."
DETERMINATION OF LIBOR
Pursuant to the Transfer and Servicing Agreement, the Master Servicer will
determine One-Month LIBOR for purposes of calculating the interest due on the
Class B Notes and the Noteholders' Interest Carryover for each given Interest
Period on the Business Day prior to the commencement of each Interest Period
(each, a "LIBOR Determination Date"). For purposes of calculating One-Month
LIBOR, a Business Day is any day on which banks in London and New York City are
open for the transaction of business. Interest due for any Interest Period will
be determined based on the actual number of days in such Interest Period over a
360-day year.
"One-Month LIBOR" means the London interbank offered rate for deposits in
U.S. dollars having a maturity of one month commencing on the related LIBOR
Determination Date (the "Index Maturity") which appears on Telerate Page 3750 as
of 11:00 a.m., London time, on such LIBOR Determination Date. If such rate does
not appear on Telerate Page 3750, the rate for that day will be determined on
the basis of the rates at which deposits in U.S. dollars, having the Index
Maturity and in a principal amount of not less than U.S. $1,000,000, are offered
at approximately 11:00 a.m., London time, on such LIBOR Determination Date to
prime banks in the London interbank market by the Reference Banks. The Master
Servicer will request the principal London office of each of such Reference
Banks to provide a quotation of its rate. If at least two such quotations are
provided, the rate for that day will be the arithmetic mean of the quotations.
If fewer than two quotations are provided, the rate for that day will be the
arithmetic mean of the rates quoted by major banks in New York City, selected by
the Master Servicer, at approximately 11:00 a.m., New York City time, on such
LIBOR Determination Date for loans in the U.S. dollars to leading European banks
having the Index Maturity and in a principal amount equal to an amount of not
less than U.S. $1,000,000; provided that if the banks selected as aforesaid are
not quoting as mentioned in this sentence, One-Month LIBOR in effect for the
applicable LIBOR Reset Period will be One-Month LIBOR in effect for the previous
LIBOR Reset Period.
"Telerate Page 3750" means the display page so designated on the Dow Jones
Telerate Service (or such other page as may replace that page on that service
for the purpose of displaying comparable rates or prices).
"Reference Bank" means a leading bank (i) engaged in transactions in
Eurodollar deposits in the international Eurocurrency market, (ii) not
controlling, controlled by or under common control with the Administrator or the
Transferor and (iii) having an established place of business in London.
DETERMINATION OF THE T-BILL RATES
The "T-Bill Rate" will generally be adjusted weekly on the calendar day
following each auction of direct obligations of the United States with a
maturity of 13 weeks ("91-day Treasury Bills") to equal the weighted average per
annum discount rate (expressed on a bond equivalent basis and applied on a daily
basis) of the 91-day Treasury Bills sold at such auction, as reported by the
U.S. Department of the Treasury; provided, however, that in the event that the
results of the auctions of 91-day Treasury Bills cease to be so reported, or
that no such auction is held in a particular week, then the T-Bill Rate in
effect as a result of the last such publication or report will remain in effect
until such time, if any, as the results of auctions of 91-day Treasury Bills
shall again be reported or such an auction is held, as the case may be;
provided, further, that (i) the T-Bill Rate in effect from the first day of the
Interest Period, including the initial Interest Period, through the day of the
first 91-day Treasury Bill auction on or after the first day of each Interest
Period will be based on the results of the most recent 91-day Treasury Bill
auction prior to such day and (ii) the T-Bill Rate will be
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subject to a lock-in period of six business days preceding eah Distribution
Date, during which the T-Bill Rate will remain in effect from the first day of
such period until the end of the Interest Period related to such Distribution
Date.
THE INDENTURE
Modification of the Indenture. With the consent of the holders of a
majority of the aggregate principal amount of Notes then outstanding (or, with
respect to any change affecting only certain Series of Notes, the holders of a
majority of the aggregate principal amount of Notes of such Series), the
Indenture Trustee and the Trust may execute a supplemental indenture to add
provisions to, or change in any manner or eliminate any provisions of, the
Indenture with respect to the Notes, or to modify (except as provided below) in
any manner the rights of the Noteholders.
Without the consent of the holder of each outstanding Note affected
thereby, however, no supplemental indenture will (i) change the date of payment
of any installment of principal of or interest on any Note or reduce the
principal amount thereof or the interest rate thereon, change the provisions of
the Indenture relating to the application of collections on, or the proceeds of
the sale of, the assets of the Trust to payment of principal of or interest on
the Notes, or change any place of payment where, or 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 of any series of Notes (each such series, a "Series") 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 certain defaults thereunder and
their consequences as provided for in the Indenture, (iv) modify or alter
certain provisions of the Indenture regarding the determination of Notes that
are considered "outstanding" for consent, waivers and other matters, (v) reduce
the percentage of the aggregate outstanding amount of the Notes the consent of
the holders of which is required to direct the Eligible Lender Trustee on behalf
of the Trust to sell or liquidate the Financed Student Loans, (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, (vii) modify any of the provisions of the Indenture in such
manner as to affect the calculation of the amount of any payment of interest on
any Note or (viii) 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 Indenture on any such collateral or deprive the holder
of any Note of the security afforded by the lien of the Indenture.
The Trust and the Indenture Trustee may also enter into supplemental
indentures, but without obtaining the consent of Noteholders, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or modifying in any manner the rights of Noteholders
so long as such action will not, in the opinion of counsel satisfactory to the
Indenture Trustee, materially and adversely affect the interest of any
Noteholder.
Events of Default; Rights Upon Event of Default. An "Event of Default" with
respect to the Notes is defined in the Indenture as consisting of the following
(except as described in the remaining sentences of this paragraph): (i) a
default for five business days or more in the payment of any interest on any
Note after the same becomes due and payable; (ii) a default for five business
days in the payment of principal of any Note when the same becomes due and
payable; (iii) a default in the observance or performance of any covenant or
agreement of the Trust made in the Indenture or the Transfer and Servicing
Agreement and the continuation of any such default for a period of 30 days after
notice thereof is given to the Trust by the Indenture Trustee or to the Trust
and the Indenture Trustee by the holders of at least 25% in aggregate principal
amount of the Notes then outstanding; (iv) 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 in a material respect as of the
time made, and such breach not having been cured within 30 days after notice
thereof is given to the Trust by the Indenture Trustee or to the Trust and the
Indenture Trustee by the holders of at least 25% in aggregate principal amount
of the Notes then outstanding; or (v) certain events of bankruptcy, insolvency,
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receivership or liquidation of the Trust. However, the amount of principal
required to be distributed to Noteholders under the Indenture on any Note
Distribution Date is limited to the amount of Available Funds and amounts on
deposit in the Reserve Account after payment of the Transaction Fees, the
Noteholders' Interest Distribution Amount and the Certificateholder's Interest
Distribution Amount. Any such shortfalls on any Note Distribution Date will be
carried over as a Noteholders' Principal Carryover Shortfall to be paid on
succeeding Note Distribution Dates. Therefore, the failure to pay principal on
any Class of Notes may not result in the occurrence of an Event of Default until
the Final Maturity Date of such Class of Notes. In addition, the failure to pay
the aggregate amount of Noteholders' Interest Carryover as a result of
insufficient Available Funds will not result in the occurrence of an Event of
Default.
If an Event of Default should occur and be continuing with respect to any
Series of Notes, the Indenture Trustee or holders of a majority in aggregate
principal amount of the Notes then outstanding may declare all outstanding Notes
to be immediately due and payable, by notice to the Trust or notice to the
Indenture Trustee if given by the Noteholders. Such declaration may be rescinded
by the holders of a majority in aggregate principal amount of the Notes then
outstanding at any time prior to the entry of judgment in a court of competent
jurisdiction for the payment of such amount if (i) the Trust has paid to the
Indenture Trustee a sum equal to all amounts then due with respect to the Notes
(without giving effect to such acceleration) and due to the Indenture Trustee
and (ii) all Events of Default (other than nonpayment of amounts due solely as a
result of such acceleration) have been cured or waived.
If the Notes have been declared to be due and payable following an Event of
Default with respect thereto, the Indenture Trustee may, in its discretion,
require the Eligible Lender Trustee to sell the Financed Student Loans or elect
to have the Eligible Lender Trustee maintain possession of the Financed Student
Loans and continue to apply collections with respect to such Financed Student
Loans as if there had been no declaration of acceleration. In addition, the
Indenture Trustee is prohibited from directing the Eligible Lender Trustee to
sell the Financed Student Loans following an Event of Default, other than a
default for five days or more in the payment of any principal or a default for
five days or more in the payment of any interest on any Note, unless (i) the
holders of 66 2/3% of the aggregate amount of the Notes outstanding consent to
such sale, (ii) the proceeds of such sale are sufficient to pay in full the
principal of and the accrued interest on the Notes outstanding at the date of
such sale or (iii) the Indenture Trustee determines that the collections on the
Financed Student Loans and other assets of the Trust 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
principal amount of the Notes then outstanding.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, if an Event of Default should occur and be continuing with
respect to the Notes, the Indenture 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 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 such provisions for indemnification and certain limitations contained
in the Indenture, the holders of a majority in aggregate principal amount of the
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding or any remedy available to the Indenture Trustee and
the holders of a majority in aggregate principal amount of the Notes then
outstanding, 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 the holders of the outstanding Notes.
No holder of any Note will have the right to institute any proceeding with
respect to the 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 have
requested in writing that the Indenture Trustee 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 after notice failed to institute such proceeding and (v) no direction
inconsistent with such written request has
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been given to the Indenture Trustee during such 60-day period by the holders of
a majority in aggregate principal amount of the outstanding Notes.
In addition, the Indenture Trustee and the Noteholders will covenant that
they will not prior to the date which is one year and a day after the
termination of the Indenture institute against the Trust any bankruptcy,
reorganization or other proceeding under any Federal or state bankruptcy or
similar law in connection with any obligations relating to the Notes, the
Indenture or Related Documents (as defined below).
Certain Covenants. The 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, and 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 and any supplemental indenture, (ii)
no Event of Default has occurred and is continuing immediately after such merger
or consolidation, (iii) the Trust has received an opinion of counsel to the
effect that such consolidation or merger would have no material adverse federal
or Illinois or Delaware state tax consequence to the Trust or to any
Certificateholder or Noteholder, (iv) any action as is necessary to maintain the
lien and security interest created by the Indenture shall have been taken and
(v) the Trust shall have delivered to the Indenture Trustee an officer's
certificate of the Trust and an opinion of counsel each stating that such
consolidation or merger and any supplemental indenture relating thereto comply
with the terms of the Indenture and that all conditions precedent provided for
in the Indenture to such transaction have been complied with (including any
Exchange Act filings) in all material respects.
Except as otherwise permitted by the Indenture, the Transfer and Servicing
Agreement and related documents (the "Related Documents"), the Trust may not
convey or transfer all or substantially all its properties or assets, including
the assets securing the Notes, unless for the most part the conditions specified
in (i) through (v) above with respect to a permitted merger or consolidation are
met, plus the acquiror must agree (a) that all right, title and interest in the
property and assets so conveyed or transferred are subordinate to the rights of
the Noteholders, (b) to indemnify the Trust (unless otherwise provided in the
supplemental indenture) and (c) to make all filings with the Commission required
by the Exchange Act in connection with the Notes.
The Trust will not, among other things, (i) except as expressly permitted
by 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 any Notes (other than amounts
withheld under the Code or applicable state law) or assert any claim against any
present or former holder of Notes because of the payment of taxes levied or
assessed upon the Trust, (iii) except as contemplated by the Related Documents,
dissolve or liquidate in whole or in part, (iv) permit the validity or
effectiveness of the Indenture or any supplemental indenture to be impaired, or
permit the lien of the Indenture and any supplemental indenture to be amended,
hypothecated, subordinated, terminated or discharged, or permit any person to be
released from any covenants or obligations with respect to any Notes under the
Indenture except as may be expressly permitted thereby, (v) permit any lien,
charge, excise, claim, security interest, mortgage or other encumbrance (other
than the lien of the Indenture and any supplemental indenture) 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 the proceeds thereof (other than
certain tax and other liens arising by operation of law, except as expressly
permitted by the Related Documents) or (vi) permit the lien of the Indenture and
any supplemental indenture not to constitute a valid first priority (other than
with respect to such tax or other lien) security interest in the assets securing
the Notes.
The Trust may not engage in any activity other than financing, purchasing,
owning, selling, servicing and managing the Financed Student Loans and
activities incidental thereto.
The Trust will not issue, incur, assume or guarantee or otherwise become
liable for any indebtedness other than the Notes or otherwise in accordance with
the Related Documents.
Annual Compliance Statement and Other Notices. The Administrator, on behalf
of the Trust will be required to file annually, commencing in 1998, with the
Indenture Trustee a written statement as to the
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fulfillment of its obligations under the Indenture. The Trust is required to
give the Indenture Trustee written notice of each Event of Default among other
notices. The Indenture Trustee will notify Noteholders of known defaults under
the Indenture within 90 days after their occurrence.
Satisfaction and Discharge of Indenture. The Indenture will be discharged
with respect to the collateral securing the Notes upon the delivery to the
Indenture Trustee for cancellation of all the Notes or, with certain
limitations, upon deposit with the Indenture Trustee of funds sufficient for the
payment in full of all the Notes.
The Indenture Trustee. Bankers Trust Company, a New York banking
corporation, will be the Indenture Trustee under the Indenture.
Bankers Trust Company, the Indenture Trustee, may serve from time to time
as trustee under indentures or trust agreements with the Transferor or its
affiliates relating to other issues of their securities. In addition, the
Transferor or its affiliates may have other banking relationships with Bankers
Trust Company and its affiliates.
BOOK-ENTRY REGISTRATION
Noteholders may hold their certificates through DTC (in the United States)
or Cedel or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations that are participants in such systems.
Cede, as nominee for DTC, will hold the global Notes. Cedel and Euroclear
will hold omnibus positions on behalf of the Cedel Participants and the
Euroclear Participants, respectively, through customers' securities accounts in
Cedel's and Euroclear's names on the books of their respective depositories
(collectively, the "Depositories") which in turn will hold such positions in
customers' securities accounts in the Depositories' names on the books of DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of 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 holds securities for its Participants ("DTC Participants") and
facilitates the clearance and settlement among DTC Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic book-entry changes in DTC Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. DTC Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to the DTC system
is also available to others such as securities brokers and dealers, banks, and
trust companies that clear through or maintain a custodial relationship with a
DTC Participant, either directly or indirectly ("Indirect Participants"). The
rules applicable to DTC and its DTC Participants are on file with the Securities
and Exchange Commission.
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
the ordinary way in accordance with their applicable rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
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Because of time-zone differences, credits of securities in Cedel or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant Cedel
Participant or Euroclear Participant on such business day. Cash received in
Cedel or Euroclear as a result of sales of securities by or through a Cedel
Participant or a Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
Cedel or Euroclear cash account only as of the business day following settlement
in DTC.
Purchases of Notes under the DTC system must be made by or through DTC
Participants, which will receive a credit for the Notes on DTC's records. The
ownership interest of each actual owner of a Note (a "Note Owner") is in turn to
be recorded on the DTC Participants' and Indirect Participants' records. Note
Owners will not receive written confirmation from DTC of their purchase, but
Note Owners are expected to receive written confirmations providing details of
the transaction, as well as periodic statements of their holdings, from the DTC
Participant or Indirect Participant through which the Note Owner entered into
the transaction. Transfers of ownership interests in the Notes are to be
accomplished by entries made on the books of DTC Participants acting on behalf
of Note Owners. Note Owners will not receive certificates representing their
ownership interest in Notes, except in the event that use of the book-entry
system for the Notes is discontinued.
To facilitate subsequent transfers, all Notes deposited by DTC Participants
with DTC are registered in the name of DTC's nominee, Cede & Co. The deposit of
Notes with DTC and their registration in the name of Cede & Co. effects no
change in beneficial ownership. DTC has no knowledge of the actual Note Owners
of the Notes; DTC's records reflect only the identity of the DTC Participants to
whose accounts such Notes are credited, which may or may not be the Note Owners.
The DTC Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC Participants,
by DTC Participants to Indirect Participants, and by DTC Participants and
Indirect Participants to Note Owners will be governed by arrangements among
them, subject to any statutory or regulatory requirements as may be in effect
from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to Notes.
Under its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date, which assigns Cede & Co.'s consenting or voting
rights to those DTC Participants to whose accounts the Notes are credited on the
record date (identified in a listing attached thereto).
Principal and interest payments on the Notes will be made to DTC. DTC's
practice is to credit DTC Participants' accounts on the applicable Distribution
Date in accordance with their respective holdings shown on DTC's records unless
DTC has reason to believe that it will not receive payment on such Distribution
Date. Payments by DTC Participants to Note Owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name" and will
be the responsibility of such DTC Participant and not of DTC, the Indenture
Trustee or the Transferor, subject to any statutory or regulatory requirements
as may be in effect from time to time. Payment of principal and interest to DTC
is the responsibility of the Indenture Trustee, disbursement of such payments to
DTC Participants shall be the responsibility of DTC, and disbursement of such
payments to Note Owners shall be the responsibility of DTC Participants and
Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Notes at any time by giving reasonable notice to the Transferor
or the Indenture Trustee. Under such circumstances, in the event that a
successor securities depository is not obtained, Definitive Notes are required
to be printed and delivered. The Transferor may decide to discontinue use of the
system of book-entry transfers through DTC (or a successor securities
depository). In that event, Definitive Notes will be delivered to Noteholders.
See "--Definitive Notes."
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The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Transferor believes to be reliable, but
the Transferor takes no responsibility for the accuracy thereof.
Cedel Bank, Societe Anonyme ("Cedel") is incorporated under the laws of
Luxembourg as a professional depository. Cedel holds securities for its
participating organizations ("Cedel Participants") and facilitates the clearance
and settlement of securities transactions between Cedel Participants through
electronic book-entry changes in accounts of Cedel Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in Cedel in any of 32 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 and may include the underwriters of any Series
of Notes. 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.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in 25 countries generally similar to the
arrangements for cross-market transfers with DTC described above. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office (the "Euroclear Operator" or "Euroclear"), under contract with
Euroclear Clearance System, Societe Cooperative, 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 Board establishes policy for the Euroclear System. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include the
underwriters of any Series of Notes. Indirect access to the Euroclear System is
also available to other firms that 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 (collectively, the "Terms
and Conditions"). The Terms and Conditions govern transfers of securities and
cash within the Euroclear System, withdrawal of securities and cash from the
Euroclear System, and receipts of payments with respect to securities in the
Euroclear System. All securities in the Euroclear System are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants and has no record of or relationship
with persons holding through Euroclear Participants.
Distributions with respect to Notes 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 its Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See "Certain
Federal Tax Consequences." Cedel or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by a Noteholder under the
Agreement on behalf of a Cedel Participant or Euroclear Participant only in
accordance with its
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relevant rules and procedures and subject to its Depositary's ability to effect
such actions on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Notes 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.
DEFINITIVE NOTES
Notes will be issued in fully registered, certificated form (the
"Definitive Notes") to Note Owners or their nominees rather than to DTC or its
nominee, only if (i) the Administrator advises the Indenture Trustee for such
Series in writing that DTC is no longer willing or able to discharge properly
its responsibilities as Depositary with respect to such Series of Notes, and the
Administrator is unable to locate a qualified successor, (ii) the Administrator,
at its option, advises the Trustee in writing that it elects to terminate the
book-entry system through DTC or (iii) after the occurrence of an Event of
Default, Master Servicer Default or Administrator Default Noteholders
representing not less than 50% of the outstanding principal balance of the Notes
advise the Indenture Trustee and DTC through DTC Participants in writing that
the continuation of a book-entry system through DTC (or a successor thereto) is
no longer in the best interest of the Noteholders.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will cause DTC to notify all DTC
Participants of the availability through DTC of Definitive Notes. Upon surrender
by DTC of the definitive certificate representing the Notes and instructions for
registration, the Indenture Trustee will issue the Notes as Definitive Notes,
and thereafter the Indenture Trustee will recognize the holders of such
Definitive Notes as holders under the Indenture ("Holders").
Distribution of principal and interest on the Notes will be made by the
Trustee directly to Holders of Definitive Notes in accordance with the
procedures set forth herein and in the Agreement. Interest payments and any
principal payments on each Distribution Date will be made to Holders in whose
names the Definitive Notes were registered at the close of business on the
related Record Date. The final payment on any Note (whether Definitive Notes or
the Notes registered in the name of Cede representing the Notes), will be made
only upon presentation and surrender of such Note at the office or agency
specified in the notice of final distribution to Noteholders. The Indenture
Trustee will provide such notice to registered Noteholders prior to the
Distribution Date on which it expects such final distributions to occur.
Definitive Notes will be transferable and exchangeable at the offices of
the transfer agent and registrar for the Notes, which shall initially be the
Indenture Trustee. No service charges will be imposed for any registration of
transfer or exchange, but the Transfer Agent and Registrar may require payment
of a sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.
LIST OF NOTEHOLDERS
A Noteholder may, by written request to the Indenture Trustee, obtain
access to the list of all Noteholders maintained by the Indenture Trustee for
the purpose of communicating with other Noteholders with respect to their rights
under the Indenture or the Notes. The Indenture Trustee may elect not to afford
the requesting Noteholders access to the list of Noteholders if it agrees to
mail the desired communication or proxy, on behalf and at the expense of the
requesting Noteholders, to all Noteholders.
REPORTS TO NOTEHOLDERS
On each Distribution Date, the Indenture Trustee will provide to the
applicable Noteholders of record as of the related Record Date, a statement
setting forth substantially the same information as is required to be provided
on the report provided to the Indenture Trustee and the Trust described under
"Description of Transfer and Servicing Agreements--Statements to Indenture
Trustee."
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Indenture, the Indenture
Trustee will mail to each person who at any time during such calendar year was a
Noteholder and received any payment thereon, a statement containing certain
information
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for the purposes of such Noteholder's preparation of federal income tax returns.
See "Certain Federal Tax Consequences."
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following is a summary of certain terms of the Transfer and Servicing
Agreement, pursuant to which the Eligible Lender Trustee on behalf of the Trust
will obtain, the Master Servicer will service and the Administrator will perform
certain administrative functions with respect to the Financed Students Loans;
the Administration Agreement, pursuant to which the Administrator will undertake
certain other administrative duties with respect to the Trust and the Financed
Student Loans; and the Trust Agreement, pursuant to which the Trust has been
created and the Certificates have been issued (collectively, the "Transfer and
Servicing Agreements"). The summary does not purport to be complete and is
qualified in its entirety by reference to the provisions of the Transfer and
Servicing Agreements.
CONVEYANCE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On the Closing Date, the Transferor will contribute and assign to the
Eligible Lender Trustee on behalf of the Trust, without recourse, its entire
interest in the Financed Student Loans described in the Transfer and Servicing
Agreement, all collections received and to be received with respect thereto for
the period after the Cut-off Date and all the Assigned Rights pursuant to the
Transfer and Servicing Agreement. Each Financed Student Loan will be identified
in schedules appearing as an exhibit to the Transfer and Servicing Agreement.
The Eligible Lender Trustee will, concurrently with such contribution and
assignment, execute, authenticate and deliver the Notes, which will be
authenticated by the Indenture Trustee.
In the Transfer and Servicing Agreement, the Transferor will make certain
representations and warranties with respect to the Financed Student Loans to the
Trust for the benefit of the Certificateholders and the Noteholders, including,
among other things, that (i) each Financed Student Loan, at the time of transfer
to the Trust, is free and clear of all security interests, liens, charges and
encumbrances and no offsets, defenses or counterclaims have been asserted or, to
the Transferor's knowledge, threatened; (ii) the information provided with
respect to the Financed Student Loans is true and correct as of the Cut-off
Date; and (iii) each Financed Student Loan, at the time it was originated,
complied and, at the applicable Closing Date, complies in all material respects
with applicable federal and state laws (including, without limitation, the
Higher Education Act, consumer credit, truth-in-lending, equal credit
opportunity and disclosure laws) and applicable restrictions imposed by the
Program or under any Guarantee Agreement.
Following the discovery by or notice to the Transferor of a breach of any
such representation or warranty with respect to any Financed Student Loan that
materially and adversely affects the interests of the Certificateholders or the
Noteholders in such Financed Student Loan (it being understood that any such
breach that does not affect any Guarantor's obligation to guarantee payment of
such Financed Student Loan will not be considered to have such a material
adverse effect), the Transferor will, unless such breach is cured within 90
days, purchase such Financed Student Loan from the Eligible Lender Trustee, as
of the first day following the end of such 90-day period that is the last day of
a Collection Period, at a price equal to the applicable Purchase Amount (as
defined below). In addition, the Transferor will reimburse the Trust for any
accrued interest amounts that a Guarantor refuses to pay pursuant to its
Guarantee Agreement, or for any Interest Subsidy Payments and Special Allowance
Payments that are lost or that must be repaid to the Department, with respect to
a Financed Student Loan as a result of a breach of any such representation or
warranty by the Transferor. The purchase and reimbursement obligations of the
Transferor will constitute, together with the right to receive certain amounts
from the Reserve Account, the sole remedy available to or on behalf of the
Trust, the Certificateholders or the Noteholders for any such uncured breach.
The Transferor's purchase and reimbursement obligations are contractual
obligations pursuant to the Transfer and Servicing Agreement that may be
enforced against the Transferor, but the breach of which will not constitute an
Event of Default.
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"Purchase Amount" means, as to any Financed Student Loan on any date of
determination, the amount required to prepay in full the outstanding principal
balance of such Financed Student Loan as of the last day of the most recently
completed Collection Period, including all accrued but unpaid interest thereon
(including interest to be capitalized) through the last day of the Collection
Period in which such Financed Student Loan is being purchased.
ACCOUNTS
The Indenture Trustee will establish and maintain the Collection Account,
the Note Distribution Account, the Expense Account, the Reserve Account and the
Monthly Advance Account. The Eligible Lender Trustee will establish and maintain
the Certificate Distribution Account and the Certificate Monthly Advance Account
in the name of the Eligible Lender Trustee on behalf of the Certificateholders.
The foregoing accounts are referred to collectively as the "Trust Accounts" in
the name of the Indenture Trustee on behalf of the Noteholders and the
Certificateholders.
Funds in the Trust Accounts will be invested as provided in the Transfer
and Servicing Agreement in Eligible Investments. "Eligible Investments" are
generally limited to investments acceptable to the Rating Agencies as being
consistent with the rating of the Notes. For so long as the Transferor is a
Certificateholder, all investments of the Trust will be required to be made in
investments permissible for a national bank. Eligible Investments are also
limited to obligations or securities that mature not later than the Business Day
immediately preceding the day on which funds in the applicable Trust Account may
be required to be withdrawn. If the amount required to be withdrawn from the
Reserve Account to cover shortfalls in the amount of Available Funds exceeds the
amount of cash in the Reserve Account, a temporary shortfall in the amounts
distributed to the Noteholders could result. This could, in turn, increase the
average life of the Notes. Investment earnings on funds deposited in the Trust
Accounts, net of losses and investment expenses (collectively, "Investment
Earnings"), will be deposited in the Collection Account and will be treated as
collections of interest on the Financed Student Loans.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
An "Eligible Institution" is generally a depository institution organized under
the federal or any state banking laws whose deposits are insured by the Federal
Deposit Insurance Corporation and whose unsecured long-term debt obligations are
rated "A" or better by Standard & Poor's and "A2" or better by Moody's, or bear
one of the two highest short-term ratings by Standard & Poor's and the highest
short-term rating by Moody's.
SERVICING PROCEDURES
Pursuant to the Transfer and Servicing Agreement, the Master Servicer has
agreed to service, and perform all other related tasks with respect to, all the
Financed Student Loans acquired from time to time. The Master Servicer is
required pursuant to the Transfer and Servicing Agreement to perform all
services and duties customary to the servicing of Financed Student Loans
(including all collection practices), and to do so with reasonable care and in
compliance with all standards and procedures provided for in the Higher
Education Act, the Guarantee Agreements, and all other applicable federal and
state laws.
Without limiting the foregoing, the duties of the Master Servicer under the
Transfer and Servicing Agreement include, but are not limited to, the following:
collecting and depositing into the Collection Account all payments with respect
to the Financed Student Loans, including claiming and obtaining any Guarantee
Payments with respect thereto and with respect to Interest Subsidy Payments and
Special Allowance Payments, responding to inquiries from borrowers on the
Financed Student Loans, investigating delinquencies and sending out statements,
payment coupons and tax reporting information to borrowers. In addition, the
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Master Servicer will keep ongoing records with respect to such Financed Student
Loans and collections thereon and will furnish monthly and annual statements to
the Administrator with respect to such information, in accordance with the
customary standards and as otherwise required in the Transfer and Servicing
Agreement.
The Master Servicer may enter into sub-servicing agreements with
sub-servicers pursuant to which some or all of the Financed Student Loans may be
serviced on behalf of the Master Servicer. No such sub-servicing arrangement
will relieve the Master Servicer of its duties and obligations under the
Transfer and Servicing Agreement.
PAYMENTS ON FINANCED STUDENT LOANS
The Master Servicer will deposit all payments on Financed Student Loans for
which it is acting as primary servicer (from whatever source) and all proceeds
of such Financed Student Loans collected by it during each Collection Period
into the Collection Account (i) within one Business Day after it has received an
aggregate of $30,000 during any month and (ii) on the last Business Day of each
month, all other collections received during such month. The Master Servicer
shall cause each other Servicer to deposit in the Collection Account, no less
frequently than weekly, all payments on Financed Student Loans for which such
other Servicer is acting as primary servicer (from whatever source) and all
proceeds of such Financed Student Loans collected by it during each Collection
Period.
MASTER SERVICER COVENANTS
In the Transfer and Servicing Agreement, the Master Servicer covenants
that: (a) it will duly satisfy or cause to be duly satisfied all obligations on
its part to be fulfilled under or in connection with the Financed Student Loans,
maintain in effect all qualifications required in order to service the Financed
Student Loans and comply in all material respects with all requirements of law
in connection with servicing the Financed Student Loans, the failure to comply
with which would have a materially adverse effect on the Certificateholders or
the Noteholders; (b) it will not permit any rescission or cancellation of a
Financed Student Loan except as ordered by a court of competent jurisdiction or
other government authority or as otherwise consented to by the Eligible Lender
Trustee and the Indenture Trustee; (c) it will do nothing to impair the rights
of the Certificateholders and the Noteholders in the Financed Student Loans; and
(d) it will not reschedule, revise, defer or otherwise compromise with respect
to payments due on any Financed Student Loan except pursuant to any applicable
deferral or forbearance periods or otherwise in accordance with its guidelines
with respect to the servicing of the Financed Student Loans (notwithstanding the
foregoing, the Master Servicer may, in its sole discretion, without having to
obtain the consent or approval of any other party, waive amounts owing under a
Financed Student Loan up to and including $50.00); provided, however, that the
Master Servicer may not agree to any decrease of the interest rate on, or the
principal amount payable with respect to, any Financed Student Loan except as
otherwise permitted by the Higher Education Act or any Guarantee Agreement.
Under the terms of the Transfer and Servicing Agreement, if the Master
Servicer discovers, or receives written notice, that any covenant of the Master
Servicer set forth above has not been complied with in all material respects and
such noncompliance has not been cured within 90 days thereafter and has a
materially adverse effect on the interest of the Certificateholders or the
Noteholders in any Financed Student Loan (it being understood that any such
breach that does not affect any Guarantor's obligation to guarantee payment of
such Financed Student Loan will not be considered to have such a material
adverse effect), unless such breach is cured, the Master Servicer will purchase
such Financed Student Loan as of the first day following the end of such 90-day
period that is the last day of a Collection Period. In that event, the Master
Servicer will be obligated to deposit into the Collection Account an amount
equal to the Purchase Amount of such Financed Student Loan and the Trust's
interest in any such purchased Financed Student Loan will be automatically
assigned to the Master Servicer. Notwithstanding the above, if the Master
Servicer is obligated to purchase a Financed Student Loan as a result of a
failure to service such Financed Student Loan in accordance with the Higher
Education Act and the applicable Guarantee Agreement, the Purchase Amount will
not exceed the amount the related Guarantor would be obligated to pay if not for
such breach. In addition,
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the Master Servicer will reimburse the Trust for any accrued interest amounts
that a Guarantor refuses to pay pursuant to its Guarantee Agreement, or for any
Interest Subsidy Payments and Special Allowance Payments that are lost or that
must be repaid to the Department with respect to a Financed Student Loan as a
result of a breach of any such covenant of the Master Servicer; provided,
however, that such reimbursements shall not exceed the amount the Guarantor
would have paid if not for such breach.
SERVICING COMPENSATION
The Master Servicer will be entitled to receive the Servicing Fee. The
Servicing Fee will be payable quarterly in advance, out of Available Funds and
amounts on deposit in the Reserve Account, on each Distribution Date (or in the
case of the initial Servicing Fee, on the Closing Date) based on the
Administrator's good faith estimate of the Servicing Fee that will accrue during
the three Collection Periods immediately succeeding such Distribution Date (or
in the case of the initial Servicing Fee, the three Collection Periods
immediately succeeding the Closing Date) plus (or minus) the difference (or
excess) of the actual Servicing Fee accrued for the three Collection Periods
immediately preceding such Distribution Date.
The Servicing Fee will compensate the Master Servicer and each other
Servicer for performing the functions of a thirdparty servicer of student loans
as an agent for their beneficial owner, including collecting and posting all
payments, responding to inquiries of borrowers on the Financed Student Loans,
investigating delinquencies, pursuing, filing and collecting any Guarantee
Payments, accounting for collections and furnishing monthly and annual
statements to the Administrator. The Servicing Fee also will reimburse the
Master Servicer for certain taxes, accounting fees, outside auditor fees, data
processing costs and other costs incurred in connection with administering the
Financed Student Loans.
DISTRIBUTIONS
Deposits to Collection Account. On or before each Determination Date, the
Administrator will provide the Indenture Trustee and the Eligible Lender Trustee
a report setting forth by component the Available Funds for the immediately
preceding Collection Period.
For purposes hereof, the term "Available Funds" means the sum, without
duplication, of the following amounts with respect to the related Collection
Period: (i) all collections received by the Master Servicer or any Servicer on
the Financed Student Loans (including any Guarantee Payments received with
respect to the Financed Student Loans); (ii) any payments, including without
limitation Interest Subsidy Payments and Special Allowance Payments received by
the Eligible Lender Trustee during such Collection Period with respect to the
Financed Student Loans; (iii) all proceeds from any sales of Financed Student
Loans by the Trust during such Collection Period; (iv) any payments of or with
respect to interest received by the Master Servicer or a Servicer during such
Collection Period with respect to a Financed Student Loan for which a Realized
Loss was previously allocated; (v) the aggregate Purchase Amounts received for
those Financed Student Loans purchased by the Transferor or purchased by the
Master Servicer under an obligation which arose during the related Collection
Period; (vi) the aggregate amounts, if any, received from the Transferor or the
Master Servicer as reimbursement of non-guaranteed interest amounts, or lost
Interest Subsidiary Payments and Special Allowance Payments with respect to the
Financed Student Loans pursuant to the Transfer and Servicing Agreement; and
(vii) Investment Earnings for such Collection Period; provided, however, that
Available Funds will exclude all payments and proceeds of any Financed Student
Loans the Purchase Amount of which has been included in Available Funds for a
prior Collection Period.
Distributions from Collection Account. On each Determination Date, the
Administrator will advise the Indenture Trustee and the Eligible Lender Trustee
in writing of the applicable Noteholders' Interest Distribution Amount and
Certificateholders' Interest Distribution Amount. Additionally, on each
Determination Date the Administrator will advise the Indenture Trustee and the
Eligible Lender Trustee in writing of the applicable Noteholders' Principal
Distribution Amount (or, after all the Notes have been paid in full, the
Certificateholders' Principal Distribution Amount). Further, on each
Determination Date the Administrator will advise the Indenture Trustee in
writing of the estimated Servicing Fee, Administration Fee, Indenture
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Trustee Fee, and Eligible Lender Trustee Fee (collectively, the "Transaction
Fees") payable for the three succeeding Collection Periods.
On each Distribution Date, the Indenture Trustee will transfer from the
Collection Account, in the following priority and from payments received on or
with respect to the Financed Student Loans during the three Collection Periods
immediately preceding the month of such Distribution Date (or with respect to
the first Distribution Date, from the Closing Date through and including the
Collection Period immediately preceding such Distribution Date), (i) to a
separate account held with and in the name of the Indenture Trustee (the
"Expense Account"), an amount up to the estimated Transaction Fees for the three
immediately succeeding Collection Periods and all overdue Transaction Fees from
prior Collection Periods (plus (or minus) the difference (or excess) of the
actual Transaction Fees for the three immediately preceding Collection Periods
and the Transaction Fees deposited into the Expense Account on the preceding
Distribution Date), (ii) to a separate account held with and in the name of the
Indenture Trustee for the benefit of the Noteholders (the "Note Distribution
Account"), an amount up to the Noteholders' Interest Distribution Amount, (iii)
to the Note Distribution Account, the Noteholders' Principal Distribution
Amount, (iv) to a supplemental account held with and in the name of the Eligible
Lender Trustee for the benefit of the Certificateholders (the "Certificate
Distribution Account"), the Certificateholders' Interest Distribution Amount,
and (v) after the Notes have been paid in full, to the Certificateholder
Distribution Account, the Certificateholders' Principal Distribution Amount.
On each Distribution Date following the transfer to the Expense Account
described in the preceding paragraph, the Indenture Trustee will distribute from
the Expense Account (in addition to any amounts transferred from the Reserve
Account as described herein) the following amounts in the following order of
priority: (i) to the Master Servicer, the estimated Servicing Fee for the three
immediately succeeding Collection Periods and all overdue Servicing Fees, (ii)
to the Administrator, the estimated Administration Fee for the three immediately
succeeding Collection Periods and all overdue Administration Fees, (iii) to the
Indenture Trustee, the estimated Indenture Trustee Fee for the three immediately
succeeding Collection Periods and all overdue Indenture Trustee Fees, and (iv)
to the Eligible Lender Trustee, the estimated Eligible Lender Trustee Fee for
the three immediately succeeding Collection Periods and all overdue Eligible
Lender Trustee Fees.
On each Distribution Date, following the transfer to the Note Distribution
Account described in the second preceding paragraph, the Indenture Trustee will
distribute to the Noteholders as of the related Record Date all amounts
transferred to the Note Distribution Account as set forth above (in addition to
any amounts transferred from the Reserve Account and the Monthly Advance Account
and any Parity Percentage Payments transferred from the Collection Account, each
as described below) in the following order of priority; first, to the Class A-1
and Class A-2 Noteholders, the Class A Noteholders' Interest Distribution Amount
(pro rata based upon the portion thereof allocable to each such class), second,
to the Class B Noteholders, the Class B Noteholders' Interest Distribution
Amount, third, to the Class A-1 Noteholders, the Noteholders' Principal
Distribution Amount until the outstanding principal amount of the Class A-1
Notes has been paid in full, fourth, to the Class A-2 Noteholders, the
Noteholders' Principal Distribution Amount until the outstanding principal
balance of the Class A-2 Notes has been paid in full, and fifth, to the Class B
Noteholders, the Noteholders' Principal Distribution Amount until the
outstanding principal amount of the Class B Notes has been paid in full. On each
Distribution Date, the Eligible Lender Trustee will distribute to the
Certificateholders all amounts transferred to the Certificate Distribution
Account as set forth above (in addition to any amounts transferred from the
Reserve Account and the Monthly Advance Account, each as described herein).
On each Distribution Date, after making all required transfers to the
Expense Account, the Note Distribution Account and, if applicable, the
Certificate Distribution Account, the Indenture Trustee will transfer any
amounts remaining in the Collection Account (other than amounts representing
payments received during such month) in the following order of priority: (i) to
the Reserve Account, the amount, if any, necessary to increase the balance
thereof to the Specified Reserve Account Balance, (ii) to the Note Distribution
Account, the amount, if any, which when applied as a payment of principal on
such Distribution Date to the class of Notes then receiving payments of
principal, is necessary for the Parity Percentage to equal
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102.5% on such Distribution Date (the amount so transferred to the Note
Distribution Account is the "Parity Percentage Payment") and (iii) to the Note
Distribution Account, the amount of any outstanding Noteholders' Interest
Carryover. Any amounts remaining in the Collection Account after such transfers
(other than amounts representing payments received during such current month)
will be distributed to the Transferor.
All principal payments of Notes of any Class shall be made pro rata within
that class. In connection with each principal payment of Notes of any Class, the
Indenture Trustee shall compute the Principal Factor for that Class. The
"Principal Factor" shall be a number, carried to a seven-digit decimal,
indicating the principal balance of each Note of a Class as of a Distribution
Date (after giving effect to any payments made on that date) as a fraction of
the original principal amount of such Note. The Principal Factor for each Class
of Notes shall be initially 1.0000000 and will thereafter decline to reflect the
reduction in the principal balance of the Notes of that Class after any payment
of principal. The principal balance of any Note can be determined by multiplying
the original principal amount of such Note by the Principal Factor applicable to
that Class of Notes.
Notwithstanding the foregoing, if there has been an Event of Default with
respect to payment of the Notes, (i) all principal payments on the Class A Notes
will be made first, on a pro rata basis to all Class A Noteholders (based on the
ratio of the outstanding principal balance of Class A Notes held by each Class A
Noteholder to the aggregate outstanding principal balance of all Class A Notes)
and second, after the Class A Notes have been paid in full, to the outstanding
principal balance of the Class B Notes and (ii) the Certificateholders will not
be entitled to any payments of principal or interest until all Notes have been
paid in full.
"Certificate Balance" equals the original principal balance of each Class
of Certificates issued reduced by all amounts allocable to principal previously
distributed to Certificateholders.
"Certificateholders' Distribution Amount" means, as to any Class of
Certificates, with respect to any Distribution Date, the Certificateholders'
Interest Distribution Amount for such Distribution Date plus, for each
Distribution Date on and after which the Notes have been paid in full, the
Certificateholders' Principal Distribution Amount for such Distribution Date.
"Certificateholders' Interest Carryover Shortfall" means, as to any Class
of Certificates, with respect to any Distribution Date, the excess, if any, of
(i) the sum of the related Certificateholders' Interest Distribution Amount on
the preceding Distribution Date and any outstanding Certificateholders' Interest
Carryover Shortfall on such preceding Distribution Date over (ii) the amount of
interest actually distributed to the Certificateholders of such Class on such
preceding Distribution Date, plus interest on the amount of such excess interest
due to the Certificateholders of such Class, to the extent permitted by law, at
the related Certificate Rate from such preceding Distribution Date to the
current Distribution Date.
"Certificateholders' Interest Distribution Amount" means, as to any Class
of Certificates, with respect to any Distribution Date relating to such
Certificates, the sum of (i) the amount of interest accrued at each related
Certificate Rate for the related Interest Period since the last Distribution
Date (or, in the case of the first Distribution Date, the Closing Date) on the
outstanding principal amount of such Certificates on the immediately preceding
Distribution Date, after giving effect to all distributions of principal to
Certificateholders of such Class on such Distribution Date (or, in the case of
the first Distribution Date, on the Closing Date) and (ii) the
Certificateholders' Interest Carryover Shortfall relating to such Certificates
for such Distribution Date.
"Certificateholders' Principal Carryover Shortfall" means, as of the close
of any Distribution Date relating to a class of Certificates on or after which
the Notes have been paid in full, the excess, if any, of (i) the sum of the
Certificateholders' Principal Distribution Amount on such Distribution Date and
any outstanding Certificateholders' Principal Carryover Shortfall for the
preceding Distribution Date over (ii) the amount of principal actually
distributed to the Certificateholders on such Distribution Date.
"Certificateholders' Principal Distribution Amount" means, on each
Distribution Date occurring after the principal balance of each Class of Notes
has been paid in full, the sum of (i) the Principal Distribution
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Amount for the three Collection Periods preceding such Distribution Date, and
(ii) the Certificateholders' Principal Carryover Shortfall as of the close of
the preceding Distribution Date; provided, however, that the Certificateholders'
Principal Distribution Amount will in no event exceed the outstanding principal
balance of the applicable class of Certificates. Further, on the first
Distribution Date occurring on or after the Distribution Date on which the
principal balance of the last outstanding Class of Notes is paid in full, the
Certificateholders' Principal Distribution Amount also will include the excess,
if any, of the amount of principal available to be distributed on such
Distribution Date over the amount of principal paid on the Notes on such date.
"Noteholders' Distribution Amount" means, as to any class of Notes, with
respect to any Distribution Date, the sum of the related Noteholders' Interest
Distribution Amount and the Noteholders' Principal Distribution Amount for such
Distribution Date.
"Noteholders' Interest Carryover Shortfall" means, as to any Class of
Notes, with respect to any Distribution Date, the excess of (i) the sum of the
related Noteholders' Interest Distribution Amount on the preceding Distribution
Date and any Noteholders' Interest Carryover Shortfall on such preceding
Distribution Date over (ii) the amount of interest actually allocated to such
Noteholders on such preceding Distribution Date, plus interest on the amount of
such excess interest due to the Noteholders, to the extent permitted by law, at
the related Class Interest Rate from such preceding Distribution Date to the
current Distribution Date.
"Noteholders' Interest Distribution Amount" means, as to any Class of
Notes, with respect to any Distribution Date, the sum of (i) the amount of
interest accrued at the respective Class Interest Rate for each Interest Period
since the last Distribution Date (or, in the case of the first Distribution
Date, the Closing Date) on the outstanding principal balance of such Class of
Notes on the immediately preceding Distribution Date after giving effect to all
principal distributions to holders of Notes of such Class on such date (or, in
the case of the first Distribution Date, on the Closing Date) and (ii) the
Noteholders' Interest Carryover Shortfall for such Class for such Distribution
Date; provided, however, that the Noteholders' Interest Distribution Amount will
not include any Noteholders' Interest Carryover.
"Noteholders' Principal Carryover Shortfall" means, as of the close of any
Distribution Date, the excess of (i) the sum of the Noteholders' Principal
Distribution Amount on such Distribution Date and any outstanding Noteholders'
Principal Carryover Shortfall for the preceding Distribution Date over (ii) the
amount of principal actually allocated to the Noteholders on such Distribution
Date.
"Noteholders' Principal Distribution Amount" means, as to the Class of
Notes entitled to receive payments of principal on each applicable Distribution
Date, the sum of (i) the Principal Distribution Amount for the three Collection
Periods immediately preceding the month of such Distribution Date, (ii) any
Parity Percentage Payments to be made on such Distribution Date and (iii) the
Noteholders' Principal Carryover Shortfall as of the close of the preceding
Distribution Date; provided, however, that the Noteholders' Principal
Distribution Amount allocable to a Class of Notes will not exceed the
outstanding principal balance of such Class of Notes. In addition, with respect
to each Class of Notes, on the related Final Maturity Date the Noteholders'
Principal Distribution Amount will include the amount required to reduce the
outstanding principal balance of such Notes to zero.
"Principal Distribution Amount" means, with respect to any Collection
Period, the sum of the following amounts: (i) that portion of all collections
received by the Master Servicer or any Servicer on the Financed Student Loans
that is allocable to principal (including the portion of any Guarantee Payments
received that is allocable to principal of the Financed Student Loans); (ii) the
portion of the proceeds allocable to principal from the sale of Financed Student
Loans by the Trust during such Collection Period; (iii) all Realized Losses
incurred during the related Collection Period; and (iv) to the extent
attributable to principal, the Purchase Amount received with respect to each
Financed Student Loan purchased by the Transferor or purchased by the Master
Servicer or under an obligation which arose during the related Collection
Period; provided, however, that the Principal Distribution Amount will exclude
all payments and proceeds of any Financed Student Loans, the Purchase Amount of
which has been included in Available Funds for a prior Collection Period.
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With respect to each Financed Student Loan submitted to a Guarantor for a
Guarantee Payment, a "Realized Loss" means the excess, if any, of (i) the unpaid
principal balance of such Financed Student Loan on the date it was first
submitted to a Guarantor for a Guarantee Payment over (ii) all amounts received
on or with respect to principal on such Financed Student Loan up through the
earlier to occur of (A) the date a related Guarantee Payment is made or (B) the
last day of the Collection Period occurring 12 months after the date the claim
for such Guarantee Payment is first denied.
MONTHLY ADVANCES
If the Master Servicer has applied for a Guarantee Payment from a Guarantor
or an Interest Subsidy Payment or a Special Allowance Payment from the
Department, and the Master Servicer has not received the related payment prior
to the end of the Collection Period immediately preceding the Distribution Date
on which such amount would be required to be distributed as a payment of
interest, the Master Servicer may, no later than the Determination Date relating
to such Distribution Date, deposit into the Monthly Advance Account an amount up
to the amount of such payments applied for but not received (such deposits by
the Master Servicer are referred to herein as "Monthly Advances"). On each
related Distribution Date, the Indenture Trustee will distribute from the
Monthly Advance Account to the Noteholders the Monthly Advance for such
Distribution Date. Such Monthly Advances are recoverable by the Master Servicer
from the source for which such Monthly Advance was made. The Master Servicer
will have no obligation, legal or otherwise, to make any Monthly Advance, and a
determination by the Master Servicer to make a Monthly Advance will not create
any obligation of the Master Servicer, legal or otherwise, to make any future
Monthly Advances.
CREDIT ENHANCEMENT
Reserve Account. Pursuant to the Transfer and Servicing Agreement, the
Reserve Account will be created and on or prior to the Closing Date and the
Transferor will deposit to the Reserve Account cash or Eligible Investments in
an amount equal to the Initial Reserve Account Deposit. The Reserve Account will
be augmented on each Distribution Date by deposit therein of the amount, if any,
necessary to reinstate the balance of the Reserve Account to the Specified
Reserve Account Balance from the amount of Available Funds remaining after
making all prior distributions on such date as described above under the heading
"--Distributions--Distributions from the Collection Account". Also, if amounts
were transferred from the Reserve Account to cover a Realized Loss on a Financed
Student Loan, any subsequent payments of principal received on or with respect
to such Financed Student Loan will be deposited into the Reserve Account. As
described below, subject to certain limitations, amounts on deposit in the
Reserve Account will be released to the Transferor to the extent that the amount
on deposit in the Reserve Account exceeds the Specified Reserve Account Balance.
If the amount, if any, on deposit in the Reserve Account on any
Distribution Date (after giving effect to all deposits or withdrawals therefrom
on such Distribution Date) is greater than the Specified Reserve Account
Balance, subject to certain limitations, the Administrator will instruct the
Indenture Trustee to distribute the amount of the excess, after payment of any
unpaid Noteholders' Interest Carryover or to purchase Financed Student Loans for
which there has been an uncured breach of certain representations and
warranties, to the Transferor. Upon any distribution to the Transferor of
amounts from the Reserve Account, the Noteholders will not have any rights in,
or claims to, such amounts.
The Reserve Account is intended to enhance the likelihood of timely receipt
by the Noteholders of the full amount of principal and interest due them and to
decrease the likelihood that the Noteholders will experience losses. In certain
circumstances, however, the Reserve Account could be depleted. If the amount
required to be withdrawn from the Reserve Account to cover shortfalls in the
amount of Available Funds exceeds the amount of cash in the Reserve Account, a
temporary shortfall in the amount of principal and interest distributed to the
Noteholders could result. This could, in turn, increase the average life of the
Notes. Moreover, amounts on deposit in the Reserve Account (other than amounts
in excess of the Specified Reserve Account Balance) will not be available to
cover any aggregate unpaid Noteholders' Interest Carryover.
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Subordination of the Class B Notes. The rights of the holders of the Class
B Notes to receive distributions with respect to interest and principal will be
subordinated to such rights of the holders of the Class A-1 Notes and the Class
A-2 Notes to the extent described herein. This subordination is intended to
enhance the likelihood of regular receipt by holders of Class A-1 and Class A-2
Notes of the full amount of the Class A-1 and Class A-2 Noteholders' Interest
Distribution Amount and, after distribution of the Class B Interest Distribution
Amount, the Class A-1 and Class A-2 Noteholders' Principal Distribution Amount.
Subordination of the Certificates. The rights of Certificateholders to
receive distributions of interest and principal will be subordinated to such
rights of the holders of the Notes to the extent described herein.
SWAP AGREEMENTS
Pursuant to the Indenture, the Issuer may enter into one or more swap
agreements with a counterparty whereby some or all of the interest payments
received on the Financed Student Loans (which payments generally are based on
the 91-day Treasury Bill Rate) may be paid to the counterparty in exchange for a
payment of interest based upon another index (i.e., One-Month LIBOR). No such
swap agreement will be entered into unless, among other conditions, each Rating
Agency then rating a Class of Notes confirms that entering into such swap
agreement will not cause such Rating Agency to lower its rating assigned to such
Notes. The obligations of the Trust to make payments to the counterparty will
rank pari passu with the Trust's obligations to pay interest on the Class A
Notes. In connection with entering into a swap agreement, appropriate amendments
will be made to the applicable Transfer and Servicing Agreements without
obtaining the consent of any Noteholders or Certificateholders.
STATEMENTS TO INDENTURE TRUSTEE
On each Determination Date preceding a Distribution Date, the Master
Servicer or the Administrator will provide to the Indenture Trustee (for the
Indenture Trustee to forward on each succeeding Distribution Date to each
Noteholder) a statement which will include the following information with
respect to such Distribution Date or for the preceding Collection Period or
Collection Periods, to the extent applicable:
(i) the amount of the distribution allocable to principal of each
class of Notes;
(ii) the amount of the distribution allocable to interest on each
class of Notes and Certificates, together with the interest rates
applicable with respect thereto (indicating whether such interest rates are
based on the T-Bill Rate or the One-Month LIBOR, as the case may be, or on
the Net Loan Rate, with respect to each class of Notes and Certificates,
and specifying what each such interest rate would have been if it had been
calculated using the alternate basis);
(iii) the amount of the distribution, if any, allocable to any
Noteholders' Interest Carryover together with the outstanding amount, if
any, thereof after giving effect to any such distribution;
(iv) the Pool Balance as of the close of business on the last day of
each preceding Collection Period since the last Distribution Date;
(v) the aggregate outstanding principal balance of each class of Notes
and Certificates as of such Distribution Date, after giving effect to
payments allocated to principal reported under clause (i) above;
(vi) the amount of the Servicing Fee allocated to the Master Servicer,
the amount of the Administration Fee allocated to the Administrator, the
amount of the Indenture Trustee Fee allocated to the Indenture Trustee, the
amount of the Eligible Lender Trustee Fee allocated to the Eligible Lender
Trustee, respectively, with respect to such Collection Period;
(vii) the amount of the aggregate Realized Losses, if any, for each
Collection Period since the last Distribution Date and the aggregate
amount, if any, received (stated separately for interest and principal)
with respect to Financed Student Loans for which Realized Losses were
allocated previously;
(viii) the amount of the distribution attributable to amounts in the
Reserve Account, the amount of any other withdrawals from the Reserve
Account for such Distribution Date, the balance of the Reserve
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Account on such Distribution Date, after giving effect to changes therein
on such Distribution Date, the then applicable Parity Percentage and the
amount of the distribution, if any, attributable to Parity Percentage
Payments;
(ix) the aggregate amount, if any, paid for Financed Student Loans
purchased from the Trust during each preceding Collection Period since the
last Distribution Date; and
(x) the number and principal amount of Financed Student Loans, as of
each preceding Collection Period since the last Distribution Date, that are
(i) 30 to 60 days delinquent, (ii) 61 to 90 days delinquent, (iii) 91 to
120 days delinquent, (iv) more than 120 days delinquent and (v) for which
claims have been filed with the appropriate Guarantor and which are
awaiting payment.
EVIDENCE AS TO COMPLIANCE
The Transfer and Servicing Agreement will provide that a firm of
independent public accountants will furnish to the Eligible Lender Trustee and
the Indenture Trustee annually a statement (based on the examination of certain
documents and records and on such accounting and auditing procedures considered
appropriate under the circumstances) as to compliance by the Master Servicer
during the preceding calendar year (or, in the case of the first such
certificate, the period from March 27, 1997 to December 31, 1997) with certain
provisions of the Transfer and Servicing Agreement relating to the servicing of
the Financed Student Loans.
The Transfer and Servicing Agreement will further provide that a firm of
independent public accountants (which may be the same firm referred to in the
immediately preceding paragraph) will furnish to the Eligible Lender Trustee and
the Indenture Trustee annually a statement (based on the examination of certain
documents and records and on such accounting and auditing procedures considered
appropriate under the circumstances) as to compliance by the Administrator
during the preceding calendar year (or, in the case of the first such
certificate, the period from the Closing Date to December 31, 1997) with certain
provisions of the Transfer and Servicing Agreement and the Administration
Agreement relating to the administration of the Trust and the Financed Student
Loans.
The Transfer and Servicing Agreement will also provide for delivery to the
Eligible Lender Trustee and the Indenture Trustee, concurrently with the
delivery of each statement of compliance referred to above, of a certificate
signed by an officer of the Master Servicer or the Administrator, as the case
may be, stating that, to his knowledge, the Master Servicer or the
Administrator, as the case may be, has fulfilled in all material respects all
its obligations under the Transfer and Servicing Agreement and the
Administration Agreement, respectively, throughout the preceding calendar year
(or, in the case of the first such certificate, the period from the Closing Date
to December 31, 1997) 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 statute thereof. Each of the Master Servicer and the Administrator
has agreed to give the Indenture Trustee and the Eligible Lender Trustee notice
of certain Servicer Defaults and Administrator Defaults, respectively, under the
Transfer and Servicing Agreement.
Copies of such statements and certificates may be obtained by Noteholders
by a request in writing addressed to the Indenture Trustee.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Transfer and Servicing Agreement will provide that the Master Servicer
may not resign from its obligations and duties as Master Servicer thereunder,
except upon determination that the Master Servicer's performance of such duties
is no longer permissible under applicable law or shall violate any final order
of a court or administrative agency with jurisdiction over the Master Servicer
or its properties. No such resignation will become effective until the Indenture
Trustee or a successor servicer has assumed the Master Servicer's servicing
obligations and duties under the Transfer and Servicing Agreement.
The Transfer and Servicing Agreement will further provide that neither the
Transferor, the Master Servicer nor any of its directors, officers, employees or
agents will be under any liability to the Trust, the
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Noteholders or the Certificateholders, the Indenture Trustee or the Eligible
Lender Trustee, except as provided under the Transfer and Servicing Agreement or
the Administration Agreement for taking any action or for refraining from taking
any action pursuant to the Transfer and Servicing Agreement, or for errors in
judgment; provided, however, that neither the Transferor, the Master Servicer
nor any such person will be protected against any liability that would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their respective duties thereunder. In addition, the Transfer and
Servicing Agreement will provide that the Transferor and the Master Servicer
shall not be under any obligation to appear in, prosecute, or defend any legal
action that is not incidental to its duties in accordance with the Transfer and
Servicing Agreement and that, in its opinion, may cause it to incur any expense
or liability.
Under the circumstances specified in the Transfer and Servicing Agreement,
any entity into which the Master Servicer may be merged or consolidated, or any
entity resulting from any merger or consolidation to which the Master Servicer
is a party, or any entity succeeding to the business of the Master Servicer,
which corporation or other entity in each of the foregoing cases assumes the
obligations of the Master Servicer, will be the successor of the Master Servicer
under the Transfer and Servicing Agreement.
MASTER SERVICER DEFAULT; ADMINISTRATOR DEFAULT
"Master Servicer Default" under the Transfer and Servicing Agreement will
consist of: (i) any failure by the Master Servicer to deliver to the Indenture
Trustee for deposit in any of the Trust Accounts any collections, Guarantee
Payments or other amounts received with respect to the Financed Student Loans,
which failure continues unremedied for three Business Days after written notice
from the Indenture Trustee or the Eligible Lender Trustee is received by the
Master Servicer or after discovery by the Master Servicer; (ii) any failure by
the Master Servicer duly to observe or perform in any material respect any other
covenant or agreement of the Master Servicer in the Transfer and Servicing
Agreement which failure materially and adversely affects the rights of
Noteholders and Certificateholders and which continues unremedied for 60 days
after the giving of written notice of such failure (A) to the Master Servicer by
the Indenture Trustee, the Eligible Lender Trustee or the Administrator or (B)
to the Master Servicer and to the Indenture Trustee and the Eligible Lender
Trustee by holders of Notes evidencing not less than 25% in principal amount of
the outstanding Notes; (iii) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities, or similar proceedings with respect to the
Master Servicer and certain actions by the Master Servicer indicating its
insolvency, reorganization pursuant to bankruptcy proceedings or inability to
pay its obligations; and (iv) any limitation, suspension or termination by the
Department of the Master Servicer's eligibility to service Student Loans which
materially and adversely affects the Master Servicer's ability to service
Financed Student Loans.
"Administrator Default" under the Transfer and Servicing Agreement or the
Administration Agreement will consist of (i) any failure by the Administrator to
direct the Indenture Trustee or the Eligible Lender Trustee, as applicable, to
make any required distributions from any of the Trust Accounts, which failure
continues unremedied for three Business Days after written notice from the
Indenture Trustee or the Eligible Lender Trustee is received by the
Administrator or after discovery of such failure by the Administrator; (ii) any
failure by the Administrator duly to observe or perform in any material respect
any other covenant or agreement in the Administration Agreement or the Transfer
and Servicing Agreement which failure materially and adversely affects the
rights of Noteholders, and which continues unremedied for 60 days after the
giving of written notice of such failure (A) to the Administrator, the Indenture
Trustee or the Eligible Lender Trustee or (B) to the Administrator and to the
Indenture Trustee and the Eligible Lender Trustee by holders of Notes evidencing
not less than 25% in principal amount of the outstanding Notes; and (iii)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities, or similar proceedings with respect to the Administrator and
certain actions by the Administrator indicating its insolvency or inability to
pay its obligations.
RIGHTS UPON SERVICER DEFAULT AND ADMINISTRATOR DEFAULT
As long as a Servicer Default under the Transfer and Servicing Agreement or
an Administrator Default under the Transfer and Servicing Agreement or the
Administration Agreement remains unremedied, the
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Indenture Trustee or holders of Notes evidencing not less than 25% in principal
amount of then outstanding Notes may terminate all the rights and obligations of
the Master Servicer under the Transfer and Servicing Agreement, or the
Administrator under the Transfer and Servicing Agreement and the Administration
Agreement, as the case may be, whereupon a successor servicer or administrator
appointed by the Indenture Trustee or the Indenture Trustee will succeed to all
the responsibilities, duties and liabilities of the Master Servicer under the
Transfer and Servicing Agreement, or the Administrator under the Transfer and
Servicing Agreement and the Administration Agreement, as the case may be, and
will be entitled to similar compensation arrangements. In the event that a
successor Master Servicer or Administrator, as the case may be, has not been
appointed at the time when the predecessor Master Servicer or Administrator has
ceased to act as Master Servicer or Administrator, then the Indenture Trustee
shall automatically be appointed successor Master Servicer or Administrator.
Notwithstanding the above, the Indenture Trustee shall, if it shall be unwilling
or legally unable so to act, appoint or petition a court of competent
jurisdiction to appoint, any established institution whose regular business
shall include the servicing of student loans, as the successor to the Master
Servicer or Administrator, as the case may be, under this Agreement. In the
event that a successor Master Servicer or Administrator, as the case may be, has
not been appointed at the time when the predecessor Master Servicer or
Administrator has ceased to act as Master Servicer or Administrator, then the
Indenture Trustee shall automatically be appointed as successor Master Servicer
or Administrator.
WAIVER OF PAST DEFAULTS
The holders of Notes evidencing at least a majority in principal amount of
the then outstanding Notes may, on behalf of all Noteholders and
Certificateholders, waive any default by the Master Servicer in the performance
of its obligations under the Transfer and Servicing Agreement, or any default by
the Administrator of its obligations under the Transfer and Servicing Agreement
and the Administration Agreement, as the case may be, and their respective
consequences, except a default in making any required deposits to or payments
from any of the Trust Accounts or giving instructions regarding the same in
accordance with the Transfer and Servicing Agreement. No such waiver will impair
the Noteholders' or the Certificateholders' rights with respect to subsequent
defaults.
AMENDMENT
The Transfer and Servicing Agreements may be amended by the parties
thereto, with the consent of the Indenture Trustee, for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of the Transfer and Servicing Agreements or of modifying in any manner the
rights of Noteholders or Certificateholders; provided, however, that no such
amendment may (i) increase or reduce in any manner the amount of, or accelerate
or delay the timing of, collections of payments with respect to the Financed
Student Loans or distributions that are required to be made for the benefit of
the Noteholders or the Certificateholders or (ii) reduce the aforesaid
percentage of the Notes or Certificates which are required to consent to any
such amendment, without the consent of the holders of all the outstanding Notes
and Certificates.
INSOLVENCY EVENT
If any of certain events of insolvency or receivership, readjustment of
debt, marshaling of assets and liabilities, or similar proceedings with respect
to the Transferor or certain actions by the Transferor indicating its insolvency
or inability to pay its obligations (each, an "Insolvency Event") occurs, the
Financed Student Loans will be liquidated and the Trust will be terminated.
Promptly after the occurrence of any Insolvency Event, notice thereof is
required to be given to Noteholders and Certificateholders; provided, however,
that any failure to give such required notice will not prevent or delay
termination of the Trust. Upon termination of the Trust, the Eligible Lender
Trustee will direct the Indenture Trustee promptly to sell the assets of the
Trust (other than the Trust Accounts) in a commercially reasonable manner and on
commercially reasonable terms. The proceeds from any such sale, disposition or
liquidation of the Financed Student Loans will be treated as collections thereon
and deposited in the Collection Account. If the proceeds from the liquidation of
the Financed Student Loans and any amounts on deposit in the Reserve Account are
not sufficient to pay the
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Notes in full, the amount of principal returned to the Noteholders will be
reduced and the Noteholders will incur a loss.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes and the satisfaction and
discharge of the Indenture, the Eligible Lender Trustee will succeed to all the
rights of the Indenture Trustee, and the Certificateholders will succeed to all
the rights of the Noteholders, under the Transfer and Servicing Agreement,
except as otherwise provided therein.
TERMINATION
The obligations of the Master Servicer, the Transferor, the Administrator,
the Eligible Lender Trustee and the Indenture Trustee pursuant to the Transfer
and Servicing Agreements will terminate upon (i) the maturity or other
liquidation of the last Financed Student Loan and the disposition of any amount
received upon liquidation of any remaining Financed Student Loans and (ii) the
payment to the Noteholders and the Certificateholders of all amounts required to
be paid to them pursuant to the Transfer and Servicing Agreements. In order to
avoid excessive administrative expense, the Transferor is permitted at its
option to repurchase from the Eligible Lender Trustee, as of the end of any
Collection Period immediately preceding a Distribution Date, if the then
outstanding Pool Balance is 5% or less of the Initial Pool Balance, all
remaining Financed Student Loans at a price equal to the aggregate Purchase
Amounts thereof as of the end of such Collection Period, which amounts will be
used to retire the Notes and the Certificates concurrently therewith. Upon
termination of the Trust, all right, title and interest in the Financed Student
Loans and other funds of the Trust, after giving effect to any final
distributions to Noteholders and Certificateholders therefrom, will be conveyed
and transferred to the Transferor.
ADMINISTRATOR
PNC Bank, National Association, in its capacity as Administrator, will
enter into the Administration Agreement with the Trust and the Indenture
Trustee, pursuant to which the Administrator will agree, to the extent provided
therein, (i) to direct the Indenture Trustee to make the required distributions
from the Trust Accounts on each Distribution Date, (ii) to prepare (based on the
reports received from the Master Servicer) and provide periodic and annual
statements to the Eligible Lender Trustee and the Indenture Trustee with respect
to distributions to Noteholders and Certificateholders and any related Federal
income tax reporting information and (iii) to provide the notices and to perform
other administrative obligations required by the Indenture and the Trust
Agreement. As compensation for the performance of the Administrator's
obligations under the Administration Agreement and as reimbursement for its
expenses related thereto, the Administrator will be entitled to an
administration fee equal to 0.02% per annum of the outstanding principal amount
of the Notes and Certificates (the "Administration Fee").
CERTAIN LEGAL ASPECTS OF THE FINANCED STUDENT LOANS
TRANSFER OF FINANCED STUDENT LOANS
The Transferor intends that the transfer of the Financed Student Loans by
it to the Eligible Lender Trustee on behalf of the Trust will constitute a valid
contribution and assignment of such Financed Student Loans. Notwithstanding the
foregoing, if the transfer of the Financed Student Loans is deemed to be an
assignment of collateral as security for the benefit of the Trust, a security
interest in the Federal Loans created on behalf of the Eligible Lender Trustee
may, pursuant to the provisions of 20 U.S.C. sec.1087-2(d)(3), be perfected by
the filing of notice of such security interest in the manner provided by the
applicable state law version Uniform Commercial Code ("UCC") for perfection of a
security interest in accounts. A financing statement or statements covering the
Financed Student Loans will be filed under the UCC to protect the interest of
the Eligible Lender Trustee in the event the transfer by the Transferor is
deemed to be subject to the UCC.
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If the transfer of the Financed Student Loans is deemed to be an assignment
as security for the benefit of the Trust, there are certain limited
circumstances under the UCC in which prior or subsequent transferees of Financed
Student Loans could have an interest in such Financed Student Loans with
priority over the Eligible Lender Trustee's interest. A tax or other government
lien on property of the Transferor arising prior to the time a Financed Student
Loans came into existence may also have priority over the interest of the
Eligible Lender Trustee in such Financed Student Loan. Under the Transfer and
Servicing Agreement, however, the Transferor will warrant that it has caused the
Financed Student Loans to be transferred to the Eligible Lender Trustee on
behalf of a Trust free and clear of any lien of any third party. In addition,
the Transferor will covenant that it will not sell, pledge, assign, transfer or
grant any lien on any Financed Student Loan (or any interest therein) other than
to the Eligible Lender Trustee on behalf of a Trust.
Pursuant to the Transfer and Servicing Agreement, either the Master
Servicer or a sub-servicer as custodian on behalf of the Trust will have custody
of the promissory notes evidencing the Financed Student Loans following the
conveyance of the Financed Student Loans to the Eligible Lender Trustee and the
pledge thereof to the Indenture Trustee. Although the accounts of the Transferor
will be marked to indicate the conveyance and the Transferor will cause UCC
financing statements to be filed with the appropriate authorities, the Financed
Student Loans will not be physically segregated in the Master Servicer's or such
sub-servicer's offices. If, through inadvertence or otherwise, any of the
Financed Student Loans 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 Financed Student Loans in the ordinary course of its
business and took possession of such Financed Student Loans, then the purchaser
(or secured party) would acquire an interest in the Financed Student Loans
superior to the interest of the Eligible Lender Trustee and the Indenture
Trustee if the purchaser (or secured party) acquired (or took a security
interest in) the Financed Student Loans for new value and without actual
knowledge of the Eligible Lender Trustee's and the Indenture Trustee's
respective interests. See "Description of the Transfer and Servicing
Agreements--Conveyance of Financed Student Loans; Representations and
Warranties" and "--Servicer Covenants."
CERTAIN MATTERS RELATING TO RECEIVERSHIP
The FDIA, as amended by FIRREA, sets forth certain powers that the FDIC
could exercise if it were appointed as receiver or conservator of the
Transferor.
Subject to clarification by FDIC regulations or interpretations, it would
appear form the positions taken by the FDIC that the FDIC, in its capacity as a
receiver or conservator for the Transferor, would not interfere with the timely
transfer to the Trust of collections with respect to the Financed Student Loans.
To the extent that the transfer of the Financed Student Loans is deemed to
create a security interest, and that interest was validly perfected before the
Transferor's insolvency and was not taken in contemplation of insolvency or with
the intent to hinder, delay or defraud the Transferor or its creditors, based
upon opinions and statements of policy issued by the general counsel of the FDIC
addressing the enforceability against the FDIC, as conservator or receiver for a
depository institution, of a security interest in collateral granted by such
depository institution, such security interest should not be subject to
avoidance and payments to the Trust with respect to the Financed Student Loans
should not be subject to recovery by the FDIC as receiver or conservator of the
Transferor. If, however, the FDIC were to assert a contrary position, certain
provisions of the FDIA which, at the request of the FDIC, have been applied in
recent lawsuits to avoid security interests in collateral granted by depository
institutions, would permit the FDIC to avoid such security interests, thereby
resulting in possible delays and reductions in payments on the Notes. In
addition, if the FDIC were to require the Indenture Trustee or the Eligible
Lender Trustee to establish its rights to such payments by submitting to and
completing the administrative claims procedure under the FDIA, as amended by
FIRREA, delays in payments on the Notes and possible reductions in the amount of
the payments could occur.
CONSUMER PROTECTION LAWS
Numerous Federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. Also, some state laws impose finance charge ceilings and other
restrictions on certain consumer transactions and require contract disclosures
in
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addition to those required under federal law. These requirements impose specific
statutory liabilities upon lenders who fail to comply with their provisions. In
certain circumstances, the Trust may be liable for certain violations of
consumer protection laws that apply to the Financed Student Loans, either as
assignee from the Transferor or as the party directly responsible for
obligations arising after the transfer. Many of these requirements are preempted
by the provisions of the Higher Education Act. For a discussion of the Trust's
rights if the Financed Student Loans were not originated or serviced in
compliance in all material respects with applicable laws, See "Description of
the Transfer and Servicing Agreements--Conveyance of Financed Student Loans;
Representations and Warranties" and "--Master Servicer Covenants."
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO FINANCED STUDENT LOANS
The Higher Education Act, including the implementing regulations thereunder
(in the case of Federal Loans), impose specified requirements, guidelines and
procedures with respect to originating and servicing Student Loans such as the
Financed Student Loans. Generally, those procedures require that completed loan
applications be processed, a determination of whether an applicant is an
eligible borrower under applicable standards (including a review of a financial
need analysis in the case of certain Federal Loans) be made, the borrower's
responsibilities under the loan be explained to him or her, the promissory note
evidencing the loan be executed by the borrower and then that the loan proceeds
be disbursed in a specified manner by the lender. After the loan is made, the
lender must establish repayment terms with the borrower, properly administer
deferrals and forbearance and credit the borrower for payments made thereon. If
a borrower becomes delinquent in repaying a loan, a lender or a servicing agent
must perform certain collection procedures (primarily telephone calls and demand
letters) which vary depending upon the length of time a loan is delinquent. The
Master Servicer has agreed pursuant to the Transfer and Servicing Agreement to
perform collection and servicing procedures on behalf of the Trust. However,
failure to follow these procedures or failure of the Transferor to follow
procedures relating to the origination of any Financed Student Loans could
result in adverse consequences. In the case of any Financed Student Loans, any
such failure could result in the Department's refusal to make reinsurance
payments to the Guarantors or to make Interest Subsidy Payments and Special
Allowance Payments to the Eligible Lender Trustee with respect to such Financed
Student Loans or in the Guarantors' refusal to honor their Guarantee Agreements
with the Eligible Lender Trustee with respect to such Financed Student Loans.
Failure of the Guarantors to receive reinsurance payments from the Department
could adversely affect the Guarantors' ability or legal obligation to make
Guarantee Payments to the Eligible Lender Trustee with respect to such Financed
Student Loans.
Loss of any such Guarantee Payments, Interest Subsidy Payments or Special
Allowance Payments could adversely affect the amount of Available Funds on any
Distribution Date and the Trust's ability to pay principal and interest on the
Notes. Under certain circumstances, pursuant to the Transfer and Servicing
Agreement, the Transferor is obligated to repurchase any Financed Student Loan,
or the Master Servicer is obligated to purchase any Financed Student Loan, if a
breach of the representations, warranties or covenants of the Transferor or the
Master Servicer, as the case may be, with respect to such Financed Student Loan
has a material adverse effect on the interest of the Trust therein and such
breach is not cured within any applicable cure period (it being understood that
any such breach that does not affect any Guarantor's or the Secretary's
obligation to guarantee payment of such Financed Student Loan will not be
considered to have such a material adverse effect). See "Description of the
Transfer and Servicing Agreements--Conveyance of Financed Student Loans;
Representations and Warranties" and "--Master Servicer Covenants." The failure
of the Master Servicer to so purchase a Financed Student Loan would constitute a
breach of the Transfer and Servicing Agreement, enforceable by the Eligible
Lender Trustee on behalf of the Trust or by the Indenture Trustee on behalf of
the Noteholders, but would not constitute an Event of Default under the
Indenture.
FINANCED STUDENT LOANS GENERALLY NOT SUBJECT TO DISCHARGE IN BANKRUPTCY
The Financed Federal Loans are generally not dischargeable by a borrower in
bankruptcy pursuant to the Bankruptcy Code, unless (i) such loan first became
due before seven years (exclusive of any applicable suspension of the repayment
period) before the date of the bankruptcy or (ii) excepting such debt from
discharge will impose an undue hardship on the debtor and the debtor's
dependents.
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CERTAIN FEDERAL TAX CONSEQUENCES
Set forth below is a summary of Certain Federal income tax consequences of
the purchase, ownership and disposition of the Notes. Mayer, Brown & Platt,
special Federal tax counsel for the Trust ("Federal Tax Counsel") is of the
opinion that the discussion hereunder fully and fairly discloses all material
Federal tax risks associated with the purchase, ownership and disposition of the
Notes.
This summary does not deal with all aspects of Federal income taxation
applicable to all categories of holders of the Notes, some of which may be
subject to special rules or special treatment under the Federal income tax laws.
For example, it does not discuss the specific tax treatment of Notes that are
held by insurance companies, banks and certain other financial institutions,
regulated investment companies, individual retirement accounts life insurance
companies, tax-exempt organizations or dealers in securities. Furthermore, this
summary is based upon present provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), the regulations promulgated thereunder, and judicial or
ruling authority, all of which are subject to change, which change may be
retroactive. Moreover, there are no cases or Internal Revenue Service (the
"IRS") rulings on similar transactions involving a trust that issues debt and
equity interests 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.
This discussion is directed to prospective investors who purchase Notes in
the initial distribution thereof and who hold the Notes as "capital assets"
within the meaning of Section 1221 of the Code. Prospective investors are
advised to consult their own tax advisors with regard to the Federal income tax
consequences of the purchase, ownership and disposition of the Securities, as
well as the tax consequences arising under the laws of any state, foreign
country or other jurisdiction. The Trust has been provided with an opinion of
Federal Tax Counsel regarding certain of the Federal income tax matters
discussed below. An opinion of counsel, however, is not binding on the IRS, and
no ruling on any of the issues discussed below will be sought from the IRS.
FEDERAL TAX CONSEQUENCES WITH RESPECT TO THE NOTES
Tax Characterization of the Notes and the Trust. Federal Tax Counsel has
advised the Trust that based on the terms of the Notes and the transactions
relating to the Financed Student Loans as set forth herein, the Notes will be
treated as debt for Federal income tax purposes. There is, however, no specific
authority with respect to the characterization for Federal income tax purposes
of securities having the same terms as the Notes.
Federal Tax Counsel is also of the opinion that based on the applicable
provisions of the Trust Agreement and related documents and the minimum
denomination of the Certificates, the Trust will not be classified as an
association or publicly traded partnership taxable as a corporation for Federal
income tax purposes, and because the Trust has not elected and will not elect
under Treasury Regulation 301,7701-3 to be classified as an association, the
Trust also will not be so classified for federal income tax purposes. If the IRS
were to successfully characterize the Trust as a corporation for Federal income
tax purposes, the income from the Financed Student Loans (reduced by deductions,
possibly including interest on the Notes) would be subject to Federal income tax
at corporate rates, which would reduce the amounts available to make payments on
the Notes.
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 Trust. If so, the Trust might be
treated as a publicly traded partnership taxable as a corporation with the
adverse consequences described above (and the taxable corporation would not be
able to deduct interest on the Notes). The remainder of this discussion assumes
that the Notes will be treated as debt and that the Trust will not be treated as
a publicly traded partnership taxable as a corporation.
Interest Income on the Notes. The stated interest on the Notes will be
taxable to a Noteholder as ordinary income when received or accrued in
accordance with such Noteholder's method of tax accounting. It is not
anticipated that the Notes will be issued with "original issue discount" within
the meaning of
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Section 1273 of the Code ("OID"). A holder who purchases a Note at a discount
that exceeds a statutorily defined de minimis amount will be subject to the
"market discount" rules of the Code, and a holder who purchases a Note at a
premium will be subject to the premium amortization rules of the Code.
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 OID (if any), market discount 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. Subject to the rules of the Code concerning market discount on the
Notes, any such gain or loss generally will be capital gain or loss if the note
was held as a capital asset. Capital losses generally may be deducted only to
the extent the Noteholder has capital gains for the taxable year, although under
certain circumstances non-corporate Noteholders can deduct losses in excess of
available capital gains.
Foreign Holders. If interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other non-United States person (a
"foreign person") is not effectively connected with the conduct of a trade or
business within the United States by the foreign person, the interest generally
will be considered "portfolio interest," and generally will not be subject to
United States Federal income tax and withholding tax, if the foreign person (i)
is not actually or constructively a "10 percent shareholder" of the Trust or
Student Holdings (including a holder of 10% of the outstanding Certificates) or
a "controlled foreign corporation" with respect to which the Trust or Student
Holdings is a "related person" within the meaning of the Code and (ii) provides
the person otherwise required to withhold U.S. tax with an appropriate
statement, signed under penalties of perjury, certifying that the beneficial
owner of the Note is a foreign person and providing the foreign person's name
and address. If the information provided in the statement changes, the foreign
person must so inform the person otherwise required to withhold U.S. tax within
30 days of such change. The statement generally must be provided in the year a
payment occurs (prior to such payment) or in either of the two preceding years.
If a Note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide a signed
statement to the withholding agent. However, in that case, 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%, 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) the 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 individual is not present in the United States for 183 days
or more in the taxable year or does not have a tax home in the United States.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States Federal income tax on the
interest, gain or income at regular Federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
Proposed Treasury regulations, which would be effective with respect to
payments made after December 31, 1997 if adopted in their current form, would
provide alternative certification requirements and means for obtaining the
exemption from federal income and withholding tax.
Information Reporting and Withholding. The Trust will be required to report
annually to the IRS, and to each Noteholder of record, the amount of interest
paid on the Notes (and the amount of interest withheld for Federal income taxes,
if any) for each calendar year, except as to exempt holders (generally, holders
that are
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corporations, tax-exempt organizations, qualified pension and profit-sharing
trusts, individual retirement accounts.). For nonresident aliens who provide
certification as to their status as nonresidents interest paid will be reported
on Form 1042-S. However, withholding will not apply as long as the certification
is valid. Generally, certification must be renewed every three calendar years.
Accordingly, each holder (other than exempt holders who are not subject to the
reporting requirements) 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 or recertify its foreign status, the Trust will be required to
withhold 31% for U.S. residents or 30% for nonresident aliens 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.
STATE AND LOCAL TAX CONSEQUENCES
The above discussion does not address the tax treatment of the Trust, the
Notes or the Noteholders under any state or local tax laws. The activities to be
undertaken in servicing and collecting the Financed Student Loans will take
place in a number of states and, therefore, many different tax regimes
potentially apply to different portions of the transactions. Prospective
investors are urged to consult with their tax advisors regarding the state and
local tax treatment of the Trust as well as any state and local tax consequences
of them purchasing, holding and disposing of Notes.
ERISA CONSIDERATIONS
Subject to the following discussion, the Notes may be acquired by pension,
profit-sharing or other employee benefit plans or retirement arrangements, as
well as an individual retirement accounts and Keogh plan (each a "Benefit
Plan"). Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code prohibit a Benefit Plan from
engaging in certain transactions with persons that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to such
Benefit Plan. A violation of these "prohibited transaction" rules may result in
an excise tax or other penalties and liabilities under ERISA and the Code for
such persons or the fiduciaries of the Benefit Plan. In addition, Title I of
ERISA also requires fiduciaries of a Benefit Plan subject to ERISA to make
investments that are prudent, diversified and in accordance with the governing
plan documents.
Certain transactions involving the Trust might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit Plan
that purchased Notes if assets of the Trust were deemed to be assets of the
Benefit Plan. Under a regulation issued by the United States Department of Labor
(the "Regulation"), the assets of the Trust would be treated as plan assets of a
Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquired an "equity interest" in the Trust and none of the exceptions contained
in the Regulation was applicable. An equity interest is defined under the
Regulation as an interest other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. Although there is little guidance on the subject, the Transferor
believes that, at the time of their issuance, the Notes should be treated as
indebtedness of the Trust without substantial equity features for purposes of
the Regulation. This determination is based in part upon the traditional debt
features of the Notes, including the reasonable expectation of purchasers of
Notes that the Notes will be repaid when due, as well as the absence of
conversion rights, warrants and other typical equity features.
However, without regard to whether the Notes are treated as an equity
interest for purposes of the Regulation, the acquisition or holding of Notes by
or on behalf of a Benefit Plan could be considered to give rise to a prohibited
transaction if the Trust, the Transferor, the Depositor, the Administrator, the
Master Servicer, the Indenture Trustee or the Eligible Lender Trustee is or
becomes a party in interest or a disqualified person with respect to such
Benefit Plan or a transfer of a Note occurs between a party in interest or a
disqualified person and a Benefit Plan. Certain exemptions from the prohibited
transaction rules could be applicable to the purchase and holding of Notes by a
Benefit Plan depending on the type and circumstances of the plan fiduciary
making the decision to acquire such Notes. Included among these exemptions are:
Prohibited Transaction Class Exemption ("PTCE") 96-23, regarding transactions
effected by "in-house asset
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managers"; PTCE 95-60, regarding investments by insurance company general
accounts; PTCE 91-38, regarding investments by bank collective investment funds;
PTCE 90-1, regarding investments by insurance company pooled separate accounts;
and PTCE 84-14, regarding transactions effected by "qualified professional asset
managers." By acquiring a Note, each purchaser will be deemed to represent that
either (i) it is not acquiring the Notes with the assets of a Benefit Plan; or
(ii) the acquisition of the Notes will not give rise to a non-exempt prohibited
transaction under Section 406(a) of ERISA or Section 4975 of the Code.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements, however, governmental plans may be
subject to comparable state law restrictions.
A plan fiduciary considering the purchase of Notes should consult its legal
advisors regarding whether the assets of the Trust would be considered plan
assets, the possibility of exemptive relief from the prohibited transaction
rules and other issues and their potential consequences.
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UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting Agreement
dated , 1997 (the "Underwriting Agreement"), among the Transferor,
Smith Barney Inc. and PNC Capital Markets, Inc. (the "Underwriters"), the
Transferor has agreed to sell to the Underwriters, and each Underwriter has
severally agreed to purchase from the Transferor, the principal amount of each
Class of Notes set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
---------------------------------------------------
UNDERWRITER CLASS A-1 NOTES CLASS A-2 NOTES CLASS B NOTES
------------------------------------------ --------------- --------------- -------------
<S> <C> <C> <C>
Smith Barney Inc.......................... $ $ $
PNC Capital Markets, Inc.................. $ $ $
Total..................................... $ $ $
</TABLE>
In the Underwriting Agreement, the Underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
Notes offered hereby, if any Notes are purchased. In the event of a default by
any Underwriter, the Underwriting Agreement provides that, in certain
circumstances, purchase commitments of the non-defaulting Underwriter may be
increased or purchase commitments of all Underwriters may be terminated. The
Transferor has been advised by the Underwriters that the Underwriters propose
initially to offer the Notes to the public at the public offering price with
respect to each Class set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of % of the
principal amount of the Notes. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of % of such principal amount to certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The Underwriting Agreement provides that the Transferor will indemnify the
Underwriters against certain liabilities, including liabilities under applicable
securities laws, or contribute to payments the Underwriters may be required to
make in respect thereof.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with the
Regulation M under the Exchange Act. Over-allotment involves syndicate sales in
excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the Notes in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession from a
syndicate member when the Notes originally sold by such syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Notes to be higher than it would
otherwise be in the absence of such transactions.
PNC Capital Markets, Inc. is an affiliate of the Transferor and a wholly
owned indirect subsidiary of the PNC Bank Corp.
Smith Barney Inc. has provided from time to time, and may provide in the
future, investment or commercial banking services to the Transferor and its
affiliates, for which Smith Barney Inc. or its affiliates have received or will
receive customary fees and commissions. An affiliate of Smith Barney Inc. holds
all the Series 1997-1 notes previously issued by the Trust, which will be paid
in full immediately prior to the issuance of the Notes.
LEGAL MATTERS
Certain legal matters relating to the Transferor, the Master Servicer and
the Administrator will be passed upon by Libby G. Fishman, General
Counsel-Consumer Bank of PNC Bank Corp. Certain legal matters relating to the
validity of the issuance of the Notes will be passed upon for the Trust by
Mayer, Brown & Platt. Mayer, Brown & Platt has performed legal services for the
Transferor and it is expected that it will continue to perform such services in
the future. Certain federal income tax and other matters will be passed upon for
the
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Trust by Mayer, Brown & Platt. Certain legal matters relating to the validity of
the issuance of the Notes will be passed upon for the Underwriters by Stroock &
Stroock & Lavan LLP.
FINANCIAL INFORMATION
The Transferor has determined that its financial statements are not
material to the offering made hereby. The Trust will engage in no activities
other than as described herein. Accordingly, no financial statements with
respect to the Trust are included in this Prospectus.
RATING
It is a condition to the issuance and sale of the Class A-1 Notes and the
Class A-2 Notes that they each be rated "AAA" by Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies ("Standard & Poor's"), and
"Aaa" by Moody's Investors Service, Inc. ("Moody's"), and it is a condition to
the issuance of the Class B Notes that they be rated at least "A" by Standard &
Poor's and at least "A2" by Moody's. Each of Standard & Poor's and Moody's is
also referred to herein as a "Rating Agency" and collectively, as the "Rating
Agencies." A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered PNC Student
Loan Trust I Asset Backed Notes (the "Global Securities") to be issued in Series
from time to time (each, a " Series") will be available only in book-entry form.
Investors in the Global Securities may hold such Global Securities through any
of The Depository Trust Company ("DTC"), Cedel or Euroclear. The Global
Securities 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 holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Notes 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 Securities 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 Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities 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 respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to U.S. corporate debt obligations. 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 Securities 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 Securities 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 U.S. corporate
debt obligations in same-day funds.
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 purchaser. When Global
Securities 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
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Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date. Payment will then be made by the
respective Depositary to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
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 Global Securities credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Securities 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 debit 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
settlement. The most direct means of doing so is to pre-position 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
Securities are credited to their accounts 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 the finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this 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 sending Global Securities to
the respective Depositary 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 Participant 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
Securities are to be transferred by the respective clearing system through the
respective Depositary 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 Depositary, as appropriate, to deliver Global Securities
to the DTC Participant's account against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date. The payment will then be reflected in the
account of the 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). Should the Cedel
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in debit in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
charges incurred over that one-day period. If settlement is not completed on the
intended value (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 Securities 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 were taken.
At lease three techniques should be readily available to eliminate this
potential problem:
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(i) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(ii) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in their Cedel or
Euroclear account in order to settle the sale side of the trade; or
(iii) 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 Securities 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, 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 Notes that
are non-U.S. Persons 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, 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 that are Note Owners 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 Note). 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 the Note Owner or his 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 Note 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). 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 or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
the income of which is includible in gross income for United States tax
purposes, regardless of its source. 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 Securities. Investors are advised to consult their own tax
advisers for specific tax advice concerning their holding and disposing of the
Global Securities.
A-3
<PAGE> 86
INDEX OF PRINCIPAL TERMS
Set forth below is a list of the defined terms used in this Prospectus and
the pages on which the definitions of such terms may be found herein.
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
ACA........................................................................... 46
Administration Agreement...................................................... 5
Administration Fee............................................................ 9, 71
Administrator................................................................. 5
Administrator Default......................................................... 70
AFSA.......................................................................... 5, 28
Assigned Rights............................................................... 23
Available Funds............................................................... 63
Benefit Plan.................................................................. 77
Business Day.................................................................. 11
Cede.......................................................................... 3, 17, 25
Cedel......................................................................... 4
Cedel Participants............................................................ 58
Certificate Balance........................................................... 65
Certificate Distribution Account.............................................. 12, 64
Certificateholders............................................................ 12
Certificateholders' Distribution Amount....................................... 65
Certificateholders' Interest Carryover Shortfall.............................. 65
Certificateholders' Interest Distribution Amount.............................. 65
Certificateholders' Principal Carryover Shortfall............................. 65
Certificateholders' Principal Distribution Amount............................. 66
Certificates.................................................................. 4
Class......................................................................... 5
Class A Notes................................................................. 1, 4
Class A-1 Notes............................................................... 1, 4
Class A-2 Notes............................................................... 1, 4
Class B Notes................................................................. 1, 4
Class B Interest Rate......................................................... 24
Class Interest Rate........................................................... 5
Closing Date.................................................................. 9
Code.......................................................................... 75
Collection Account............................................................ 11
Collection Period............................................................. 11
Commission.................................................................... 3
Consolidation Loan............................................................ 37
Cooperative................................................................... 58
Corporation................................................................... 27
Cut-off Date.................................................................. 9
Deferral Period............................................................... 34
Deferral Phase................................................................ 10
Definitive Notes.............................................................. 59
Department.................................................................... 10, 29
Depositor..................................................................... 3
Depositories.................................................................. 56
Depository.................................................................... 50
</TABLE>
i
<PAGE> 87
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Determination Date............................................................ 12
Distribution Date............................................................. 1, 5
DLP Loans..................................................................... 44
DLP Program................................................................... 44
DTC........................................................................... 3, 4, 17
DTC Participants.............................................................. 56
Effective Interest Rate....................................................... 7
Eligible Deposit Account...................................................... 61
Eligible Institution.......................................................... 61
Eligible Investments.......................................................... 61
Eligible Lender Trustee....................................................... 1, 5
Eligible Lender Trustee Fee................................................... 12
Eligible Student.............................................................. 30
ERISA......................................................................... 77
Euroclear..................................................................... 4, 57
Euroclear Operator............................................................ 58
Euroclear Participants........................................................ 58
Event of Default.............................................................. 53
Exchange Act.................................................................. 3
Expense Account............................................................... 12
FDIA.......................................................................... 25
FDIC.......................................................................... 25
FDOE.......................................................................... 10
Federal Assistance............................................................ 32
Federal Direct Student Loan Program........................................... 22
Federal Loan Program.......................................................... 10
Federal Loans................................................................. 10
Federal Tax Counsel........................................................... 75
Final Maturity Date........................................................... 52
Financed Student Loans........................................................ 1, 9
FIRREA........................................................................ 25
Forbearance Period............................................................ 34
Forbearance Periods........................................................... 24
Grace Period.................................................................. 34
Grace Periods................................................................. 24
Great Lakes................................................................... 5, 29
Guarantee Agreements.......................................................... 29
Guarantee Payments............................................................ 19
Guarantor..................................................................... 10
Guarantors.................................................................... 10
Higher Education Act.......................................................... 29
Holders....................................................................... 59
Holding Company............................................................... 27
Indenture..................................................................... 4
Indenture Trustee............................................................. 5
Indenture Trustee Fee......................................................... 12
Index Maturity................................................................ 52
Indirect Participants......................................................... 56
Initial Pool Balance.......................................................... 9
</TABLE>
ii
<PAGE> 88
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Insolvency Event.............................................................. 71
Interest Period............................................................... 6, 51
Interest Subsidy Payments..................................................... 32
Investment Earnings........................................................... 61
IRS........................................................................... 75
LIBOR Determination Date...................................................... 52
Margin........................................................................ 6, 51
Master Servicer............................................................... 4
Master Servicer Default....................................................... 70
Monthly Advance Account....................................................... 16
Monthly Advances.............................................................. 16, 67
Moody's....................................................................... 8, 80
Net Loan Rate................................................................. 7
1992 Amendments............................................................... 32
1993 Amendments............................................................... 32
1993 Technical Amendments..................................................... 32
NJHEAA........................................................................ 10
Note Distribution Account..................................................... 12, 64
Noteholders................................................................... 5
Noteholders' Distribution Amount.............................................. 66
Noteholders' Interest Carryover............................................... 6, 51
Noteholders' Interest Carryover Shortfall..................................... 66
Noteholders' Interest Distribution Amount..................................... 66
Noteholders' Principal Carryover Shortfall.................................... 66
Noteholders' Principal Distribution Amount.................................... 66
Note Owner.................................................................... 57
Notes......................................................................... 1, 4
Obligors...................................................................... 11
OID........................................................................... 76
One-Month LIBOR............................................................... 7
PP Loans...................................................................... 44
PP Program.................................................................... 44
Parity Percentage............................................................. 8
Parity Percentage Payments.................................................... 14, 65
Participants.................................................................. 50
PHEAA......................................................................... 5
PLUS Loans.................................................................... 9, 36
Pool Balance.................................................................. 11
Principal Distribution Amount................................................. 66
Principal Factor.............................................................. 14, 65
Program....................................................................... 30
Program Operating Expense Percentage.......................................... 7
PTCE.......................................................................... 78
Purchase Amount............................................................... 61
Rating Agencies............................................................... 18
Realized Loss................................................................. 67
Record Date................................................................... 5
Reference Bank................................................................ 52
Registration Statement........................................................ 3
</TABLE>
iii
<PAGE> 89
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Regulation.................................................................... 77
Related Documents............................................................. 55
Repayment Phase............................................................... 11
Reserve Account............................................................... 14
Reserve Account Deposit....................................................... 14
Securities Act................................................................ 3, 4
Serial Loan................................................................... 23
Series........................................................................ 13
Servicer...................................................................... 5
Servicers..................................................................... 5
Servicing Fee................................................................. 8
SLS Loans..................................................................... 9, 35
SLS Program................................................................... 35
Special Allowance Payments.................................................... 32
Specified Reserve Account Balance............................................. 15
Stafford Loans................................................................ 32
Standard & Poor's............................................................. 18, 80
Student Loans................................................................. 9
T-Bill Rate................................................................... 7, 52
Telerate Page 3750............................................................ 52
Terms and Conditions.......................................................... 58
Terms Supplement.............................................................. 4
Transaction Fees.............................................................. 12, 64
Transfer and Servicing Agreement.............................................. 4
Transfer and Servicing Agreements............................................. 60
Transferor.................................................................... 1, 4
Transferor Trust.............................................................. 20
91-day Treasury Bills......................................................... 6, 52
91-day Treasury Bill Rate..................................................... 24
Trust......................................................................... 1, 4
Trust Accounts................................................................ 48
Trust Agreement............................................................... 9
UCC........................................................................... 72
Underlying Federal Loan....................................................... 37
Underwriters.................................................................. 79
Unit Amount................................................................... 8
Unsubsidized Stafford Loans................................................... 35
USAF.......................................................................... 5
USAG.......................................................................... 5, 29
</TABLE>
iv
<PAGE> 90
==============================================================================
NO DEALER, SALESMAN OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRANSFEROR OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE NOTES OFFERED HEREBY NOR AN OFFER OF
SUCH NOTES TO ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER
WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information................. 3
Reports to Noteholders................ 3
Incorporation of Certain Documents by
Reference........................... 3
Summary of Terms...................... 4
Risk Factors.......................... 19
Formation of the Trust................ 26
Use of Proceeds....................... 27
The Transferor........................ 27
The Servicers......................... 27
The Student Loan Financing Business... 29
The Financed Student Loan Pool........ 39
Description of the Notes.............. 50
Description of the Transfer and
Servicing Agreements................ 60
Certain Legal Aspects of the Financed
Student Loans....................... 72
Certain Federal Tax Consequences...... 75
State and Local Tax Consequences...... 77
ERISA Considerations.................. 77
Underwriting.......................... 79
Legal Matters......................... 79
Financial Information................. 80
Rating................................ 80
Annex I--Global Clearance, Settlement
and Tax Documentation Procedures.... A-1
Index of Principal Terms.............. i
</TABLE>
==============================================================================
==============================================================================
$
PNC STUDENT LOAN TRUST I
STUDENT LOAN
ASSET BACKED NOTES
SERIES 1997-2
$
Senior Treasury Rate Class A-1 Notes
$
Senior Treasury Rate Class A-2 Notes
$
Subordinate LIBOR Rate Class B Notes
PNC Bank, National Association
Transferor
------------
PROSPECTUS
------------
SMITH BARNEY INC.
PNC CAPITAL MARKETS, INC.
, 1997
==============================================================================
<PAGE> 91
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
[Alternate Page]
$
PNC STUDENT LOAN TRUST I
STUDENT LOAN ASSET BACKED NOTES, SERIES 1997-2
------------------
PNC BANK, NATIONAL ASSOCIATION
Transferor
------------------
PNC Student Loan Trust I, a Delaware business trust (the "Trust"), will
issue $[ ] aggregate principal amount of Senior Treasury Rate Class A-1
Asset Backed Notes (the "Class A-1 Notes"), $[ ] aggregate principal amount
of Senior Treasury Rate Class A-2 Asset Backed Notes (the "Class A-2 Notes" and,
together with the Class A-1 Notes, the "Class A Notes") and $[ ] aggregate
principal amount of Subordinate LIBOR Rate Class B Asset Backed Notes (the
"Class B Notes" and, together with the Class A Notes, the "Notes"). The assets
of the Trust will include a pool of guaranteed education loans to students and
parents of students acquired by The First National Bank of Chicago, as eligible
lender trustee on behalf of the Trust (the "Eligible Lender Trustee"), from PNC
Bank, National Association (the "Transferor") (the "Financed Student Loans"),
collections and other payments with respect to the Financed Student Loans and
monies on deposit in certain trust accounts to be established (including the
Collection Account, the Reserve Account, the Note Distribution Account, the
Expense Account and the Monthly Advance Account). The Notes will be
collateralized by the assets of the Trust.
------------------
The Notes will be available for purchase in denominations of $50,000 and
integral multiples thereof in book-entry form only. Interest on and principal of
the Notes will be payable quarterly on or about the [fifteenth day] of each
, , , and , commencing [ ], 1997 (each, a
"Distribution Date"); provided, that no distribution in respect of principal of
the Class A-2 Notes will be payable until the Class A-1 Notes are paid in full
(except as otherwise described herein) and no distribution in respect of
principal of the Class B Notes will be payable until the Class A Notes are paid
in full. Interest on the Notes will accrue, subject to certain limitations
described herein, for each Interest Period at a per annum rate equal to the
T-Bill Rate plus the applicable Margin for the Class A-1 Notes and Class A-2
Notes and OneMonth LIBOR plus the applicable Margin for the Class B Notes. The
Margin will be [ ]% for the Class A-1 Notes, [ ]% for the Class A-2
Notes and [ ]% for the Class B Notes. The final maturity date for the Class
A-1 Notes will be the [ ] Distribution Date , the final maturity date for
the Class A-2 Notes will be the [ ] Distribution Date and the final maturity
date for the Class B Notes will be the [ ] Distribution Date.
(Continued on following page)
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK
FACTORS" BEGINNING ON PAGE 19.
------------------
THE NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT INTERESTS
IN OR OBLIGATIONS OF THE TRANSFEROR, THE MASTER SERVICER, THE SERVICERS, THE
ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES OR SUBSIDIARIES. THE NOTES ARE NOT DEPOSITS OF
A BANK. THE NOTES ARE NOT GUARANTEED OR INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY GOVERNMENTAL AGENCY.
------------------
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.
This Prospectus is to be used by PNC Capital Markets, Inc., an affiliate of
PNC Bank, National Association, in connection with offers and sales relating to
market-making transactions in the Notes in which PNC Capital Markets, Inc. acts
as principal. PNC Capital Markets, Inc. may also act as agent in such
transactions. Sales will be made at prices related to the prevailing prices at
the time of sale.
PNC CAPITAL MARKETS, INC.
The date of this Prospectus is [ ], 1997
<PAGE> 92
[Alternate Page]
(Cover continued from previous page)
However, payment in full of the Notes could occur earlier than such final
maturity dates as described herein. In addition, the Notes will be repaid (i) on
any Distribution Date on which the Transferor exercises its option to purchase
the Financed Student Loans, exercisable when the outstanding Pool Balance is
reduced to 5% or less of the Initial Pool Balance and (ii) under certain
circumstances as described herein, upon the insolvency of the Transferor and
subsequent termination of the Trust pursuant to the Trust Agreement (as defined
herein).
There is currently no secondary market for the Notes. Smith Barney Inc.
intends to, and PNC Capital Markets, Inc. may, make a secondary market for the
Notes, but neither of them has any obligation to do so. There can be no
assurance that a secondary market for the Notes will develop or, if one does
develop, that it will continue. The Notes will not be listed on any national
securities exchange.
------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN
OF DISTRIBUTION."
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS EFFECTING TRANSACTIONS IN
THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 93
[Alternate Page]
PLAN OF DISTRIBUTION
This Prospectus is to be used by PNC Capital Markets, Inc., an affiliate of
PNC Bank, National Association, in connection with offers and sales related to
market-making transactions in the Notes in which PNC Capital Markets, Inc. acts
as principal. PNC Capital Markets, Inc. may also act as agent in such
transactions. Sales will be made at prices related to the prevailing prices at
the time of sale. Any obligations of PNC Capital Markets, Inc. are the sole
obligations of PNC Capital Markets, Inc. and do not create any obligations on
the part of any affiliate of PNC Capital Markets, Inc.
FINANCIAL INFORMATION
The Transferor has determined that its financial statements are not
material to the offering made hereby. The Trust will engage in no activities
other than as described herein. Accordingly, no financial statements with
respect to the Trust are included in this Prospectus.
RATING
It is a condition to the issuance and sale of the Class A-1 Notes and the
Class A-2 Notes that they each be rated "AAA" by Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies ("Standard & Poor's"), and
"Aaa" by Moody's Investors Service, Inc. ("Moody's"), and it is a condition to
the issuance of the Class B Notes that they be rated at least "A" by Standard &
Poor's and at least "A2" by Moody's. Each of Standard & Poor's and Moody's is
also referred to herein as a "Rating Agency" and collectively, as the "Rating
Agencies." A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency.
<PAGE> 94
[Alternate Page]
===============================================================================
NO DEALER, SALESMAN OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRANSFEROR OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE NOTES OFFERED HEREBY NOR AN OFFER OF
SUCH NOTES TO ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER
WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information................. 3
Reports to Noteholders................ 3
Incorporation of Certain Documents by
Reference........................... 3
Summary of Terms...................... 4
Risk Factors.......................... 19
Formation of the Trust................ 26
Use of Proceeds....................... 27
The Transferor........................ 27
The Servicers......................... 27
The Student Loan Financing Business... 29
The Financed Student Loan Pool........ 39
Description of the Notes.............. 50
Description of the Transfer and
Servicing Agreements................ 60
Certain Legal Aspects of the Financed
Student Loans....................... 72
Certain Federal Tax Consequences...... 75
State and Local Tax Consequences...... 77
ERISA Considerations.................. 77
Plan of Distribution..................
Legal Matters.........................
Financial Information.................
Rating................................
Annex I--Global Clearance, Settlement
and Tax Documentation Procedures.... A-1
Index of Principal Terms.............. i
</TABLE>
===============================================================================
===============================================================================
$
PNC STUDENT LOAN TRUST I
STUDENT LOAN
ASSET BACKED NOTES
SERIES 1997-2
$
Senior Treasury Rate Class A-1 Notes
$
Senior Treasury Rate Class A-2 Notes
$
Subordinate LIBOR Rate Class B Notes
PNC Bank, National Association
Transferor
------------
PROSPECTUS
------------
PNC CAPITAL MARKETS, INC.
, 1997
===============================================================================
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder other
than underwriting discounts and commissions.
<TABLE>
<S> <C>
Registration Fee...................................................... $
"Blue Sky" Registration Fees..........................................
Printing and Engraving Expenses.......................................
Trustee Fees and Expenses.............................................
Legal Fees and Expenses...............................................
Accountants' Fees and Expenses........................................
Rating Agencies' Fees.................................................
Miscellaneous.........................................................
--------
Total............................................................ $
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Association of PNC Bank, National Association ("PNC Bank"),
expressly permit PNC Bank to indemnify its directors and officers, subject to
certain conditions. Article Seventh provides in relevant part:
(a) Subject to any prohibitions or limitations set forth in section
(b) of this Article or [PNC Bank's] By-laws, [PNC Bank] may indemnify or
reimburse any Director, officer, employee for, or advance amounts in
payment of, any expenses actually incurred in any threatened, pending or
completed action or proceeding, whether civil, criminal, administrative, or
investigative, to which such individual was or is a party or a potential
party by reason of his or her performance of official duties on behalf of
or at the request of [PNC Bank]. Such duties shall specifically include,
but not be limited to, service performed at the request of [PNC Bank] as a
representative of a domestic or foreign corporation for profit or
not-for-profit, partnership, joint venture, trust or other enterprise. For
purposes of this Article, "expenses" shall include, but not be limited to,
attorneys' fees and costs, judgments, fines, taxes, penalties, and amounts
paid or to be paid in settlement.
According to section (b) of Article Seventh, no indemnification shall be
made:
(i) . . . in any case where the act or failure to act giving rise to
the claim for indemnification is determined by a court of competent
jurisdiction to have constituted willful misconduct or recklessness;
(ii) . . . for any expenses incurred in an administrative proceeding
or action instituted by a federal bank regulatory agency which proceeding
or action results in a final order assessing civil money penalties or
requiring affirmative action by the Director, officer, or employee in the
form of payments to [PNC Bank], or a final removal or prohibition order
against such individual issued pursuant to 12 U.S.C. sec.sec.1818(e) or
(g). . .; and
(iii) . . . with respect to amounts provided for by any compromise
settlement unless such settlement shall have been approved by a court of
competent jurisdiction, or the holders of record of a majority of the
outstanding shares of [PNC Bank], or the Board of Directors, acting by vote
of Directors not parties to the same or substantially the same action, suit
or proceeding, constituting a majority of the whole number of Directors.
Section (b) also enumerates conditions for advancement of expenses as
follows:
[PNC Bank] may advance expenses to a Director, officer or employee in
connection with an action or proceeding under 12 U.S.C. sec.sec. 164 or
1818 [relating to penalties for failure to make reports and
II-1
<PAGE> 96
termination of status as an insured depository institution, respectively,]
only if the Board of Directors has first made such determinations and
otherwise satisfied such procedural requirements, if any, as may be
specified by rule, regulation, advice or guidance, issued by a Federal bank
regulatory agency having jurisdiction over [PNC Bank]. . . . Any advance of
expenses must be subject to a written and legally binding agreement which
specifies, at a minimum, that reimbursement to [PNC Bank] of expenses
advanced (including expenses already paid) shall be required if and to the
extent that the Board of Directors finds that the Director, officer, or
employee willfully misrepresented factors relevant to the Board's decision
to advance expenses, or a final order is issued assessing civil money
penalties or requiring affirmative action by the individual in the form of
payments to [PNC Bank], or a removal or prohibition order against the
individual is issued pursuant to 12 U.S.C. sec.sec.1818(e) or (g). . . .
[Such] agreement shall [also] provide that [PNC Bank] shall cease advancing
expenses at any time the Board of Directors believes, or reasonably should
believe, that any of the necessary conditions then imposed by rule,
regulation, advice, or guidance issued by a federal bank regulatory agency
having jurisdiction over [PNC Bank] upon such advancement are no longer
met.
Article Seventh expressly states that such indemnification or reimbursement
right is not exclusive of other rights to which such person may be entitled as a
matter of law.
In addition, Article Seventh, section (c), specifically authorizes PNC Bank
to pay reasonable premiums for insurance covering the expenses and the
liabilities of its Directors, officers, and employees, provided that no such
insurance coverage may be purchased for a final order assessing civil money
penalties against such individuals by a federal bank regulatory agency. PNC Bank
Corp., PNC Bank's parent bank holding company, has purchased directors' and
officers' liability insurance that covers certain liabilities which may be
incurred by directors and officers of PNC Bank in connection with the
performance of their duties.
In August 1995, after reviewing Article Seventh, the OCC indicated that
Article Seventh was consistent with the law and the requirements of the OCC.
PNC Bank's By-laws provide for the mandatory indemnification of its
Directors, subject to specified conditions. Section 13 of the By-laws provides
in relevant part:
(a) To the fullest extent permitted by applicable law, each Director
shall be indemnified and held harmless by [PNC] Bank for all actions taken
by him or her and for all failures to take action to the fullest extent
permitted by Pennsylvania law against all expense, liability and loss
(including without limitation attorneys' fees, judgments, fines, taxes,
penalties, and amounts paid or to be paid in settlement) reasonably
incurred or suffered by him or her.
There are certain circumstances where indemnification under Section 13 is
not permitted. No indemnification shall be made "in any case where the act or
failure to act giving rise to the claim for indemnification is determined by a
court of competent jurisdiction to have constituted willful misconduct or
reckless." In addition, Section 13 does not apply to any administrative
proceeding or action instituted by a Federal bank regulatory agency which
"results in a final order assessing civil money penalties or requiring
affirmative action by the Director in the form of making payments to [PNC]
Bank."
II-2
<PAGE> 97
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
(a) All financial statements, schedules and historical financial
information have been omitted as they are not applicable.
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.**
3.1 Articles of Association of PNC BANK, NATIONAL ASSOCIATION.*
3.2 By-Laws of PNC BANK, NATIONAL ASSOCIATION.*
4.1 Indenture between the Trust and the Indenture Trustee (including forms of
Notes).**
4.2 Trust Agreement between the Registrant, the Eligible Lender Trustee and the
Delaware Trustee.**
4.3 Form of Transfer and Servicing Agreement, among the Registrant, the Master
Servicer and the Eligible Lender Trustee.**
5.1 Opinion of Mayer, Brown & Platt with respect to legality.**
8.1 Opinion of Mayer, Brown & Platt with respect to federal tax matters.**
23.1 Consents of Mayer, Brown & Platt (included in their opinions filed as Exhibits
5.1 and 8.1).**
24.1 Powers of Attorney of certain officers and directors of Registrant.*
24.2 Power of Attorney of B.R. Brown.*
24.3 Power of Attorney of Rocco A. Ortenzio.*
26.1 Form of T-1. Statement of Eligibility under the Trust Indenture Act of 1939 of
Bankers Trust Company.**
99.1 Administration Agreement among the Registrant, the Master Servicer and the
Indenture Trustee.**
</TABLE>
- ------------
* Filed herewith.
** To be filed by pre-effective amendment.
ITEM 17. UNDERTAKINGS
The Undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement; provided, however, that (a)(i) and
(a) (ii) will not apply if the information required to be included in a
post-effective amendment thereby is contained in periodic reports filed pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this registration statement.
(b) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(d) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in this Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE> 98
(e) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described under Item 15
above, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of an action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(f) That, for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(i) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(g) That, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Pittsburgh, Commonwealth of Pennsylvania, on the 18th
day of April, 1997.
PNC BANK, NATIONAL ASSOCIATION
By: /s/ BRYAN W. RIDLEY
------------------------------------
Bryan W. Ridley
Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------- ---------------------------------------- ----------------
<C> <S> <C>
* Chairman and Director April 18, 1997
- -----------------------------------------
THOMAS H. O'BRIEN
* President and Chief Executive Officer April 18, 1997
- ----------------------------------------- (principal executive officer) and
JAMES E. ROHR Director
* Controller (principal financial and April 18, 1997
- ----------------------------------------- accounting officer)
WILLIAM J. JOHNS
* Director April 18, 1997
- -----------------------------------------
B.R. BROWN
* Director April 18, 1997
- -----------------------------------------
CONSTANCE C. CLAYTON, ED. D.
* Director April 18, 1997
- -----------------------------------------
EBERHARD FABER IV
* Director April 18, 1997
- -----------------------------------------
STUART HEYDT, M.D.
* Director April 18, 1997
- -----------------------------------------
EDWARD P. JUNKER III
* Director April 18, 1997
- -----------------------------------------
THOMAS A. MCCONOMY
* Director April 18, 1997
- -----------------------------------------
ROCCO A. ORTENZIO
* Director April 18, 1997
- -----------------------------------------
JANE G. PEPPER
* Director April 18, 1997
- -----------------------------------------
ROBERT C. ROBB, JR.
* Director April 18, 1997
- -----------------------------------------
DANIEL M. ROONEY
* Director April 18, 1997
- -----------------------------------------
SETH E. SCHOFIELD
[*] Signature by Libby G. Fishman as
Attorney-in-Fact under Powers of Attorney
/s/ LIBBY G. FISHMAN
- -----------------------------------------
</TABLE>
II-5
<PAGE> 100
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
- ------- --------------------------------------------------------------------- -----------
<S> <C> <C>
1.1 Form of Underwriting Agreement.**
3.1 Articles of Association of PNC BANK, NATIONAL ASSOCIATION.*
3.2 By-Laws of PNC BANK, NATIONAL ASSOCIATION.*
4.1 Indenture dated as of March 27, 1997 between the Trust and the
Indenture Trustee (including forms of Notes).**
4.2 Trust Agreement dated as of March 27, 1997 between the Registrant and
the Eligible Lender Trustee and First Chicago Delaware.**
4.3 Form of Transfer and Servicing Agreement, among the Registrant, the
Servicer and the Trustee.**
5.1 Opinion of Mayer, Brown & Platt with respect to legality.**
8.1 Opinion of Mayer, Brown & Platt with respect to federal tax
matters.**
23.1 Consents of Mayer, Brown & Platt
(included in their opinions filed as Exhibits 5.1 and 8.1).**
24.1 Power of Attorney of certain officers and directors.*
24.2 Power of Attorney of B.R. Brown.*
24.3 Power of Attorney for Rocco A. Ortenzio.*
25.1 Form of T-1 Statement of Eligibility under all Trust Indenture Act of
1939 of Bankers Trust Company.**
99.1 Form of Administration Agreement among the Seller, the Servicer and
the Indenture Trustee.**
</TABLE>
- ---------
* Filed herewith.
** To be filed by pre-effective amendment.
II-6
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF ASSOCIATION
(Effective September 6, 1996 in connection with PNC Bank, National Association
and Midlantic Bank, National Association Merger.)
FIRST: The title of this Association shall be "PNC Bank, National
Association."
SECOND: The main office of the Association shall be in the City of
Pittsburgh, Allegheny County, Pennsylvania. The general business of the
Association shall be conducted at its main office and its regularly established
branches.
THIRD: The Board of Directors of the Association shall consist of not
less than five (5) nor more than twenty-five (25) shareholders, the exact
number of Directors within such minimum and maximum limits to be fixed and
determined from time to time by a resolution of a majority of the full Board of
Directors or by resolution of the shareholders at any annual or special meeting
thereof. Unless otherwise provided by the laws of the United States, any
vacancy in the Board of Directors for any reason, including an increase in the
number thereof, may be filled by action of the Board of Directors.
A majority of the Board of Directors shall be necessary to constitute a
quorum for the transaction of business at any Directors' meeting.
FOURTH: The annual meeting of the shareholders for the election of
Directors and the transaction of whatever other business may be brought before
said meeting shall be held at the main office or such other place as the Board
of Directors may designate, on the day of each year specified therefor in the
By-laws, but if no election is held on that day, it may be held on any
subsequent day according to the provisions of law; and all elections shall be
held according to such lawful regulations as may be prescribed by the Board of
Directors. Any action which may be taken at a meeting of the shareholders of
the Association may be taken without a meeting if a consent in writing setting
forth the action so taken is signed by all the shareholders who would be
entitled to vote at a meeting for such purpose.
FIFTH: The amount of the authorized capital stock of this Association
shall be Forty Million Dollars ($40,000,000) divided into 4,000,000 shares of
common stock of the par value of Ten Dollars ($10) each, but said capital stock
may be increased or decreased from time to time in accordance with the
provisions of the laws of the United States.
No holder of shares of the capital stock of any class of the
Association shall have any preemptive or preferential right of subscription to
any shares of any class of stock of the Association, whether now or hereafter
authorized, or to any obligations convertible into stock of the Association,
issued or sold, nor any right of subscription to any thereof other than such,
if any, as the Board of Directors, in its discretion, may from time to time
determine and at such price as the Board of Directors may from time to time
fix.
The Association, at any time and from time to time, may authorize and
issue debt obligations, whether or not subordinated, without the approval of
the shareholders.
SIXTH: The Board of Directors shall appoint one of its members
President of the Association who shall be Chairman of the Board; but the Board
of Directors may appoint a Director, in lieu of the President, to be Chairman
of the Board, who shall perform such duties as may be designated by the Board
<PAGE> 2
of Directors. The Board of Directors shall have the power to appoint one or
more Vice Presidents; to appoint a Cashier, a Secretary, and such other
officers and employees as may be required to transact the business of the
Association; to fix the salaries to be paid such officers and employees; to
dismiss such officers and employees and to appoint others to take their place.
The Board of Directors shall have the power to define the duties of
officers and employees of the Association and to require adequate bonds from
them for the faithful performance of their duties; to make all By-laws that may
be lawful for the general regulation of the business of the Association and the
management of its affairs, including the manner of election or appointment of
Directors and the appointment of judges of election, and generally to do and
perform all acts that may be lawful for a Board of Directors to do and perform.
SEVENTH: (a) Subject to any prohibitions or limitations set forth in
section (b) of this Article or Association's By-Laws, the Association may
indemnify or reimburse any Director, officer, or employee for, or advance
amounts in payment of, any expenses actually and reasonably incurred in any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative, or investigative, to which such individual was or is a party or
a potential party by reason of his or her performance of official duties on
behalf of or at the request of the Association. Such duties shall specifically
include, but not be limited to, service performed at the request of the
Association as a representative of a domestic or foreign corporation for profit
or not-for-profit, partnership, joint venture, trust or other enterprise. For
purposes of this Article, "expenses" shall include, but not be limited to,
attorneys' fees and costs, judgments, fines, taxes, penalties, and amounts paid
or to be paid in settlement.
(b) Notwithstanding any provision of this Article or the Association's By-Laws,
the following prohibitions and limitations shall apply: (i) No indemnification
shall be made in any case where the act or failure to act giving rise to the
claim for indemnification is determined by a court of competent jurisdiction to
have constituted willful misconduct or recklessness; (ii) No indemnification
shall be made for any expenses incurred in an administrative proceeding or
action instituted by a federal bank regulatory agency which proceeding or action
results in a final order assessing civil money penalties or requiring
affirmative action by the Director, officer, or employee in the form of payments
to the Association, or a final removal or prohibition order against such
individual issued pursuant to 12 U.S.C. Sections 1818(e) or (g); (iii) The
Association may advance expenses to a Director, officer or employee in
connection with an action or proceeding under 12 U.S.C. Sections 164 or 1818
only if the Board of Directors has first made such determinations and otherwise
satisfied such procedural requirements, if any, as may be specified by rule,
regulation, advice, or guidance, issued by a federal bank regulatory agency
having jurisdiction over the Association; (iv) Any advance of expenses must be
subject to a written and legally binding agreement which specifies, at a
minimum, that reimbursement to the Association of expenses advanced (including
expenses already paid) shall be required if and to the extent that the Board of
Directors finds that the Director, officer, or employee willfully misrepresented
factors relevant to the Board's decision to advance expenses, or a final order
is issued assessing civil money penalties or requiring affirmative action by the
individual in the form of payments to the Association, or a removal or
prohibition order against the individual is issued pursuant to 12 U.S.C.
Sections 1818(e) or (g); further, the aforesaid agreement shall provide that the
Association shall cease advancing expenses at any time the Board of Directors
believes, or reasonably should believe, that any of the necessary conditions
then imposed by rule, regulation, advice, or guidance issued by a federal bank
regulatory agency having jurisdiction over the Association upon such advancement
are no longer met; and (v) No indemnification shall be made with respect to
amounts provided for by any compromise settlement unless such settlement shall
have been approved by a court of competent jurisdiction, or the holders of
record of a majority of the outstanding shares of the Association, or the Board
of Directors, acting by vote of Directors
<PAGE> 3
not parties to the same or substantially the same action, or proceeding,
constituting a majority of the whole number of Directors.
(c) The Association may pay reasonable premiums for insurance covering
the payment of expenses and the liabilities of its Directors, officers, and
employees, provided that no such insurance coverage may be purchased for a
final order assessing civil money penalties against such individuals by a
federal bank regulatory agency.
(d) Any amendment or repeal of this Article, or the adoption of any
other provision of the Articles of Association or By-Laws which has the effect
of increasing the liability of the Association's Directors, officers, and
employees shall operate prospectively only and shall not affect any action
taken, or any failure to act, prior to the adoption of such amendment, repeal
or other provisions.
(e) The Board of Directors may adopt By-Law provisions consistent with
this Article and may limit the classes of individuals to whom this Article
shall apply. In the event of any inconsistency or conflict between this Article
and such By-Law provisions, this Article shall control; provided, that a By-Law
provision limiting the classes of individuals to whom this Article shall apply
shall not be deemed to be such an inconsistency or conflict.
(f) The rights of indemnification or reimbursement provided for in this
Article shall not be exclusive of other rights, if any, to which such
Directors, officers, or employees, or their personal representatives, may be
entitled as a matter of law.
EIGHTH: The Board of Directors shall have the power, without the
approval of the shareholders, to change the location of the main office to any
other place within the limits of the City of Pittsburgh, Allegheny County,
Pennsylvania, and to establish or change the location of any branch or branches
of the Association subject to the approval of the Comptroller of the Currency.
NINTH: The corporate existence of the Association shall continue until
terminated in accordance with the laws of the United States.
TENTH: The Board of Directors of the Association, or any three (3) or
more shareholders owning, in the aggregate, not less than ten (10%) percentum
of the stock of the Association, may call a special meeting of the shareholders
at any time. Unless otherwise provided by the laws of the United States, a
notice of the time, place, and purpose of every annual and every special
meeting of the shareholders shall be given by first-class mail, postage
prepaid, mailed at least ten (10) days prior to the date of such meeting to
each shareholder of record at his address as shown upon the books of the
Association.
ELEVENTH: These Articles of Association may be amended at any regular
or special meeting of the shareholders by the affirmative vote of the holders
of a majority of the stock of this Association, unless the vote of the holders
of a greater amount of stock is required by law, and in that case by the vote
of the holders of such greater amount.
<PAGE> 1
EXHIBIT 3.2
PNC BANK, NATIONAL ASSOCIATION
BY-LAWS
(as most recently amended 04/09/96)
Effective September 6, 1996 in connection with PNC Bank, National Association
and Midlantic Bank, National Association Merger.
ARTICLE I. MEETINGS OF SHAREHOLDERS
SECTION 1. ANNUAL MEETING. The Annual Meeting of the Shareholders of the Bank
for the election of Directors and the transaction of all other business that
may properly come before the meeting shall be held at the Pittsburgh National
Building or other convenient place selected by the directors, on the Tuesday
that next follows the annual meeting of the shareholders of PNC Bank Corp. If
for any reason no such election of directors is made on that day, the Board of
Directors shall order the election to be held on some subsequent day, as soon
thereafter as practicable.
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders shall be held
when called by the Board of Directors or when called in writing by one or more
shareholders owning in the aggregate not less than ten per centum of the
outstanding shares of stock of the Bank.
SECTION 3. NOTICE AND RECORD DATE. Notice of shareholders' meetings shall be
given in the manner set forth in Article VIII, Section 5, not less than ten
days nor more than sixty prior to the meeting. The Board of Directors may fix a
date not less than ten nor more than forty days prior to the annual meeting or
any special meeting of the shareholders as the record date for the
determination of shareholders entitled to notice of and to vote at any such
meeting, or any adjournment thereof, and only shareholders of record on the
date so fixed shall be entitled to notice of and to vote at any meeting, or any
adjournment thereof. In no event shall the record date as fixed by the Board
of Directors be prior to the date on which the action is taken fixing such
record date.
SECTION 4. QUORUM; SHAREHOLDER ACTION. A majority of the shares outstanding
represented in person or by proxy shall constitute a quorum. Less than a quorum
may adjourn any meeting from time to time and the meeting may be held as
adjourned without further notice. A majority of the votes cast shall decide
every question or matter submitted to the shareholders at any duly convened
meeting unless otherwise provided by law. Shareholders may vote in person or by
proxy duly authorized in writing, but no officer or employee of the Bank may
act as proxy.
SECTION 5. WRITTEN ACTION OF SHAREHOLDERS. Any action which may be taken at a
meeting of the shareholders of the Bank may be taken without a meeting if a
consent in writing setting forth the action so taken, signed by all the
shareholders who would be entitled to vote at a meeting for such purpose and
such written consent, shall be filed with the Secretary of the Bank.
ARTICLE II. DIRECTORS
SECTION 1. BOARD OF DIRECTORS. The Board of Directors shall have the power to
manage and administer the business and affairs of the Bank. Except as expressly
limited by law, all corporate powers of the Bank shall be vested in and may be
exercised by the Board of Directors.
<PAGE> 2
SECTION 2. NUMBER. The Board of Directors shall consist of not less than five
nor more than twenty-five individuals, the exact number within such minimum and
maximum limits to be fixed and determined from time to time by resolution of a
majority of the Board or by resolution of a majority of the shareholders.
Between annual meetings of shareholders, the Board of Directors, by a vote of a
majority of the Board, may increase the membership of the Board, within the
maximum above prescribed, but not more than four members and, by like vote,
appoint individuals to fill the vacancies created thereby.
SECTION 3. ELECTION; TERM OF OFFICE. The Board of Directors shall be elected at
each annual meeting of the shareholders. Each Director shall hold office from
the time of his election and his qualification to serve as such and until the
election and qualification of his successor or until such Director's earlier
death, resignation, disqualification or removal.
SECTION 4. ORGANIZATION MEETING. A meeting of the Board of Directors for the
purpose of organizing the new board, appointing the officers of the Bank for
the ensuing year and transacting other business shall be held without notice
immediately following the annual election of the Directors or as soon
thereafter as is practicable at such time and place as the Secretary may
designate.
SECTION 5. REGULAR MEETINGS. The regular meetings of the Board of Directors
shall be held, without notice, at such times and places as the Board of
Directors shall by resolution determine.
SECTION 6. SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by the Chairman of the Board or the President and shall be called at the
request of any three Directors. Notice of special meetings shall be given in
the manner set forth in Article VIII, Section 5.
SECTION 7. QUORUM; BOARD ACTION. A majority of the Directors then in office
shall constitute a quorum for the transaction of business at any meeting.
Unless otherwise provided by law, any action of the Board of Directors may be
taken upon the affirmative vote of a majority of the Directors present at a
duly convened meeting.
SECTION 8. VACANCIES. Any vacancy in the Board of Directors may be filled by
appointment by a majority of the remaining Directors at any regular meeting or
at a special meeting called for that purpose.
SECTION 9. PARTICIPATION OTHER THAN BY ATTENDANCE. To the extent permitted by
law, any Director may participate in any regular or special meeting of the
Board of Directors or of any committee of the Board of Directors by means of a
conference telephone or similar communications equipment by means of which all
persons participating in the meeting are able to hear each other.
SECTION 10. WRITTEN ACTION OF DIRECTORS. Any action which may be taken by the
Directors at a duly convened meeting may be taken upon the unanimous written
consent of the Directors.
SECTION 11. COMPENSATION. Each director, advisory director, and member of an
Advisory Board of a branch office, who is not a salaried officer, shall receive
compensation in such amount and in such manner as the Board of Directors may
from time to time determine.
SECTION 12. RESIGNATION; REMOVAL. Any Director may resign by submitting his
resignation to the Chief Executive Officer, the Chairman, the President or the
Secretary. Such resignation shall become effective upon its submission or at
any later time specified. Any Director may be removed from office by action of
the shareholders or the Board taken in accordance with applicable law.
<PAGE> 3
SECTION 13. PERSONAL LIABILITY FOR MONETARY DAMAGES.
(a) To the fullest extent permitted by applicable law, each Director
shall be indemnified and held harmless by the Bank for all actions taken by him
or her and for all failures to take action to the fullest extent permitted by
Pennsylvania law against all expense, liability and loss (including without
limitation attorneys' fees, judgments, fines, taxes, penalties, and amounts
paid or to be paid in settlement) reasonably incurred or suffered by him or
her. No indemnification pursuant to this Section 13 shall be made, however, in
any case where the act or failure to act giving rise to the claim for
indemnification is determined by a court of competent jurisdiction to have
constituted willful misconduct or recklessness.
(b) This Section 13 shall not apply to any administrative proceeding
or action instituted by a federal bank regulatory agency which proceeding or
action results in a final order assessing civil money penalties or requiring
affirmative action by the Director in the form of making payments to the Bank.
(c) The provisions of this Section 13 shall be deemed to be a contract
with each Director of the Bank who serves as such at any time while this
Section 13 is in effect and each such Director shall be deemed to be doing so
in reliance on the provisions of this Section 13. Any amendment or repeal of
this Section 13 or adoption of any other provision of the By-Laws or the
Articles of Association which has the effect of increasing Director liability
shall operate prospectively only and shall not affect any action taken, or any
failure to act, prior to the adoption of such amendment, repeal or other
provision.
SECTION 14. CORPORATE GOVERNANCE PROCEDURES. The Board of Directors and each
committee thereof shall have the authority to adopt or otherwise avail itself
of such corporate governance procedures as may be included from time to time in
the Pennsylvania Business Corporation Law of 1988, provided that any such
procedure complies with, or is not inconsistent with, applicable federal
banking statutes and regulations, and safe and sound banking practices.
ARTICLE III. COMMITTEES
SECTION 1. APPOINTMENT; POWERS. In addition to the Committees described in this
Article III, the Board may appoint one or more standing or temporary committees
consisting of two or more Directors. The Board may invest such committees with
such power and authority, subject to such conditions, as it may see fit.
SECTION 2. EXECUTIVE COMMITTEE. The Board may appoint from among its members an
Executive Committee which, to the maximum extent permitted by law or as
otherwise provided herein shall have and exercise in the intervals between the
meetings of the Board of Directors all the powers of the Board of Directors.
All acts done and powers conferred by the Executive Committee from time to time
shall be deemed to be, and may be certified as being, done and conferred under
authority of the Board of Directors. Four directors shall constitute a quorum
regardless of whether the directors present shall have been formally appointed
to the Executive Committee, and the action of a majority of the directors
present at a meeting, unless a majority of such Directors are officers of the
Bank, shall decide any matter or question submitted to the Executive Committee.
SECTION 3. EXAMINING COMMITTEE. The Board shall appoint from among its members
an Examining Committee which shall be composed of not less than three
directors, none of whom shall be officers of the Bank. The Board of Directors
shall select a Chairman from the Committee's membership and the Committee may
appoint a Secretary who need not be a director. The Committee shall meet on
call of its Chairman. The
<PAGE> 4
duties and responsibilities of the Committee shall be as required by law and as
assigned from time to time by the Board of Directors.
SECTION 4. CRA POLICY COMMITTEE. The Board of Directors shall appoint from
among its members a Community Reinvestment Act Policy Committee which shall
consist of not less than three directors, and such other officers who shall
from time to time be appointed by the Board of Directors. The duties and
responsibilities of the Committee shall be as assigned from time to time by the
Board of Directors.
SECTION 5. PERSONNEL AND COMPENSATION COMMITTEE. The Board may appoint from
among its members a Personnel and Compensation Committee. The duties and
responsibilities of the Committee shall be as assigned by the Board of
Directors.
SECTION 6. NOMINATING COMMITTEE. The Board may appoint from among its members a
Nominating Committee. The duties and responsibilities of the Committee shall be
as assigned by the Board of Directors.
SECTION 7. FIDUCIARY COMMITTEE. The Board may appoint from among its members a
Fiduciary Committee. The duties and responsibilities of the Committee shall be
as assigned by the Board of Directors.
SECTION 8. CREDIT COMMITTEE. The Board may appoint from among its members a
Credit Committee. The duties and responsibilities of the Credit Committee shall
be as assigned by the Board of Directors.
SECTION 9. ASSET AND LIABILITY MANAGEMENT COMMITTEE. The Board may appoint from
among its members an Asset and Liability Management Committee. The duties and
responsibilities of the Committee shall be as assigned by the Board of
Directors.
SECTION 10. ORGANIZATION. All committees shall determine their own
organization, procedures and times and places of meeting, unless otherwise
directed by the Board and except as otherwise provided in these ByLaws. A
majority of the Directors appointed to a committee shall constitute a quorum
for the transaction of business at any meeting unless as otherwise provided in
these By-Laws. In the case of committees with an even number of Directors
appointed to the committees, one-half of the Directors shall constitute a
quorum. Unless otherwise prevented by law or by the procedures established by
the committee, any action of the committee may be taken upon the affirmative
vote of a majority or one-half, as the case may be, of the Directors present at
a duly convened meeting or upon the unanimous written consent of all Director
members.
SECTION 11. ADVISORY BOARDS. Any branch office, with the approval of the Board
of Directors or the Chief Executive Officer, may have an Advisory Board
consisting of Directors, officers or members of the public, who may from time
to time be appointed by the Board of Directors of the Chief Executive Officer
or his designee. The Chairman of each Advisory Board shall be designated by the
Board of Directors or the Chief Executive Officer. Each Advisory Board shall
meet at such time or times as shall be determined by the Chairman of such
Advisory Board. Advisory Boards shall be established for information and
marketing purposes only and shall not have any duties, powers or
responsibilities.
ARTICLE IV. OFFICERS
SECTION 1. OFFICERS GENERALLY. The officers of the Bank, in order of precedence
or rank, shall be a Chairman of the Board; one or more Vice Chairmen, if any; a
President; one or more Vice Presidents, of whom one or more may be designated,
in order of precedence or rank, Senior Executive, Executive or Senior Vice
Presidents, and one of whom may be designated as responsible to direct, manage
and supervise all fiduciary
<PAGE> 5
activities; a Cashier; a Secretary; a Controller; an Audit Director; and such
other officers and functional officer titles, as the Board of Directors, the
Chairman, the Vice Chairman or the President may from time to time designate.
The Board of Directors shall from time to time designate from among the
Chairman of the Board, the Vice Chairmen and the President, one of these
officers to be the Chief Executive Officer.
SECTION 2. ELECTIONS; APPOINTMENT. All officers having the rank of Senior Vice
President or higher shall be elected by the Board of Directors and shall hold
office during the pleasure of the Board of Directors. All other Vice Presidents
and other officers shall be appointed by the Chairman of the Board, a Vice
Chairman or President or other officer authorized by the Board of Directors to
appoint officers, and such action shall be reported to the Board of Directors.
SECTION 3. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall have the
general supervision of the policies, business and operations of the Bank; shall
have general executive powers as well as those duties and powers as may be
assigned by the Board of Directors; and shall have all other powers and duties
as are usually incident to the chief executive officer of a national bank. In
the absence of the Chief Executive Officer his powers and duties shall be
performed by such other officer or officers as shall be designated by the Board
of Directors.
SECTION 4. CHAIRMAN. The Chairman of the Board shall have general executive
powers, shall preside at all meetings of the shareholders and shall have such
other powers and duties as may be assigned to him from time to time by the
Board of Directors.
SECTION 5. VICE CHAIRMAN. A Vice Chairman shall have general executive powers
and shall have such duties and powers as shall be assigned from time to time by
the Board of Directors or the Chief Executive Officer.
SECTION 6. PRESIDENT. The President shall have general executive powers and
shall have such duties and powers as may be assigned from time to time by the
Board of Directors or the Chief Executive Officer.
SECTION 7. SENIOR OFFICERS; VICE PRESIDENTS. The Senior Executive, Executive
and Senior Vice Presidents as well as all other Vice Presidents shall have such
duties and powers as may from time to time be assigned to them by the Board of
Directors or by the Chief Executive Officer. Any reference in these By-Laws to
a Vice President shall apply equally to a Senior Executive, Executive, or a
Senior Vice President unless the context otherwise requires.
SECTION 8. VICE PRESIDENT IN CHARGE OF TRUSTS. The Vice President in Charge of
Trusts, if any, under the direction of the Chief Executive Officer, shall
direct, manage and supervise all fiduciary activities of the Bank and shall be
responsible to the Board of Directors, the Chief Executive Officer and the
Fiduciary Committee for the administration of the Bank's fiduciary powers. He
shall have such other duties and powers as may be assigned to him by the Board
of Directors or the Chief Executive Officer.
SECTION 9. CASHIER. Unless otherwise delegated to another officer or officers
by the Board of Directors, the Cashier shall be responsible for all moneys,
funds, securities, fidelity and indemnity bonds and other valuables belonging
to the Bank, exclusive of the assets held by the Bank in a fiduciary capacity;
shall cause to be kept proper records of the transactions of the Bank; and
shall perform such other duties as may be assigned to him by the Board of
Directors or the Chief Executive Officer.
<PAGE> 6
SECTION 10. SECRETARY. The Secretary shall attend the meetings of the
shareholders, of the Board of Directors, and of the Executive Committee, if
any, and shall keep minutes thereof in suitable minute books. He shall have
charge of the corporate records, papers, and the corporate seal of the Bank. He
shall have charge of the stock and transfer records of the Bank and shall keep
a record of all shareholders and give notices of all meetings of shareholders
and special meetings of the Board of Directors. He shall perform such other
duties as may be assigned to him by the Board of Directors or the Chief
Executive Officer.
SECTION 11. TRUST OFFICERS. The Officers performing fiduciary functions, being
all officers assigned to the Trust, Trust and Investment Management or other
Fiduciary Department, Division, or other unit of the Bank, shall execute and
perform all actions desirable to carry out the fiduciary functions of the Bank,
and shall perform such other duties as may be assigned by the Board of
Directors, the Chief Executive Officer, or the Vice President in Charge of
Trusts, if any.
SECTION 12. CONTROLLER. The Controller shall be the chief accounting officer
and shall supervise systems and accounting records and shall be responsible for
the preparation of financial reports.
SECTION 13. AUDIT DIRECTOR. The Audit Director shall have charge of auditing
the books, records and accounts of the Bank. He shall report directly to the
Board of Directors or a committee thereof.
SECTION 14. ASSISTANT OFFICERS. Each Assistant Officer shall assist in the
performance of the duties of the officer to whom he is assistant and shall
perform such duties in the absence of the officer. He shall perform such
additional duties as the Board of Directors, the Chief Executive Officer, or
the officer to whom he is assistant, may from time to time assign to him.
SECTION 15. TENURE OF OFFICE. The Chief Executive Officer, the Chairman, and
the President shall each hold office for the year for which the Board was
elected and until the appointment and qualification of his successor or until
his earlier death, resignation, disqualification or removal by the Board of
Directors. All other officers and employees shall hold office at the pleasure
of the appropriate appointing authority.
SECTION 16. RESIGNATION. An officer may resign at any time by delivering
written notice to the Bank. A resignation is effective when the notice is given
unless the notice specifies a later effective date.
ARTICLE V. FIDELITY BONDS
SECTION 1. Fidelity Bonds, for the faithful performance of their duties, shall
be carried on all officers and employees in such form and amounts as the Board
of Directors or Chief Executive Officer may require.
ARTICLE VI. GENERAL POWERS OF OFFICERS
SECTION 1. The corporate seal of the Bank may be imprinted or affixed by any
process. The Secretary and any other officers authorized by resolution of the
Board of Directors shall have authority to affix and attest the corporate seal
of the Bank.
SECTION 2. The authority of officers and employees of this Bank to execute
documents and instruments on its behalf in cases not specifically provided for
in these By-Laws shall be as determined from time to time by the Board of
Directors, or, in the case of employees, by officers in accordance with
authority given them by the Board of Directors.
<PAGE> 7
SECTION 3. Each of the Chairman of the Board, any Vice Chairman, the President,
any one of the Vice Presidents, the Cashier or the Secretary of this Bank is
hereby authorized to pledge assets of the Bank as security for the safekeeping
and prompt payment of deposits of public funds, or other funds, as required or
permitted by law. Such officers may also pledge assets of the Bank as may be
authorized from time to time by the Board of Directors.
ARTICLE VII. STOCK CERTIFICATES
SECTION 1. Certificates of stock of the Bank shall be signed by the Chairman of
the Board, or a Vice Chairman, or the President, or a Vice President, and
countersigned by the Cashier or an Assistant Cashier, or by the Secretary or an
Assistant Secretary, and shall be sealed with the seal of the Bank. The seal
may be a facsimile. Where any such certificate is manually countersigned by two
authorized officers, or is manually countersigned by one authorized officer and
manually signed by a Registrar, the signature of the Chairman of the Board, or
a Vice Chairman, or the President, or Vice President upon such certificate may
be a facsimile. In case any such officer who has signed or countersigned, or
whose facsimile signature has been placed upon such certificate shall have
ceased to be an officer before such certificate is issued, it may be issued by
the Bank with the same effect as if such officer were still an officer at the
time of this issue.
SECTION 2. The shares of stock of the Bank shall be transferable only on its
books upon surrender of the stock certificate for such shares properly
endorsed.
SECTION 3. Transfers of stock shall not be suspended preparatory to the
declaration of dividends, but dividends shall be paid to the shareholders in
whose name the stock is standing on the records of the Bank at the close of
business on such day subsequent to the date of declaration of the dividend as
the Board of Directors may designate.
SECTION 4. If a stock certificate shall be lost, stolen, or destroyed, the
shareholder may file with the Bank an affidavit stating the circumstances of
the loss, theft or destruction and may request the issuance of a new
certificate. He shall give to the Bank a bond which shall be in such sum,
contain such terms and provisions and have such surety or sureties as the Board
of Directors may direct. The Bank may thereupon issue a new certificate
replacing the certificate lost, stolen or destroyed.
ARTICLE VIII. GENERAL
SECTION 1. EXERCISE OF AUTHORITY DURING EMERGENCIES. The Board of Directors or
the Executive Committee may from time to time adopt resolutions authorizing
certain persons and entities to exercise authority on behalf of this Bank in
time of emergency, and in the time of emergency any such resolutions will be
applicable, notwithstanding any provisions to the contrary contained in these
By-Laws.
SECTION 2. CHARITABLE CONTRIBUTIONS. The Board of Directors may authorize
contributions to community funds, or to charitable, philanthropic, or
benevolent instrumentalities conducive to public welfare in such sums as the
Board of Directors may deem expedient and in the interest of the Bank.
SECTION 3. FISCAL YEAR. The fiscal year of the Bank shall be the calendar
year.
<PAGE> 8
SECTION 4. AMENDMENTS. These By-Laws may be altered, amended, added to or
repealed by a vote of a majority of the Board of Directors at any regular
meeting of the Board of Directors, or at any special meeting of the Board of
Directors called for that purpose.
SECTION 5. NOTICE; WAIVER OF NOTICE. Any notice required to be given to any
shareholder or Director may be given either personally or by sending a copy
thereof through the mail, or by telegram, charges prepaid, or by facsimile to
his or her address or telephone number, as the case may be, appearing on the
books of the Bank, or supplied by him or her to the Bank for the purpose of
notice. If the notice is sent by mail or by telegraph, it shall be deemed to
have been given to the person entitled thereto when deposited in the United
States mail or with a telegraph office for transmission to such person. Each
notice shall specify the place, day, and hour of the meeting, and, in the case
of a special meeting, the general nature of the business to be transacted.
Unless otherwise provided by law, whenever any notice is required to be given
to any shareholder or Director under the provisions of these By-Laws or under
the provisions of the Articles of Association, a waiver thereof in writing,
signed by the person or persons entitled to such notice, whether before or
after the time stated therein, will be deemed equivalent to the given of such
notice. Except in the case of a special meeting of shareholders or Directors,
neither the business to be transacted nor the purpose of the meeting need be
specified in the waiver of notice of such meeting. Attendance of a person
either in person or by proxy, when permitted, will constitute a waiver of
notice of such meeting, except where such person attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting was not lawfully called or convened.
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
PNC BANK, NATIONAL ASSOCIATION
REGISTRATION STATEMENT
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Directors and/or
Officers of PNC Bank, National Association. (the "Bank"), hereby names,
constitutes and appoints Melanie S. Cibik, Libby G. Fishman and Thomas R.
Moore, or any one of them, severally, with full power of substitution, such
person's true and lawful attorney-in-fact and agent to execute in such person's
name, place and stead, in any and all capacities, a Registration Statement (on
whatever form) for the registration under the Securities Act of 1933, as
amended, of notes backed or secured by government guaranteed student education
loans to be issued by the PNC Student Loan Trust I, a Delaware business trust,
in which the Bank holds a minority beneficial interest, and to execute in such
person's name, place and stead, in any and all capacities, any and all
amendments to said Registration Statement.
And such persons hereby ratify and confirm all that any said attorney-in-fact
and agent, or substitute, shall lawfully do or cause to be done by virtue
hereof.
Witness the due execution hereof by the following persons in the capacities
indicated as of this April 8, 1997.
Name/Signature Capacity
- -------------- --------
/s/ THOMAS H. O'BRIEN Chairman and Director
- ---------------------------
Thomas H. O'Brien
/s/ B.R. BROWN Director
- ---------------------------
B. R. Brown
/s/ CONSTANCE CLAYTON Director
- ---------------------------
Constance E. Clayton, Ed.D
/s/ EBERHARDT FABER IV Director
- ---------------------------
Eberhardt Faber IV
/s/ STUART HEYDT Director
- ---------------------------
Stuart Heydt, M.D.
/s/ WILLIAM J. JOHNS Controller
- ---------------------------
William J. Johns
<PAGE> 2
/s/ EDWARD P. JUNKER, III Director
- ---------------------------
Edward P. Junker, III
/s/ T.A. MCCONOMY Director
- ---------------------------
Thomas A. McConomy
/s/ ROCCO A. ORTENZIO Director
- ---------------------------
Rocco A. Ortenzio
/s/ JANE G. PEPPER Director
- ---------------------------
Jane G. Pepper
/s/ ROBERT C. ROBB, JR. Director
- ---------------------------
Robert C. Robb, Jr.
/s/ JAMES E. ROHR President and Chief Executive
- --------------------------- Officer and Director
James E. Rohr
/s/ DANIEL M. ROONEY Director
- ---------------------------
Daniel M. Rooney
/s/ SETH E. SCHOFIELD Director
- ---------------------------
Seth E. Schofield
<PAGE> 1
EXHIBIT 24.2
POWER OF ATTORNEY
PNC BANK, NATIONAL ASSOCIATION
REGISTRATION STATEMENT
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of PNC Bank,
National Association. (the "Bank"), hereby names, constitutes and appoints
Melanie S. Cibik, Libby G. Fishman and Thomas R. Moore, or any one of them,
severally, with full power of substitution, such person's true and lawful
attorney-in-fact and agent to execute in such person's name, place and stead,
as a Director of the Bank, a Registration Statement (on whatever form) for the
registration under the Securities Act of 1933, as amended, of notes backed or
secured by government guaranteed student education loans to be issued by the
PNC Student Loan Trust I, a Delaware business trust, in which the Bank holds a
minority beneficial interest, and to execute in such person's name, place and
stead, as a Director of the Bank, any and all amendments to said Registration
Statement.
And such person hereby ratifies and confirms all that any said attorney-in-fact
and agent, or substitute, shall lawfully do or cause to be done by virtue
hereof.
Witness the due execution hereof by the following person as a Director of the
Bank as of this April 8, 1997.
/s/ B.R. BROWN
- ---------------------
B.R. Brown
<PAGE> 1
EXHIBIT 24.3
POWER OF ATTORNEY
PNC BANK, NATIONAL ASSOCIATION
REGISTRATION STATEMENT
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of PNC Bank,
National Association. (the "Bank"), hereby names, constitutes and appoints
Melanie S. Cibik, Libby G. Fishman and Thomas R. Moore, or any one of them,
severally, with full power of substitution, such person's true and lawful
attorney-in-fact and agent to execute in such person's name, place and stead,
as a Director of the Bank, a Registration Statement (on whatever form) for the
registration under the Securities Act of 1933, as amended, of notes backed or
secured by government guaranteed student education loans to be issued by the
PNC Student Loan Trust I, a Delaware business trust, in which the Bank holds a
minority beneficial interest, and to execute in such person's name, place and
stead, as a Director of the Bank, any and all amendments to said Registration
Statement.
And such person hereby ratifies and confirms all that any said attorney-in-fact
and agent, or substitute, shall lawfully do or cause to be done by virtue
hereof.
Witness the due execution hereof by the following person as a Director of the
Bank as of this April 8, 1997.
/s/ ROCCO A. ORTENZIO
- ------------------------
Rocco A. Ortenzio
