<PAGE>
Rule 424(b)(5)
File No. 333-8929
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 31, 1996)
$30,800,000
Union Financial Services-1, Inc.
TAXABLE STUDENT LOAN ASSET-BACKED NOTES
SERIES 1997A
CONSISTING OF
$30,800,000 SUBORDINATE CLASS 1997B-4 LIBOR RATE NOTES
Union Financial Services-1, Inc. (the "Issuer") is offering $30,800,000
aggregate principal amount of its Taxable Student Loan Asset-Backed Notes,
Series 1997A (the "Series 1997A Notes"). The Series 1997A Notes are to be issued
in one Class designated as Subordinate Class 1997B-4 LIBOR Rate Notes (the
"Class 1997B-4 Notes"). See "Terms of the Offering" herein.
PROSPECTIVE INVESTORS IN THE SERIES 1997A NOTES SHOULD CONSIDER THE
DISCUSSION OF CERTAIN MATERIAL FACTORS SET FORTH UNDER "RISK FACTORS" ON PAGE 1
OF THE PROSPECTUS.
The Series 1997A Notes will be issued in the initial principal amount of
$30,800,000. The Series 1997A Notes will be collateralized by: (i) a revolving
portfolio of student loans evidenced by promissory notes meeting certain
requirements described herein (the "Financed Eligible Loans") and moneys due or
paid thereunder after the applicable date of acquisition; (ii) funds on deposit
in certain trust accounts including the Reserve Fund; and (iii) certain related
rights and property held in trust for the benefit of the Registered Owners (as
defined in the attached Prospectus) (collectively, the "Trust Estate"). The
Financed Eligible Loans have been and are expected to be acquired by the Issuer
from Union Bank and Trust Company (the "Seller") pursuant to a Student Loan
Purchase Agreement. The Issuer has contracted with Union Bank and Trust Company
to act as Servicer, who in turn has contracted with UNIPAC Service Corporation
to act as Subservicer, of the Financed Eligible Loans. THE SERIES 1997A NOTES
ARE SUBJECT TO OPTIONAL, MANDATORY AND EXTRAORDINARY OPTIONAL REDEMPTION AS MORE
FULLY DESCRIBED HEREIN. SEE "TERMS OF THE OFFERING" HEREIN.
(cover continued on next page)
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 SUPPLEMENT OR
THE ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SERIES 1997A NOTES REPRESENT OBLIGATIONS SOLELY OF THE ISSUER, AND ARE
NOT INSURED OR GUARANTEED BY ANY GOVERNMENT AGENCY OR INSTRUMENTALITY, BY ANY
AFFILIATE OF THE ISSUER, BY ANY INSURANCE COMPANY OR BY ANY OTHER PERSON OR
ENTITY. THE REGISTERED OWNERS GENERALLY WILL NOT HAVE RECOURSE TO THE ISSUER AND
THE ISSUER WILL HAVE NO SIGNIFICANT ASSETS AVAILABLE TO MAKE PAYMENT ON THE
SERIES 1997A NOTES OTHER THAN THOSE PLEDGED AS COLLATERAL FOR THE NOTES UNDER
THE INDENTURE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) ISSUER(2)
<S> <C> <C> <C>
Series 1997A Notes....................................... 100% 0.40% 99.60%
Total.................................................... $30,800,000 $123,200 $30,676,800
</TABLE>
(1) The Issuer has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Issuer, estimated to be $175,000.
The Series 1997A Notes are offered by Smith Barney Inc. (the "Underwriter")
subject to prior sale, when, as and if issued to the Underwriter, subject to
approval of certain legal matters by counsel for the Underwriter. The
Underwriter reserves 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 Series
1997A Notes will be made in book-entry-only form through the Same Day Funds
Settlement System of The Depository Trust Company on or about March 20, 1997.
SMITH BARNEY INC.
The date of this Prospectus Supplement is March 19, 1997.
<PAGE>
(cover continued from prior page)
Interest on the Series 1997A Notes is payable monthly on the first Business
Day of each month, commencing April 1, 1997. The Applicable Rate (as defined
herein) with respect to the Series 1997A Notes will be determined by the
Calculation Agent (initially Smith Barney Inc.) from time to time as described
herein to equal the rate of interest described as the LIBOR-Based Rate. The
Stated Maturity for the Series 1997A Notes is July 1, 2030.
The Issuer has previously issued $566,000,000 of its Taxable Student Loan
Asset-Backed Notes, $540,700,000 of which will remain Outstanding on the Date of
Issuance of the Series 1997A Notes and after giving effect to the intended use
of proceeds (collectively, the "Prior Notes"). Certain of the Prior Notes were
designated as Class A (the "Prior Class A Notes") and certain were designated as
Class B (the "Prior Class B Notes"). The Series 1997A Notes are designated as
Class B. The Indenture authorizes the issuance of other Additional Notes in the
future, which Additional Notes may be issued on a parity with, or subordinate
to, the Prior Class A Notes, and may be senior to, on a parity with or
subordinate to, the Series 1997A Notes and the Prior Class B Notes. The Prior
Class A Notes, the Series 1997A Notes, the Prior Class B Notes, and any
Additional Notes are collectively referred to herein as the "Notes."
(end of cover page)
<PAGE>
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS EFFECTING TRANSACTIONS
IN THE SERIES 1997A NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER THE PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
THE PROSPECTUS THAT ACCOMPANIES THIS PROSPECTUS SUPPLEMENT CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT CONTAINED HEREIN,
AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THE PROSPECTUS AND THIS
PROSPECTUS SUPPLEMENT IN FULL TO OBTAIN MATERIAL INFORMATION CONCERNING THE
SERIES 1997A NOTES. SALES OF THE SERIES 1997A NOTES MAY NOT BE CONSUMMATED
UNLESS THE PURCHASER HAS RECEIVED BOTH THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES 1997A
NOTES, INCLUDING PURCHASES OF THE SERIES 1997A NOTES TO STABILIZE THEIR
MARKET PRICE AND PURCHASES OF THE SERIES 1997A NOTES TO COVER SOME OR ALL
OF A SHORT POSITION IN THE SERIES 1997A NOTES MAINTAINED BY THE UNDERWRITER.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."
S-1
<PAGE>
TERMS OF THE OFFERING
The terms of the offering of the Series 1997A Notes described below are
qualified in their entirety by reference to the detailed information
appearing elsewhere herein and in the Prospectus. Capitalized terms used
herein and not defined shall have the respective meanings assigned them in
the Prospectus under "Index to and Glossary of Terms."
SECURITIES OFFERED The Taxable Student Loan Asset-Backed Notes, Series
1997A consist of one Class, designated as Subordinate
Class 1997B-4 LIBOR Rate Notes with an initial
aggregate stated principal balance of $30,800,000.
The Series 1997A Notes and the Prior Class B Notes
are subordinated in certain respects to the Prior
Class A Notes, as more fully described herein and in
the Prospectus. The Series 1997A Notes will be
issued pursuant to the Indenture as hereinafter
described.
SERIES 1997A NOTES The Series 1997A Notes will bear interest at an
initial rate of 5.95% per annum through March 31,
1997 and will be paid on the first Business Day of
each month beginning April 1, 1997 (each, an "Interest
Payment Date"), until maturity or earlier redemption
or payment to the holders of record of the Series
1997A Notes on the Business Day immediately preceding
the Interest Payment Date.
After the initial Interest Period for the Series
1997A Notes, the Applicable Rate for the Series 1997A
Notes will be reset by the Calculation Agent
(initially Smith Barney Inc.) on the LIBOR
Determination Date to equal the LIBOR-Based Rate;
provided, however, that the Applicable Rate shall not
exceed the Class 1997B-4 Maximum Interest Rate (i.e.,
lesser of (a) 18% per annum or (b) the maximum rate
of interest permitted under State law for student
loan notes of the Issuer). See "Description of the
Notes--LIBOR Rate Notes" and "Certain Definitions
and Provisions Related to LIBOR Rate Notes" in the
Prospectus with respect to the determination of and
certain procedures with respect to LIBOR-Based Notes
and certain definitions relating thereto.
S-2
<PAGE>
The following definitions with respect to the Series
1997A Notes should be read in conjunction with the
information under "Certain Definitions and Provisions
Related to LIBOR Rate Notes" in the Prospectus.
"Applicable Rate" means 5.95% for the Initial
Interest Period for the Series 1997A Notes and,
thereafter, the LIBOR-Based Rate, but in no event
exceeding the Class 1997B-4 Maximum Interest Rate.
"Initial Interest Payment Date" means April 1,
1997.
"Initial Interest Period" means the period from
and including the Date of Issuance of the Series
1997A Notes and ending on March 31, 1997.
"LIBOR-Based Rate" means One-Month LIBOR plus 0.45%.
STATED MATURITY DATE The Stated Maturity for the Series 1997A Notes is
July 1, 2030.
DATE OF ISSUANCE OF March 20, 1997.
SERIES 1997A NOTES
DENOMINATIONS The Series 1997A Notes will be issued in minimum
denominations of $1,000,000 and any integral multiple
of $100,000 in excess thereof.
POOL CHARACTERISTICS A description of the outstanding portfolio of
Financed Eligible Loans pledged to the Trustee
as of January 16, 1997 is included herein under
"Characteristics of the Financed Eligible Loans."
Each Student Loan Purchase Agreement includes
portfolio characteristic requirements applicable
to all Eligible Loans acquired thereunder at the
respective dates of acquisition. See "Seller
Representations and Warranties" in the Prospectus.
USE OF PROCEEDS The Issuer estimates that the proceeds from the sale
of the Series 1997A Notes will be applied as follows:
S-3
<PAGE>
Deposit to Escrow Fund* $30,392,239
Deposit to Reserve Fund 110,000
Deposit to Cost of Issuance Fund
(including underwriter's discount) 297,761
-----------
Total $30,800,000
-----------
-----------
---------------
* See "TERMS OF THE OFFERING--Escrow Fund" herein.
SERVICER AND SUBSERVICER Union Bank and Trust Company shall act as Servicer
(in such capacity, the "Servicer") and UNIPAC
Service Corporation shall act as Subservicer and
Custodian of the Financed Eligible Loans. See
"Certain Relationships Among Financing Participants"
in the Prospectus.
THE SELLER Union Bank and Trust Company (the "Seller") has sold
Eligible Loans to the Issuer pursuant to the terms
of a Student Loan Purchase Agreement with the Issuer
and the Issuer may acquire additional Eligible Loans
from the Seller or from other qualified lenders. See
"Seller Representations and Warranties--The Sellers"
in the Prospectus.
INDENTURE The Series 1997A Notes are being issued pursuant to a
Second Amended and Restated Indenture of Trust
between the Issuer and the Trustee, as amended and
supplemented from time to time, and a related Series
1997A Supplemental Indenture of Trust (collectively,
the "Indenture") and are payable solely from the
funds and assets held thereunder. The Issuer has
previously issued and intends to issue Notes of other
Series which also are or will be secured by the
Financed Eligible Loans.
The Prior Class A Notes constitute "Senior Notes"
under the Indenture, are senior to the Series 1997A
Notes and the Prior Class B Notes and to any
Additional Notes secured on a parity with or
subordinate to the Series 1997A Notes and the Prior
Class B Notes. The Series 1997A Notes and the Prior
Class B Notes constitute "Subordinate Notes" under
the Indenture, secured on a basis which is
subordinate to the Prior Class A Notes. Additional
Notes secured on a parity with or on a basis
subordinate to the Prior Class A Notes may be issued
under the Indenture. Such Additional Notes may be
secured on a basis
S-4
<PAGE>
which is senior to, on a parity with or on a basis
which is subordinate to the Series 1997A Notes and
the Prior Class B Notes. If subordinate to the
Series 1997A Notes and the Prior Class B Notes, such
Additional Notes would constitute "Junior-Subordinate
Notes" under the Indenture.
MANDATORY REDEMPTION The Series 1997A Notes are subject to mandatory
redemption, in whole or in part, at a redemption price
equal to the principal amount thereof to be redeemed
plus accrued and unpaid interest to the date of
redemption, on any Interest Payment Date subsequent
to May 1, 1999, from moneys representing principal
payments received with respect to the Financed
Eligible Loans acquired with respect to such Series
and other excess revenues transferred to the
Subordinate Note Redemption Account. See "Description
of the Notes--Mandatory Redemption" in the Prospectus.
OPTIONAL REDEMPTION The Series 1997A Notes are subject to optional
redemption, in whole or in part, on any Interest
Payment Date on or after May 1, 1999, at a redemption
price equal to the principal amount thereof to be
redeemed, plus interest accrued, if any, to the date
of redemption.
See "Description of the Notes--Optional Redemption"
in the Prospectus.
EXTRAORDINARY OPTIONAL The Series 1997A Notes shall also be subject to
REDEMPTION extraordinary optional redemption, in whole or in
part, on any Interest Payment Date at a redemption
price equal to the principal amount of the Series
1997A Notes being redeemed, plus accrued interest,
if any, to the date of redemption, if the Issuer
reasonably determines that it is unable to acquire
Financed Eligible Loans, that the rate or return on
Financed Eligible Loans has materially decreased,
or that the costs of administering the Trust Estate
have placed unreasonable burdens upon the ability
of the Issuer to perform its obligations under the
Indenture.
See "Description of the Notes--Extraordinary Optional
Redemption" in the Prospectus.
S-5
<PAGE>
ESCROW FUND The sum of $30,392,239 of the proceeds of this
offering will be deposited in the Escrow Fund
created pursuant to the Escrow Agreement dated as
of March 1, 1997 (the "Escrow Agreement"), between
the Issuer and Norwest Bank Minnesota, National
Association (the "Escrow Agent"), on the Date of
Issuance of the Series 1997A Notes. Amounts
deposited in the Escrow Fund will be held, invested
in Government Obligations and applied by the Escrow
Agent for (i) the payment when due of the interest
on the Issuer's $11,000,000 Taxable Student Loan
Asset-Backed Notes, Subordinate Class 1996B LIBOR
Rate and the Issuer's $14,200,000 Taxable Student
Loan Asset-Backed Notes, Subordinate Class 1996B-2
LIBOR Rate (collectively, the "Defeased Notes") and
(ii) the redemption in May 1999 of the Defeased Notes
at 100% of their par value plus accrued interest to
such date. The Defeased Notes will no longer be
deemed Outstanding under the Indenture subsequent
to the deposit to the Escrow Fund and will no longer
be part of the Trust Estate. The accuracy of the
mathematical computations of the adequacy of cash
and securities to be held in the Escrow Fund,
together with the interest to be earned thereon,
to pay the principal of, premium, if any, and
interest on the Defeased Notes according to the
schedule established in the Escrow Agreement, will
be verified by Causey Demgen & Moore Inc., Certified
Public Accountants.
RESERVE FUND The Reserve Fund is currently funded in an amount
equal to 2% of the aggregate principal amount of the
Prior Notes Outstanding. An additional sum of
$110,000 will be deposited into the Reserve Fund on
the Date of Issuance of the Series 1997A Notes. At
any time thereafter, the amount required to be on
deposit in the Reserve Fund (the "Reserve Fund
Requirement") with respect to the Series 1997A Notes
and all Series previous outstanding shall be the
greater of an amount equal to 2% of the aggregate
principal amount of all Series then Outstanding or
$750,000.
SUBORDINATED NOTES The rights of the Class B Noteholders to receive
payments with respect to the Financed Eligible Loans
will be subordinated to such rights of the Class A
Noteholders to the extent described below. This
subordination is intended to enhance the likelihood
of regular receipt by the Class A Noteholders of the
full amount of scheduled monthly payments of principal
and interest due them and to protect the Class A
Noteholders against losses.
S-6
<PAGE>
The protection afforded to the Class A Noteholders
from the subordination feature will be effected
by the preferential right of the Class A
Noteholders to receive, before any distributions
to Class B Noteholders, current distributions
from the Trust Estate and, if necessary, by the
right of such Holders to receive future
distributions on the Financed Eligible Loans that
would otherwise have been payable to the Holders
of Class B Notes. The Class B Notes are generally
entitled to the available amounts, if any,
remaining in the Trust Estate and allocated to
the Class B Holders after distributions due to
the Holders of the Class A Notes. See
"Description of Credit Enhancement--Subordinates
Notes" in the Prospectus.
PRINCIPAL BALANCE OF NOTES On the Date of Issuance, the aggregate initial
EXCEEDS AGGREGATE PRINCIPAL principal amount of the Notes (other than the
BALANCE OF FINANCED ELIGIBLE Defeased Notes) will be approximately 103.09% of
LOANS the sum of the aggregate principal balance of the
Financed Eligible Loans and other assets on
deposit in the Funds and Accounts in the Trust
Estate. In addition, under the existing Loan
Purchase Agreements with the "Seller" each
Eligible Loan acquired during the recycling
period will be purchased by the Issuer for an
amount not to exceed 101.50% of the principal
balance thereof (including any accrued interest
thereon expected to be capitalized upon
repayment). As a result, if an Event of Default
should occur under the Indenture and the Financed
Eligible Loans were liquidated at a time when the
outstanding principal amount of the Notes exceeded
the aggregate principal balance of the Financed
Eligible Loans and other assets on deposit in the
Funds and Accounts in the Trust Estate, unless
such Financed Eligible Loans are liquidated at
a premium, Noteholders may suffer a loss as a
result thereof. However, in the absence of any
such default, any excess Note principal balance
is expected to be reduced from interest payments
received on the Financed Eligible Loans.
CERTAIN FEDERAL INCOME The Series 1997A Notes will be treated as debt of
TAX CONSEQUENCES the Issuer rather than as an interest in the
Financed Eligible Loans, for federal income tax
purposes. As such, the owners of the Series 1997A
Notes will be required to include in income
interest on such Series 1997A Notes as paid or
accrued, in accordance with their respective
accounting methods and the provisions of the
Code, including, if applicable, provisions
regulating original issue discount. See
"Certain Federal Income Tax Consequences" in
the Prospectus.
S-7
<PAGE>
ERISA CONSIDERATIONS Assuming that the Series 1997A Notes should be treated
as indebtedness without substantial equity features
under the plan asset regulations (as set forth in 29
C.F.R. Section 2510.3-101) issued by the Department
of Labor, the Series 1997A Notes are eligible for
purchase by or on behalf of employee benefit plans,
retirement arrangements, individual retirement
accounts and Keogh Plans, subject to certain
considerations discussed under "ERISA Considerations"
in the Prospectus.
RATINGS It is a condition to the issuance of the Series 1997A
Notes that they be rated "A" by Fitch Investors
Service, L.P. ("Fitch"). Fitch is referred to herein
as the "Rating Agency." See "Rating" in the
Prospectus.
S-8
<PAGE>
PREVIOUSLY ISSUED NOTES
Set forth below is certain information concerning each outstanding Series
and Class of Notes issued previously by the Issuer and outstanding as of the
Date of Issuance. The Financed Eligible Loans and other assets pledged to the
Trustee will serve as collateral for such outstanding Notes and any Additional
Notes, other than the Defeased Notes, as well as the Series 1997A Notes being
offered by means of this Prospectus Supplement and the attached Prospectus.
<TABLE>
Original Outstanding
Principal Principal Amount Interest Maturity
Series Class Date Issued Amount (As of January 16, 1997) Rate Date
- ------ ----- ----------- --------- ------------------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
1996A A-1 March 8, 1996 $ 48,300,000 $ 48,300,000 Auction July 1, 2014
1996A A-2 March 8, 1996 48,300,000 48,300,000 Auction July 1, 2014
1996A B(*) March 8, 1996 11,100,000 11,100,000 LIBOR July 1, 2014
1996B A-3 June 18, 1996 73,700,000 73,700,000 Auction July 1, 2014
1996B A-4 June 18, 1996 54,300,000 54,300,000 Auction July 1, 2014
1996B B-2(*) June 18, 1996 14,200,000 14,200,000 LIBOR July 1, 2014
1996C A-5 October 31, 1996 225,000,000 225,000,000 Treasury Rate July 1, 2005
1996C A-6 October 31, 1996 75,500,000 75,500,000 Auction July 1, 2014
1996C B-3 October 31, 1996 15,600,000 15,600,000 LIBOR July 1, 2025
</TABLE>
______________________
(*) Will be defeased on the Date of Issuance with the net proceeds of the
offering of the Series 1997A Notes.
As of the date hereof, all payments of principal and interest due and
payable on each Series specified above have been paid in full. As of January
16, 1997, the Financed Eligible Loans in repayment by principal balance
pledged to the Trustee as collateral for the outstanding Notes had
delinquencies as follows: $21,297,893 was 30 to 59 days delinquent; $8,269,839
was 60 to 89 days delinquent; $5,078,985 was 90 to 119 days delinquent; and
$4,161,824 was 120 to 179 days delinquent. As of January 16, 1997, there were
$1,580,962 of Financed Eligible Loans in claim status with a Guarantee Agency.
As of January 16, 1997, the cumulative amount of Net Losses by principal
balance of the Financed Eligible Loans was $0.
S-9
<PAGE>
The following fees are payable (per annum) with respect to the Prior
Notes previously issued or are expected to be payable (per annum) with respect
to the Series 1997A Notes:
Trustee Servicing Auction Broker Dealer Maintenance and
Series Fee Fee Agent Fees Fees Operating Expenses
- ------ ------- --------- ---------- ------------- ------------------
1996A .03% (1) $17,500(2) .25%(2) .12%
1996B .03% (1) $15,000(2) .25%(2) .12%
1996C .03% (1) $15,000(2) .25%(2) .12%
1997A .03% (1) N/A N/A .12%
_______________
(1) 0.90% per annum for Financed Eligible Loans in school, grace, deferment and
forbearance and 1.25% for Financed Eligible Loans in repayment.
(2) On Auction Rate Notes only.
As of the date hereof, all fees and expenses due and payable on each
Series specified above have been paid in full.
CREDIT ENHANCEMENT
THE RESERVE FUND
The Reserve Fund is currently funded in an amount equal to 2% of the
aggregate principal amount of the Prior Notes Outstanding. The Issuer shall
make a deposit to the Reserve Fund on the Date of Issuance in an amount equal
to $110,000. Funds available to be paid to the Issuer will be deposited
first by the Trustee into the Reserve Fund for the benefit of the Noteholders
to the extent required to maintain the Reserve Fund Requirement. Funds in the
Reserve Fund may be used to the extent the amounts in the Revenue Fund, the
Interest Fund or the Note Redemption Fund are not sufficient to pay amounts
due and payable to the Class A Noteholders and the Class B Noteholders. The
Reserve Fund shall be maintained at the greater of $750,000 or 2% of the
aggregate principal amount of all Series then Outstanding.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
S-10
<PAGE>
CHARACTERISTICS OF THE
FINANCED ELIGIBLE LOANS
COMPOSITION OF THE FINANCED ELIGIBLE LOANS AS OF JANUARY 16, 1997
Aggregate Outstanding Principal Balance......................... $531,849,975
Number of Borrowers............................................. 72,945
Average Outstanding Principal Balance Per Borrower.............. $7,291
Number of Loans................................................. 151,261
Average Outstanding Principal Balance Per Loan.................. $3,516
Approximate Weighted Average Remaining Term (months) (does not
include school, grace, deferment or forbearance)............... 121
Weighted Average Borrower Interest Rate......................... 8.25%
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY LOAN TYPE
Outstanding Percent of Loans
Number of Principal by Outstanding
Loan Types Loans Balance Balance
- ---------- --------- ----------- ----------------
Consolidated 10,974 $144,325,735 27.14%
PLUS 1,543 6,634,398 1.25
SLS 278 831,675 0.16
Stafford-Subsidized 113,935 282,336,646 53.08
Stafford-Unsubsidized 24,531 97,721,521 18.37
------- ------------ ------
Total 151,261 $531,849,975 100.00%
------- ------------ ------
------- ------------ ------
S-11
<PAGE>
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY INTEREST RATE
Outstanding Percent of Loans
Number of Principal by Outstanding
Interest Rate Range Loans Balance Balance
- ------------------- --------- ------------ ----------------
Less than 7.50% 3,412 $ 7,511,989 1.41%
7.50% to 8.49% 134,091 401,090,670 75.42
8.50% to 9.49% 13,031 116,642,105 21.93
9.50% or greater 727 6,605,211 1.24
------- ------------ ------
Total 151,261 $531,849,975 100.00%
------- ------------ ------
------- ------------ ------
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY SCHOOL TYPES
Outstanding Percent of Loans
Number of Principal by Outstanding
School Type Loans Balance Balance
----------- --------- ------------ ----------------
2-Year 10,672 $ 25,668,034 4.83%
4-Year 126,476 446,281,636 83.91
Proprietary 11,512 34,249,575 6.44
Consolidation 2,601 25,650,730 4.82
------- ------------ ------
Total 151,261 $531,849,975 100.00%
------- ------------ ------
------- ------------ ------
S-12
<PAGE>
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY BORROWER PAYMENT STATUS
Outstanding Percent of Loans
Number of Principal by Outstanding
Borrower Payment Status Loans Balance Balance
- ----------------------- --------- ------------ ----------------
Claim 611 $ 1,580,962 0.30%
Deferment 10,369 33,727,216 6.34
Grace 7,724 27,112,091 5.10
School 39,440 148,985,717 28.01
Repayment
First Year Repayment 58,088 199,954,857 37.59
Second Year Repayment 7,817 48,287,784 9.08
Third Year Repayment 4,508 22,218,306 4.18
More than 3 Years 22,704 49,983,042 9.40
------- ------------ ------
Total 151,261 $531,849,975 100.00%
------- ------------ ------
------- ------------ ------
S-13
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS
Outstanding Percent of Loans
Number of Principal by Outstanding
Location(1) Loans Balance Balance
----------- --------- ------------ ----------------
Alabama 34,489 $ 84,467,172 15.87%
Alaska 249 1,127,066 0.21
American Samoa 2 4,279 0.00
Arizona 7,130 28,585,078 5.37
Arkansas 417 2,060,003 0.39
California 4,660 21,433,806 4.03
Colorado 5,631 31,852,806 5.99
Connecticut 211 964,255 0.18
Delaware 59 339,594 0.06
District of Columbia 211 719,327 0.14
Florida 3,278 11,361,528 2.14
Foreign Country 273 1,235,561 0.23
Georgia 3,403 9,591,709 1.80
Guam 12 40,045 0.01
Hawaii 504 2,055,933 0.39
Idaho 205 989,613 0.19
Illinois 4,525 17,667,250 3.32
Indiana 797 3,585,496 0.67
Iowa 30,676 95,230,790 17.90
Kansas 8,497 43,563,648 8.19
Kentucky 536 2,325,792 0.44
Louisiana 895 3,150,767 0.59
Maine 95 625,492 0.12
Maryland 619 2,705,466 0.51
Massachusetts 520 2,992,249 0.56
Michigan 1,191 5,370,658 1.01
Military (Atlantic) 10 20,469 0.00
Military (Europe) 156 462,656 0.09
Military (Pacific) 54 194,461 0.04
Minnesota 11,933 35,921,578 6.75
Mississippi 725 2,170,311 0.41
Missouri 2,192 10,423,814 1.96
Montana 219 1,132,952 0.21
North Carolina 1,035 4,103,460 0.77
North Dakota 533 1,611,977 0.30
Nebraska 1,317 3,608,139 0.68
Nevada 3,374 11,097,324 2.09
New Hampshire 140 630,457 0.12
New Jersey 529 3,042,955 0.57
New Mexico 729 3,069,235 0.58
New York 1,157 6,162,153 1.16
Ohio 1,098 5,584,017 1.05
Oklahoma 3,535 11,423,169 2.15
Oregon 561 2,431,684 0.46
Pennsylvania 1,056 6,216,034 1.17
Puerto Rico 91 287,384 0.05
Rhode Island 50 295,831 0.06
South Carolina 502 2,165,140 0.41
South Dakota 663 2,299,385 0.43
Tennessee 1,886 6,349,277 1.19
Texas 3,482 14,727,991 2.77
Utah 355 1,835,058 0.35
Virginia 1,114 4,615,683 0.87
Virgin Islands 15 43,697 0.01
Vermont 45 245,632 0.05
Washington 1,177 4,944,220 0.93
West Virginia 213 1,125,816 0.21
Wisconsin 1,934 8,292,029 1.56
Wyoming 296 1,270,604 0.24
------- ------------ ------
Total 151,261 $531,849,975 100.00%
------- ------------ ------
------- ------------ ------
- ----------------
(1) Based on the permanent billing addresses of the borrowers of the Financed
Eligible Loans shown on the Servicer's records.
S-14
<PAGE>
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY DATE OF
DISBURSEMENT
Outstanding Percent of Loans
Disbursement Number of Principal by Outstanding
Date Loans Balance Balance
- ------------ --------- ------------ ----------------
Pre 10/01/93 75,947 $185,392,633 34.86%
Post 10/01/93 75,314 346,457,342 65.14
------- ------------ ------
Total 151,261 $531,849,975 100.00%
------- ------------ ------
------- ------------ ------
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY GUARANTEE AGENCY
Percent
Outstanding of Loans by
Number of Principal Outstanding
Guarantee Agencies(1) Loans Balance Balance
- --------------------- --------- ------------ -----------
COSLP 4,150 $ 20,986,473 3.95%
ICSAC 46,455 142,579,769 26.81
KHEAA 44,758 112,426,594 21.14
NORTHSTAR 8,342 15,803,934 2.97
NSLP 25,541 163,905,744 30.82
OGSLP 3,089 8,391,069 1.58
USAF 17,674 66,208,302 12.45
U.S. Dept. of Education 1,105 1,110,238 0.21
------- ------------ ------
Total 151,261 $531,849,975 100.00%
------- ------------ ------
------- ------------ ------
- ------------
(1) As defined herein under "Certain Information Relating to the Guarantee
Agencies."
S-15
<PAGE>
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY RANGE OF PRINCIPAL BALANCE
Percent
Outstanding of Loans by
Number of Principal Outstanding
Principal Balance Range Borrowers Balance Balance
- ----------------------- --------- ------------ -----------
Less than $1,000 4,788 $ 2,740,833 0.52%
$1,000-$1,999 8,637 12,858,414 2.42
$2,000-$2,999 11,917 30,089,216 5.66
$3,000-$3,999 7,143 24,879,874 4.68
$4,000-$4,999 5,299 23,704,899 4.46
$5,000-$5,999 5,873 32,117,845 6.03
$6,000-$6,999 4,541 29,260,718 5.50
$7,000-$7,999 3,326 24,909,330 4.68
$8,000-$8,999 2,986 25,291,144 4.76
$9,000-$9,999 2,363 22,401,565 4.21
$10,000-$10,999 2,373 24,937,877 4.69
$11,000-$11,999 2,005 22,971,644 4.32
$12,000-$12,999 1,425 17,779,584 3.34
$13,000-$13,999 1,204 16,278,213 3.06
$14,000-$14,999 1,079 15,664,084 2.95
$15,000 or greater 7,986 205,964,735 38.71
------ ------------ ------
Total 72,945 $531,849,975 100.00%
------ ------------ ------
------ ------------ ------
S-16
<PAGE>
CERTAIN INFORMATION RELATING TO THE GUARANTEE AGENCIES
GUARANTEE AGENCIES FOR THE FINANCED ELIGIBLE LOANS
Set forth below is certain historical information with respect to each
Guarantee Agency of Financed Eligible Loans listed herein that is expected to
guaranty 2% or more of the Financed Eligible Loans as of January 16, 1997
(each, a "Guarantee Agency" and, collectively, the "Guarantee Agencies").
Except as otherwise indicated below, the information regarding each Guarantee
Agency has been obtained from the Department of Education's Guaranteed
Student Loan Programs Data Book for Federal Fiscal Years 1989 and 1991, and
the Department of Education's Federal Fiscal Year 1993 Loan Programs Data
Books (each, a "DOE Data Book"). No independent verification has been or
will be made by the Issuer of such information.
GUARANTEE VOLUME. For the Federal Fiscal Year ending September 30,
1993, of all the guarantors of student loans in the United States, COSLP,
ICSAC, KHEAA, NSLP, NORTHSTAR, OGSLP and USAF ranked 14, 15, 25, 16, 8, 23
and 1, respectively, as measured by volume of Federal Loans. 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 Guarantee Agencies and
by all guarantors of Federal Loans in each of the five Federal Fiscal Year
1989 through 1993.
STAFFORD, UNSUBSIDIZED STAFFORD, SLS, PLUS AND CONSOLIDATED LOANS GUARANTEED
*DOLLARS IN MILLIONS
<TABLE>
Federal United Student All
Fiscal Colorado Iowa Kentucky Minnesota Nebraska Oklahoma Aid Funds Guarantee
Year (COSLP) (ICSAC) (KHEAA) (NORTHSTAR) (NSLP) (OGSLP) (USAF) Agencies
- ------- -------- ------- -------- ----------- ------ -------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1989 $278.7 $153.8 $ 82.5 N/A(1) N/A(2) $126.6 $1,683.5 $13,150.5
1990 254.5 180.7 88.8 N/A(1) N/A(2) 134.2 2,097.6 13,111.1
1991 283.4 227.4 102.2 $288.8 $205.8 147.1 2,833.7 14,620.3
1992 304.4 267.4 126.6 518.3 266.3 163.4 3,372.1 16,113.7
1993 326.0 309.8 160.9 641.1 334.2 195.6 4,087.6 19,355.6
</TABLE>
- --------------------
(1) NORTHSTAR Guarantee Inc. has only been the designated guarantor for the
State of Minnesota since May 1, 1991.
(2) Nebraska Student Loan Program has only been the designated guarantor for
the State of Nebraska since January 16, 1991.
RESERVE RATIO. Each Guarantee Agency's reserve ratio is determined
by dividing its cumulative cash reserves by the original principal amount
of the outstanding loans its has agreed to guarantee. The term "cumulative
cash reserves" refers to cash reserves plus (a) sources of funds
(including insurance premiums, state appropriations, federal advances,
federal reinsurance payments, administrative costs allowances, collections
on claims paid and investment earnings) minus (b) 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
---------------------
*The information set forth in the table above has been obtained from the
Federal Fiscal Years 1989, 1991 and 1993 and DOE Data Books.
S-17
<PAGE>
"original principal amount of outstanding loans" consists of the
original principal amount of loans guaranteed by such Guarantee Agency
minus (i) the original principal amount of loans canceled, claims paid
loans paid in full and loan guarantees transferred from such Guarantee
Agency to other guarantors, plus (ii) the original principal amount of
loan guarantees transferred to such Guarantee Agency to other guarantors.
The following table set forth each Guarantee Agency's cumulative cash
reserves and their corresponding reserve ratios and the national average
reserve ratio for all guarantors for the five Federal Fiscal Years 1989
through 1993:*
<TABLE>
Colorado Iowa Kentucky Minnesota
(COSLP) (ICSAC) (KHEAA) (NORTHSTAR)
---------------------- ---------------------- ---------------------- -----------------------
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>
1989 $10.4 1.0% $26.6 2.7% $11.0 2.2% N/A(1) N/A(1)
1990 10.6 0.9 31.9 2.9 11.5 2.1 N/A(1) N/A(1)
1991 4.6 0.3 32.1 2.6 11.0 1.8 $2.0 0.1%
1992 24.0 1.7 37.3 2.7 12.6 1.9 7.0 0.4
1993 27.3 1.7 40.9 2.6 19.4 2.6 12.9 0.5
</TABLE>
<TABLE>
United Student Aid
Nebraska Oklahoma Funds, Inc.
(NSLP) (OGSLP) (USAF)
---------------------- ---------------------- ---------------------- National
Federal Cumulative Cumulative Cumulative Average
Fiscal Cash Reserve Cash Reserve Cash Reserve Reserve
Year Reserves** Ratio Reserves** Ratio Reserves** Ratio Ratio
- ------- ---------- ------- ---------- ------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1989 N/A(2) N/A(2) $6.9 1.5% $ 24.6 0.5% 0.7%
1990 N/A(2) N/A(2) 7.3 1.4 13.8 0.2 1.0
1991 $1.2 0.1% 3.5 0.6 4.1 0.1 0.8
1992 4.0 0.2 8.5 1.2 100.1 1.0 1.5
1993 10.1 0.4 9.9 1.3 169.9 1.3 1.7
</TABLE>
- ---------------
*The information set forth in the table above has been obtained from the
Federal Fiscal Years 1991, 1992 and 1993 DOE Data Books. The cash reserves
and the reserve ratio increased substantially between Federal Fiscal Years
1991 and 1992. As described in the Federal Fiscal Year 1992 DOE Data Book,
this difference was caused, in part, because (a) approximately $300 million
in reinsurance claims pending during September 1991 (Federal Fiscal Year
1991) were not paid by the Department until October 1991 (Federal Fiscal Year
1992) due to the Department's computer systems modifications and (b) default
costs were decreasing, while insurance premiums, administrative costs
allowances and investment income were increasing. The cash reserves and the
reserve ratio also 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.
(1) NORTHSTAR Guarantee Inc. has only been the designated guarantor for the
State of Minnesota since May 1, 1991.
(2) Nebraska Student Loan Program has only been the designated guarantor for
the State of Nebraska since January 16, 1991.
S-18
<PAGE>
RECOVERY RATES. A Guarantee Agency'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 Guarantee Agency by the
aggregate amount of default claims paid by such Guarantee Agency during the
applicable Federal Fiscal Year with respect to borrowers. The table below
set forth the recovery rates for each Guarantee Agency 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 1989 through 1993:*
<TABLE>
RECOVERY RATE
- --------------------------------------------------------------------------------------------------
United
Federal Student
Fiscal Colorado Iowa Kentucky Minnesota Nebraska Oklahoma Aid Funds National
Year (COSLP) (ICSAC) (KHEAA) (NORTHSTAR) (NSLP) (OGSLP) (USAF) Average
- ------- -------- ------- -------- ----------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1989 23.2% 30.0% 27.1% N/A(1) N/A(2) 27.4% 24.0% 28.4%
1990 26.0 35.8 33.9 N/A(1) N/A(2) 29.7 25.7 30.7
1991 27.4 39.6 40.2 0.0% 6.0% 31.3 26.0 31.9
1992 28.7 42.7 45.1 4.1 10.4 33.0 28.1 35.1
1993 33.1 45.2 50.3 8.5 15.9 36.3 30.7 38.1
</TABLE>
_______________
* The information set forth in the table above has been obtained from the
Federal Fiscal Year 1990 DOE Data Book (with respect to Federal Fiscal Year
1989 and 1990) and from the Department (with respect to Federal Fiscal Years
1991, 1992 and 1993).
** Data not available.
(1) NORTHSTAR Guarantee Inc. has only been the designated guarantor for the
State of Minnesota since May 1, 1991.
(2) Nebraska Student Loan Program has only been the designated guarantor for
the State of Nebraska since January 16, 1991.
LOAN LOSS RESERVE. The DOE Data Book does not disclose whether any
Guarantee Agency has established a segregated loan loss reserve with respect
to its student loan guarantee obligations. Accordingly, to the extent that a
Guarantee Agency has not established such a segregated loan loss reserve, in
the event that a Guarantee Agency receives less than full reimbursement of
its guarantee obligations from the Department, the Guarantee Agency would be
forced to look to its existing assets to satisfy any such guarantee
obligations not so reimbursed.
CLAIMS RATE. For at least one of the five Federal Fiscal Years 1989
through 1993, COSLP, KHEAA, OGSLP and USAF experienced a claims rate in
excess of 5%. For each Federal Fiscal Year that such Guarantee Agencies'
claims rate exceeded 5%, the claims of such Guarantee Agencies were not fully
reimbursed by the Department. No assurance can be made that any of the
Guarantee Agencies will receive full reimbursement for reinsurance claims (or
the full 98% maximum reimbursement for loans first disbursed on or after
October 1, 1993). Notwithstanding the claims rate, the Guarantee Agencies
are required to pay the Trustee either 98% or 100% of the principal amount of
any Financed Eligible Loan properly submitted to a Guarantee Agency for
payment. The following table set forth the claims rate of each Guarantee
Agency and the national average for all guarantors of Federal Loans for the
last five Federal Fiscal Years 1989 through 1993:*
S-19
<PAGE>
<TABLE>
CLAIMS RATE
- --------------------------------------------------------------------------------------------------
United
Federal Student
Fiscal Colorado Iowa Kentucky Minnesota(1) Nebraska Oklahoma Aid Funds National
Year (COSLP) (ICSAC) (KHEAA) (NORTHSTAR) (NSLP) (OGSLP) (USAF) Average
- ------- -------- ------- -------- ------------ -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1989 3.97% 2.43% 3.38% N/A(1) N/A(2) 6.52% 8.37% 4.78%
1990 4.99 1.74 3.09 N/A(1) N/A(2) 6.89 4.98 5.06
1991 7.16 1.98 3.59 N/A(1) N/A(2) 8.67 8.41 4.51
1992 4.48 1.67 3.61 N/A(1) 4.88 6.70 4.99 4.15
1993 3.68 1.81 7.21 N/A(1) 4.75 6.30 7.30 3.83
</TABLE>
_______________
* The information set forth in the table above has been obtained from the
Federal Fiscal Year 1990 DOE Data Book (with respect to Federal Fiscal Year
1989 and 1990) and from the Department (with respect to Federal Fiscal
Years 1991, 1992 and 1993).
(1) NORTHSTAR Guarantee Inc. has only been the designated guarantor for the
State of Minnesota since May 1, 1991.
(2) Nebraska Student Loan Program has only been the designated guarantor for
the State of Nebraska since January 16, 1991 and does not need to report
a claims rate to the Department until 1996.
With respect to federal fiscal year 1995, each Guarantee Agency was
reinsured by the Department to the maximum of 98% or 100%, as applicable, of
the unpaid principal balance and accrued unpaid interest.
Each Guarantee Agency 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 COSLP, to Colorado Student Loan Program, 999 18th
Street, Suite 425, Denver, CO 80202-2440; if to ICSAC, to Iowa College
Student Aid Commission, 200 10th Street, 4th Floor, Des Moines, IA 50309; if
to KHEAA, to Kentucky Higher Education Assistance Authority, 1050 U.S. 127
South, Frankfort, KY 40601; if to NORTHSTAR, to 444 Cedar Street, Suite 1910,
St. Paul, Minnesota 55101; if to NSLP, to Nebraska Student Loan Program,
Inc., P.O. Box 82507, Lincoln, NE 68501-2507; if to OGSLP, to Oklahoma State
Guarantee Agency, 999 N.W. Grand Boulevard, Suite 300, Oklahoma City, OK
73118; if to USAF, to United Student Aid Funds, Inc., P.O. Box 6180,
Indianapolis, IN 46206.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement for the sale of the Series 1997A Notes, dated October 31, 1996, and
a related Terms Agreement dated March 19, 1997 (collectively, the
"Underwriting Agreement"), the Issuer has agreed to sell and the Underwriter
has agreed to purchase all the Series 1997A Notes. The Series 1997A Notes
initially will be offered by the Underwriter to the public at the public
offering price set forth on the cover page of this Prospectus Supplement.
After the initial public offering, the offering price and other selling terms
may be varied by the Underwriter. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Series 1997A
Notes may be deemed to be underwriters and any commissions received by them
and any profit on the resale of the Series 1997A Notes may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933, as
amended.
S-20
<PAGE>
In connection with the offering, the Underwriter and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Series 1997A
Notes. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such person may
bid for or purchase Series 1997A Notes for the purpose of stabilizing their
market price. The Underwriter also may create a short position for the
account of the Underwriter by selling more Series 1997A Notes in connection
with the offering than it is committed to purchase, and in such case may
purchase Series 1997A Notes in the open market following completion of the
offering to cover all or a portion of such short position. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Series 1997A Notes at a level above that which might otherwise
prevail in the open market. None of the transactions described in this
paragraph is required and, if they are undertaken, they may be discontinued
at any time.
The Issuer has agreed to indemnify the Underwriter against certain
liabilities including liabilities under the Securities Act of 1933, as
amended, and the Issuer has agreed to reimburse the Underwriter for the fees
and expenses of counsel to the Underwriter.
LEGAL MATTERS
Certain legal matters, including certain income tax matters, will be
passed upon for the Issuer by Kutak Rock, Denver, Colorado. Certain legal
matters relating to the validity of the issuance of the Series 1997A Notes
will be passed upon for the Underwriter by Stroock & Stroock & Lavan LLP, New
York, New York.
S-21
<PAGE>
PROSPECTUS
UNION FINANCIAL SERVICES-1, INC.
TAXABLE STUDENT LOAN ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
UNION FINANCIAL SERVICES, INC.
SPONSOR
This Prospectus relates to Union Financial Services-1, Inc. (the "Issuer")
Taxable Student Loan Asset-Backed Notes (the "Offered Notes") to be issued in
one or more series (each, a "Series") and one or more classes (each, a "Class")
on terms determined at the time of sale and described in the related prospectus
supplement (each, a "Prospectus Supplement"). The Notes will be secured
primarily by a pool of student loans purchased and to be purchased by the
Issuer, from Union Bank and Trust Company ("Union Bank") and other eligible
lenders (the "Eligible Lenders" and, together with Union Bank, each, a "Seller"
and collectively, the "Sellers") (such loans, together with any additional
student loans purchased from the Sellers from time to time by the Issuer and
pledged to the Trustee, the "Financed Eligible Loans"), collections and other
payments with respect to the Financed Eligible Loans, and moneys on deposit in
certain trust accounts to be established for the benefit of the Noteholders.
Funds on deposit in the Student Loan Fund will be used from time to time as
described herein and in the related Prospectus Supplement with respect to any
Series to purchase additional Financed Eligible Loans. The Issuer has issued
previously $249,900,000 aggregate principal amount of Taxable Student Loan
Asset-Backed Notes (the "Private Notes"). Notes issued by the Issuer in the
future under the Indenture of Trust (the "Indenture"), including the Offered
Notes, are referred to herein as "Additional Notes." The Additional Notes and
the Private Notes are hereinafter referred to collectively as the "Notes." Each
Series of Notes, including the Offered Notes and the Private Notes, will be
collateralized by the Trust Estate pledged to the Trustee. The Private Notes
are not being offered hereby and any information relating thereto is provided
solely because of its potential relevance to a prospective investor of the
Offered Notes. In addition, no new Eligible Loans will be purchased or
Additional Notes issued by the Issuer if such action would adversely affect the
ratings of the Notes that are then outstanding.
The per annum rate of interest for a Class of Notes for a period of
interest specified with respect to a Series (each, an "Interest Period") will,
subject to certain limitations described herein or in the applicable Prospectus
Supplement, equal the rate determined from time to time for such Class pursuant
to (a) the auction procedures described herein (such Notes being referred to
herein as "Auction Rate Notes"), (b) the London interbank offered rate for
one-month U.S. dollar deposits ("LIBOR") plus the amount set forth in the
related Prospectus Supplement (such Notes being referred to herein as "LIBOR
Rate Notes") or (c) the interest rate of United States Treasury securities for
one-month or three-month securities plus the amount set forth in the
related Prospectus Supplement (such Notes being referred to herein as
"Treasury Rate Notes"). The LIBOR Rate Notes and the Treasury Rate Notes are
collectively referred to herein as "Index Rate Notes." Except as otherwise
set forth in a Prospectus Supplement, interest on each Class
<PAGE>
of Offered Notes that are Auction Rate Notes will be payable on the first
Business Day following the expiration of the respective Auction Period for
such Class, commencing on the date set forth in the related Prospectus
Supplement. Interest on each Class of Index Rate Notes will be payable
quarterly, monthly or weekly on the first Business Day following the
expiration of each related Interest Period as specified in the related
Prospectus Supplement. However, if specified with respect to a Series in the
related Prospectus Supplement, interest accrued on a Class of Notes of such
Series may, instead of being paid currently, be capitalized and added to the
outstanding principal balance thereof until the date or event specified in
such Prospectus Supplement (such Notes are referred to herein as "Accrual
Notes"). The date on which a Class of Notes is entitled to receive a payment
(or, for Accrual Notes, have accrued interest added to principal) is referred
to as the "Interest Payment Date" for such Class.
The unpaid principal balance of each Class of Notes will be payable upon
its stated maturity date ("Stated Maturity"), which will be the Interest
Payment Date specified in the related Prospectus Supplement, unless otherwise
paid earlier upon redemption as provided herein. Principal payments with
respect to any Class of Notes of any Series will be made in the order of
priority with respect to each Class of Notes of any other Series as specified in
the related Prospectus Supplement. Under the circumstances described herein and
in the related Prospectus Supplement with respect to a Series, the Notes may be
subject to optional, mandatory and extraordinary optional redemption. In
addition, the Notes will be repaid on any Interest Payment Date on which the
Issuer exercises its option to purchase the Financed Eligible Loans, exercisable
when the aggregate principal balance of the Notes is reduced to 10% or less of
the principal balance of the Notes on their respective dates of issuance (each,
the "Date of Issuance").
After the respective initial Interest Period, each Interest Period for each
Class of Auction Rate Notes will consist of between 7 and 91 days, or such other
period as described herein or in the related Prospectus Supplement. Except as
otherwise specified with respect to a Series, each Interest Period for each
Class of Index Rate Notes will consist of the period beginning on the first day
of each month and ending on the last day of the such month, or if interest is
payable quarterly beginning on the first day of a month and ending on the last
day of the second succeeding month. The Interest Period for each Class of Index
Rate Notes will be as set forth in the related Prospectus Supplement.
By purchasing a Class of Auction Rate Notes, whether in an Auction or
otherwise, each prospective purchaser will be deemed to have agreed: (i) to
participate in Auctions on the terms described herein; and (ii) so long as the
beneficial ownership of the Auction Rate Notes is maintained in book-entry form
to sell, transfer or otherwise dispose of the Auction Rate Notes only pursuant
to a bid or a sell order in an auction conducted pursuant to the procedures
described herein (an "Auction"), or to or through a specified broker-dealer (as
described herein); provided, that in the case of all transfers other than those
pursuant to an Auction, either the owner of the Auction Rate Notes so
transferred, its participant or specified broker-dealer advises the agent
conducting the Auction (the "Auction Agent") of such transfer. See
"Certain Definitions and Provisions Related to Auction Rate Notes and Auction
Procedures" herein.
<PAGE>
All Financed Eligible Loans are, and all Financed Eligible Loans to be
acquired in the future will be, guaranteed by private, non-profit corporations
or state agencies (each a "Guarantee Agency"), and all Financed Eligible Loans
are and all Financed Eligible Loans to be acquired in the future will be
reinsured by the United States Department of Education (the "Department")
subject to the limitations described herein (such Financed Eligible Loans, the
"Federal Loans"). This obligation of the Department is, subject to compliance
with the Higher Education Act of 1965, as amended (the "Higher Education Act"),
supported by the full faith and credit of the United States.
SEE "RISK FACTORS" HEREIN BEGINNING ON PAGE 1 FOR A DESCRIPTION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES
AND IN EVALUATING THE FINANCED ELIGIBLE LOANS AS TO THE LIKELIHOOD OF REALIZED
LOSSES.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE NOTES DO NOT REPRESENT AN OBLIGATION OF OR AN INTEREST IN THE TRUSTEE
OR THE SELLERS OR ANY OF THEIR RESPECTIVE AFFILIATES, OTHER THAN A LIMITED
OBLIGATION OF THE ISSUER, AND THE NOTES ARE NOT INSURED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR ANY OTHER PERSON OR ENTITY, INCLUDING THE SELLERS,
THE TRUSTEE OR ANY AFFILIATE OF ANY OF THE FOREGOING.
Offers of the Offered Notes may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Plan of Distribution" herein and in the related Prospectus Supplement. The
intention of any underwriter to make a secondary market in the Offered Notes
will be set forth in the related Prospectus Supplement. There can be no
assurance that a secondary market for the Offered Notes will develop, or if it
does develop, that it will continue. Except as otherwise specified with respect
to a Series, it is not expected that the Offered Notes will be listed on a
national securities exchange. This Prospectus may not be used to consummate
sales of a Series of Offered Notes unless accompanied by a Prospectus
Supplement.
------------------------------
The date of this Prospectus is October 31, 1996.
<PAGE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES COVERED BY SUCH PROSPECTUS SUPPLEMENT,
WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO
DELIVER SUCH PROSPECTUS SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Offered Notes to be
offered hereunder, among other things, will set forth with respect to such
Series of Offered Notes: (a) the aggregate principal amount, interest rate or
rates or other applicable rate or rates (or the manner of determining such rate
or rates) and authorized denominations of each Class of such Offered Notes;
(b) certain information concerning the Financed Eligible Loans; (c) the original
principal amount and current principal amount of and certain information with
respect to each previously issued Class of Notes, along with the applicable
Stated Maturity; (d) certain information concerning the guarantee agencies with
respect to the Financed Eligible Loans (the "Guarantee Agencies"); (e) certain
information with respect to any credit enhancements; and (f) additional
information with respect to the plan of sale of such Offered Notes.
AVAILABLE INFORMATION
The Issuer has filed a Registration Statement under the Securities Act of
1933, as amended (the "1933 Act"), with the Securities and Exchange Commission
(the "Commission") with respect to the Offered Notes. The Registration
Statement and amendments thereof and to the exhibits thereto, as well as such
reports and other information, are available for inspection without charge at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th Floor, New
York, New York 10048; and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of the Registration Statement
and amendments thereof and exhibits thereto may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the Commission maintains a World Wide
Web site that contains reports, proxy and information statements and other
information regarding registrants, such as the Issuer, that file electronically
with the Commission at the following address: (http://www.sec.gov).
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Offered Notes
offered hereby and thereby nor an offer of the Offered 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.
REPORTS TO NOTEHOLDERS
Periodic and annual reports concerning the Notes and the Issuer will be
provided to the Noteholders as required by the Indenture. Unless otherwise set
forth in the related Prospectus Supplement, each Series of Offered Notes will be
issued in book-entry form and registered in the name of Cede & Co., the nominee
of The Depository Trust Company. All reports will be provided to Cede, which in
turn will provide such reports to its eligible participants (the
i
<PAGE>
"Participants") and eligible indirect participants (the "Indirect
Participants"). Such Participants and Indirect Participants will then
forward such reports to the beneficial owners of Offered Notes. See "Book
Entry Registration" herein. The Issuer will file with the Commission such
periodic reports as are required under the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission thereunder, and
will suspend the filing of such reports at its option if not so required.
ii
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of the Issuer with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), subsequent to the date of this Prospectus
and prior to the termination of the offering of the Offered Notes issued by the
Issuer shall be deemed to be incorporated by reference in this Prospectus and to
be a part of this Prospectus from the date of the filling of such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in the accompanying Prospectus Supplement) or in any other subsequently
filed document which also is or is 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 part of this Prospectus. The Issuer will provide without charge to
each person to whom a copy of the 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).
Requests for such copies should be directed to Union Financial Services-1, Inc.,
3015 South Parker Road, Suite 400, Aurora, Colorado 80014, Attention: Ronald W.
Page, Telephone: (303) 696-5664.
iii
<PAGE>
---------------------------------
TABLE OF CONTENTS TO PROSPECTUS
---------------------------------
Page
----
PROSPECTUS SUPPLEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . i
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . i
REPORTS TO NOTEHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . i
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE. . . . . . . . . . . . . . .iii
SUMMARY OF THE OFFERING. . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Securities Offered . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Sellers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Servicer and Subservicer . . . . . . . . . . . . . . . . . . . . . . . . x
Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x
Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x
Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xii
The Financed Eligible Loans. . . . . . . . . . . . . . . . . . . . . . .xii
The Higher Education Act . . . . . . . . . . . . . . . . . . . . . . . .xiv
Determination of Interest Rates. . . . . . . . . . . . . . . . . . . . .xvi
Principal Payments . . . . . . . . . . . . . . . . . . . . . . . . . . xvii
Stated Maturity Date . . . . . . . . . . . . . . . . . . . . . . . . . xvii
Auction Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . xvii
Pool Characteristics . . . . . . . . . . . . . . . . . . . . . . . . .xviii
Cutoff Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xviii
Redemption Provisions. . . . . . . . . . . . . . . . . . . . . . . . .xviii
Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . xxii
Additional Parity Notes. . . . . . . . . . . . . . . . . . . . . . . .xxiii
Sales and Repurchases of Certain Eligible Loans. . . . . . . . . . . .xxiii
Funds and Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . xxiv
Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . .xxvii
Registration of Notes. . . . . . . . . . . . . . . . . . . . . . . . xxviii
Certain Federal Income Tax Consequences. . . . . . . . . . . . . . . xxviii
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . xxviii
Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxviii
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Nature of the Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Subordination; Limited Assets. . . . . . . . . . . . . . . . . . . . . . 1
Failure to Comply with Loan Origination and Servicing Procedures for
Eligible Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Reliance Upon Sellers. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Perfection of Security Interest in Financed Eligible Loans . . . . . . . 3
Certain Insolvency Concerns. . . . . . . . . . . . . . . . . . . . . . . 3
Changing Assets of the Trust Estate. . . . . . . . . . . . . . . . . . . 5
iv
<PAGE>
Variability of Revenues. . . . . . . . . . . . . . . . . . . . . . . . . 5
Prepayment Considerations. . . . . . . . . . . . . . . . . . . . . . . . 6
Principal Balance of Notes May Exceed Aggregate Principal Balance of
Financed Eligible Loans. . . . . . . . . . . . . . . . . . . . . . . . 7
Unsecured Nature of Financed Eligible Loans; Financial Status of
Guarantee Agencies . . . . . . . . . . . . . . . . . . . . . . . . . 7
Changes in Legislation . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Financed Eligible Loans and the Student Loan Fund. . . . . . . . . . 9
Issuance of Additional Notes . . . . . . . . . . . . . . . . . . . . . . 9
Maturity and Prepayment Assumptions. . . . . . . . . . . . . . . . . . . 10
Basis Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Certain Legal Aspects. . . . . . . . . . . . . . . . . . . . . . . . . . 11
Book-Entry Registration. . . . . . . . . . . . . . . . . . . . . . . . . 12
Repurchase of Financed Eligible Loans. . . . . . . . . . . . . . . . . . 12
Ratings of the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 13
DESCRIPTION OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . 13
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Auction Rate Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
LIBOR Rate Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Treasury Rate Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Accrual Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Principal Payments of the Notes. . . . . . . . . . . . . . . . . . . . . 17
Mandatory Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Optional Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Extraordinary Optional Redemption. . . . . . . . . . . . . . . . . . . . 19
Optional Purchase. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Notice and Partial Redemption of Notes . . . . . . . . . . . . . . . . . 19
Accelerated Maturity of Notes. . . . . . . . . . . . . . . . . . . . . . 20
SECURITY AND SOURCES OF PAYMENT FOR THE NOTES. . . . . . . . . . . . . . . . 21
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Funds and Accounts and Flow of Revenues. . . . . . . . . . . . . . . . . 21
Student Loan Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Revenue Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Reserve Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Interest Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Note Redemption Fund . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Student Loan Holding Fund. . . . . . . . . . . . . . . . . . . . . . . . 34
Cost of Issuance Fund. . . . . . . . . . . . . . . . . . . . . . . . . . 34
Operating Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
General Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Investment of Funds Held by Trustee. . . . . . . . . . . . . . . . . . . 36
Release. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
v
<PAGE>
CERTAIN DEFINITIONS AND PROVISIONS RELATED
TO AUCTION RATE NOTES AND AUCTION PROCEDURES . . . . . . . . . . . . . . . . 37
Auction-Related Definitions. . . . . . . . . . . . . . . . . . . . . . . 37
Summary of Auction Procedures. . . . . . . . . . . . . . . . . . . . . . 44
Auction Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Auction Note Interest Rate . . . . . . . . . . . . . . . . . . . . . . . 49
AUCTION RATE NOTE SETTLEMENT PROCEDURES. . . . . . . . . . . . . . . . . . . 65
CERTAIN DEFINITIONS AND PROVISIONS RELATED TO LIBOR RATE
NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
LIBOR-Related Definitions. . . . . . . . . . . . . . . . . . . . . . . . 68
Interest on LIBOR Rate Notes . . . . . . . . . . . . . . . . . . . . . . 71
Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Notice of Payment Defaults and Cures . . . . . . . . . . . . . . . . . . 72
Calculation of Rates; Termination of Book Entry System . . . . . . . . . 72
Computation of Interest. . . . . . . . . . . . . . . . . . . . . . . . . 73
Notification of Rates, Amounts and Payment Dates . . . . . . . . . . . . 73
Calculation Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Credit Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Notice of Payment Default. . . . . . . . . . . . . . . . . . . . . . . . 75
BOOK ENTRY REGISTRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 75
ADDITIONAL NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE . . . . . . . . . . . . . . . 78
Parity of Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Other Obligations of the Issuer. . . . . . . . . . . . . . . . . . . . . 78
Pledge for Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Representations and Warranties of the Issuer . . . . . . . . . . . . . . 79
Covenants as to Additional Conveyances . . . . . . . . . . . . . . . . . 79
Further Covenants of the Issuer. . . . . . . . . . . . . . . . . . . . . 80
Servicing Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Procedures for Transfer of Funds . . . . . . . . . . . . . . . . . . . . 81
Additional Covenants with Respect to the Higher Education Act. . . . . . 82
Student Loans; Collections Thereof; Assignment Thereof . . . . . . . . . 83
Appointment of Agents. . . . . . . . . . . . . . . . . . . . . . . . . . 83
Capacity to Sue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Certain Matters Relating to Bankruptcy . . . . . . . . . . . . . . . . . 83
Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Remedies on Default. . . . . . . . . . . . . . . . . . . . . . . . . . . 85
The Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Supplemental Indentures. . . . . . . . . . . . . . . . . . . . . . . . . 96
Satisfaction of Indenture. . . . . . . . . . . . . . . . . . . . . . . . 99
SELLER REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . .101
The Sellers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101
Representations and Warranties--Portfolio Characteristics. . . . . . . .101
Representations and Warranties--Eligible Loans . . . . . . . . . . . . .102
vi
<PAGE>
Repurchase Obligation of Seller. . . . . . . . . . . . . . . . . . . . .105
DESCRIPTION OF CREDIT ENHANCEMENT. . . . . . . . . . . . . . . . . . . . . .106
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106
Subordinate Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . .107
Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . .107
Note Guarantee Insurance and Surety Bonds. . . . . . . . . . . . . . . .107
Reserve Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108
THE ISSUER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108
Executive Management . . . . . . . . . . . . . . . . . . . . . . . . . .109
THE ISSUER'S STUDENT LOAN PURCHASE PROGRAM . . . . . . . . . . . . . . . . .110
The Issuer's Student Loan Purchase Agreement . . . . . . . . . . . . . .110
Servicing of Financed Eligible Loans . . . . . . . . . . . . . . . . . .111
The Servicing Agreements . . . . . . . . . . . . . . . . . . . . . . . .111
UNIPAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112
DESCRIPTION OF THE FEDERAL FAMILY EDUCATION LOAN PROGRAM . . . . . . . . . .113
The Federal Family Education Loan Program. . . . . . . . . . . . . . . .113
Subsidized Federal Stafford Loans. . . . . . . . . . . . . . . . . . . .113
Unsubsidized Federal Stafford Loans. . . . . . . . . . . . . . . . . . .117
Special Allowance Payments . . . . . . . . . . . . . . . . . . . . . . .117
Federal PLUS and Federal SLS Loan Programs . . . . . . . . . . . . . . .118
The Federal Consolidation Loan Program . . . . . . . . . . . . . . . . .120
Federal Insurance and Reimbursement of Guarantee Agencies. . . . . . . .121
Reimbursement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .123
The Guarantee Agreement. . . . . . . . . . . . . . . . . . . . . . . . .124
Higher Education Amendments of 1992. . . . . . . . . . . . . . . . . . .124
1993 Amendments to the Federal Family Education Loan Program . . . . . .126
GUARANTEE AGENCIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .130
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .130
Other Guarantee Agencies . . . . . . . . . . . . . . . . . . . . . . . .132
WEIGHTED AVERAGE LIFE OF THE NOTES . . . . . . . . . . . . . . . . . . . . .132
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. . . . . . . . . . . . . . . . . . .133
Characterization of the Trust Estate . . . . . . . . . . . . . . . . . .133
Characterization of the Notes as Indebtedness. . . . . . . . . . . . . .134
Taxation of Interest Income of Registered Owners . . . . . . . . . . . .134
Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . .136
Limitation on the Deductibility of Certain Expenses. . . . . . . . . . .136
Tax-Exempt Investors . . . . . . . . . . . . . . . . . . . . . . . . . .136
Sale or Exchange of Notes. . . . . . . . . . . . . . . . . . . . . . . .137
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . .137
CERTAIN RELATIONSHIPS AMONG FINANCING PARTICIPANTS . . . . . . . . . . . . .139
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . .139
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .140
FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .140
RATINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .140
vii
<PAGE>
INDEX TO AND GLOSSARY OF CERTAIN TERMS . . . . . . . . . . . . . . . . . . .142
Index to Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . .142
Glossary of Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . .146
APPENDIX I--FORM OF MASTER PURCHASER'S LETTER. . . . . . . . . . . . . . . .I-1
viii
<PAGE>
SUMMARY OF THE OFFERING
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement with respect to the offering of a series of Offered Notes (each, a
"Prospectus Supplement"). Capitalized terms used herein and not defined shall
have the respective meanings referred or assigned to them in "Index to and
Glossary of Certain Terms"; provided, that terms defined in "Index to and
Glossary of Certain Terms" take precedence over the same terms defined more
briefly herein.
SECURITIES OFFERED The Taxable Student Loan Asset-Backed Notes
being offered with respect to a Prospectus
Supplement (the "Offered Notes") are issuable
in one or more series (each, a "Series") and
one or more classes (each, a "Class") within
such Series. The Offered Notes shall be
secured by a revolving pool of Financed
Eligible Loans and certain other property held
in trust for the benefit of the Registered
Owners as set forth herein under "--Trust
Estate." The Offered Notes that are designated
as Class B Notes (the "Class B Notes") and the
Private Notes that have been designated as
Class B Notes are subordinated in certain
respects to the Offered Notes that are
designated as Class A Notes and the Private
Notes that have been designated as Class A
Notes, and the Notes of any Series that are
designated as Class C Notes (the "Class C
Notes") are subordinated in certain respects to
the Offered Notes that are designated as Class
A Notes and Class B Notes, as more fully
described herein. The Offered Notes will be
issued pursuant to the Indenture as hereinafter
described. Notes issued by the Issuer in the
future under the Indenture (including the
Offered Notes) are referred to herein as
"Additional Notes." The Additional Notes and
the Private Notes are sometimes collectively
referred to herein as the "Notes."
ISSUER Union Financial Services-1, Inc., a Nevada
corporation. The Issuer is affiliated with
Union Bank and Trust Company. See "Risk
Factors" and "Certain Relationships Among
Financing Participants" herein.
SELLERS Union Bank and Trust Company ("Union Bank" and
in this capacity, the "Seller"), a Nebraska
state bank, has, in connection with the Private
Notes, entered into student loan purchase
agreements (each such agreement, together with
similar agreements entered into by other Eligible
Lenders, a "Student Loan Purchase Agreement")
with the Issuer requiring the Seller to make
Financed Eligible Loans available to be acquired
by the Issuer. The Issuer will only acquire
Financed
ix
<PAGE>
Eligible Loans from Union Bank or from other
eligible lenders as defined under the Higher
Education Act ("Eligible Lenders" and together
with Union Bank, each, a "Seller" and
collectively, the "Sellers") which other
Eligible Lenders will be specified with respect
to a Series in the related Prospectus
Supplement. See "Risk Factors--The Financed
Eligible Loans and the Student Loan Fund,"
"Certain Relationships Among Financing
Participants" and "Seller Representations and
Warranties--The Sellers" herein.
SERVICER AND SUBSERVICER Union Bank shall act as Servicer (in such
capacity, the "Servicer") and UNIPAC Service
Corporation, a Nebraska corporation ("UNIPAC"),
shall act as subservicer (the "Subservicer")
and custodian (the "Custodian") of the Financed
Eligible Loans. The Issuer may appoint other
entities to act as a Servicer or Subservicer if
approved by the Rating Agencies, which
entities, if any, will be specified with
respect to a Series in the related Prospectus
Supplement. See "Certain Relationships Among
Financing Participants."
TRUSTEE Norwest Bank Minnesota, National Association,
or such other entity as may be specified in a
Prospectus Supplement.
INDENTURE The Private Notes have been and the Offered
Notes will be issued pursuant to an Amended and
Restated Indenture of Trust between the Issuer
and the Trustee, as amended and supplemented
from time to time, and are payable solely from
the funds and assets held thereunder. Each
Series of Offered Notes will be issued pursuant
to a supplemental indenture of trust applicable
to such Series (a "Supplemental Indenture"),
and the Second Amended and Restated Indenture
of Trust together with such Supplemental
Indenture are referred to herein with respect
to a Series as the "Indenture." The Issuer has
previously issued the Private Notes designated
as its (i) Taxable Student Loan Asset-Backed
Notes, Series 1996A (the "Series 1996A
Notes"), including $48,300,000 of its Senior
Auction Rate Class A-1 Notes (the "Class A-1
Notes") and $48,300,000 of its Senior Auction
Rate Class A-2 Notes (the "Class A-2 Notes")
and $11,100,000 of its Subordinate LIBOR Rate
Class B Notes (the "Class B Notes"), and
(ii) Taxable Student Loan Asset-Backed Notes,
Series 1996B (the "Series 1996B Notes"), including
$73,700,000 of its Senior Auction Rate Class
A-3 Notes (the "Class A-3 Notes") and
$54,300,000 of its Senior Auction Rate Class
A-4 Notes (the "Class A-4 Notes") and
$14,200,000 of its Subordinate
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LIBOR Rate Class B-2 Notes (the "Class B-2
Notes"). The Class A-1, Class A-2, Class A-3
and Class A-4 Notes, together with any Notes
previously issued with respect to a Series of
Offered Notes which are designated as Class A
Notes are collectively referred to herein as
the "Prior Class A Notes," and the Class B and
Class B-2 Notes together with any Notes
previously issued with respect to a Series of
Offered Notes which are designated as Class B
Notes are collectively referred to herein as
the "Prior Class B Notes."
The Prior Class A Notes constitute and the
Offered Notes designated as Class A Notes will
constitute "Senior Notes" under the Indenture,
secured on a basis which is senior to the Prior
Class B Notes and to any Offered Notes secured
on a parity with or subordinate to the Prior
Class B Notes. The Prior Class B Notes
constitute and the Offered Notes designated as
Class B Notes will constitute "Subordinate
Notes" under the Indenture, secured on a basis
which is subordinate to the Senior Notes.
Offered Notes designated as Class A Notes will
be issued on a parity basis with the Prior
Class A Notes. Offered Notes secured on a
basis subordinate to the Prior Class A Notes
may be issued under the Indenture and such
Offered Notes may be secured on a basis which
is senior to, on a parity with or on a basis
which is subordinate to the Prior Class B
Notes. If subordinate to the Prior Class B
Notes, such Offered Notes would constitute
"Junior-Subordinate Notes" under the Indenture
and, unless otherwise specified with respect to
a Series, will be designated as Class C Notes.
The Notes of each Class of any Series will be
issued in minimum denominations of $100,000 or
any integral multiple thereof except as
specified in the related Prospectus Supplement.
The Offered Notes may be offered by the Issuer
to the extent provided in the Indenture and
without the approval of the Registered Owners
of any Notes then outstanding (the "Outstanding
Notes"); provided, among other things, that
written confirmation from each Rating Agency is
required to be received stating that the
issuance of any such Notes will not result in
any Rating Agency reducing or withdrawing its
existing ratings on the Outstanding Notes. See
"Additional Notes" herein.
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<PAGE>
TRUST ESTATE The Trust Estate will consist of: (i) a
revolving pool of Financed Eligible Loans, as
described below, and moneys payable with
respect thereto after their respective
applicable Cutoff Dates; (ii) funds in accounts
held by the Trustee under the Indenture,
including an account to acquire additional
Financed Eligible Loans from recycling
principal payments and repayments including
reimbursements for defaulted Financed Eligible
Loans under certain circumstances prior to
April 1, 1999 with respect to the Private Notes
and the date specified in the related
Prospectus Supplement with respect to the
Offered Notes (the "Student Loan Fund") and the
Reserve Fund; (iii) rights of the Issuer in and
to the Servicing Agreement, the Student Loan
Purchase Agreements and the agreements between
the respective Guarantee Agencies and the
Trustee (the "Guarantee Agreements") as the
same relate to Financed Eligible Loans and in
and to any agents conducting an Auction (each,
an "Auction Agent Agreement") and the custodian
holding files on behalf of the Trust (the
"Custodian Agreement"); and (iv) certain related
rights and property held in trust for the
benefit of the registered owners of the Notes
(the "Registered Owners").
THE FINANCED
ELIGIBLE LOANS "Financed Eligible Loans" will consist of
Federal Loans originated pursuant to the
federal family education loan program as
described herein under "Description of the
Federal Family Educational Loan Program" to
students enrolled in qualified accredited
institutions of higher education and will
include rights to receive payments made with
respect to such Financed Eligible Loans and the
proceeds thereof.
Certain of the Financed Eligible Loans will
have been originated by the respective Seller
and the remainder of the Financed Eligible
Loans will have been originated by independent
third parties and subsequently sold to the
respective Seller. The Financed Eligible Loans
constituting the assets of the Trust Estate
will vary from time to time and are required to
be Eligible Loans. An "Eligible Loan" shall
mean a loan made to students or parents of
students authorized under the Higher Education
Act for education at a qualified institution (a
"Student Loan") which: (a) will, subject to
compliance with specific origination and
servicing procedures prescribed by federal
and guarantor regulations, be guaranteed as
to the payment of principal and interest by
a state or private non-profit guarantor
(each, a "Guarantee Agency"); (b) and is
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not delinquent by the borrower more than 180
days and has not been tendered at any time to
either the Secretary or any guarantee agency,
including without limitation, the Guarantee
Agency, for payment unless the situation giving
rise to such tender has been cured.
Notwithstanding the foregoing, the Issuer will
not acquire Eligible Loans delinquent by the
borrower for more than 91 days. In addition,
with respect to each purchase of Eligible Loans
by the Issuer, the Issuer will acquire not more
than 15% of such Eligible Loans that are
delinquent by the borrower between 30 and 90 days.
With respect to Eligible Loans originated prior
to October 1, 1993, the entire principal amount
of such loans and accrued interest are required
to be fully guaranteed by the applicable
Guarantee Agency; with respect to Eligible Loans
originated on or after October 1, 1993, only
98% of the principal amount of such loans and
accrued interest are required to be guaranteed
by the applicable Guarantee Agency. Eligible
Loans which are delinquent by the borrower
continue to be guaranteed by the applicable
Guarantee Agency and principal and interest
will be paid after submission of Eligible Loan
to the applicable Guarantee Agency, subject to
compliance with origination and servicing
procedures. The Financed Eligible Loans will
be selected by each Seller from Eligible Loans
originated and purchased by such Seller based
on the criteria specified in the Student Loan
Purchase Agreement and described herein or in
the related Prospectus Supplement. See "Seller
Representations and Warranties" herein.
The payment of principal and interest on all
Eligible Loans will be guaranteed by Guarantee
Agencies and will be reinsured by the United
States Department of Education (the
"Department") to the extent provided pursuant
to the Higher Education Act. The federal
guarantee of Eligible Loans and the amount
thereof is contingent upon compliance with a
variety of due diligence and other regulations,
as further described herein, and is also
contingent upon certain servicing procedures to
be performed by the Servicer. See "Risk
Factors--Failure to Comply with Loan
Origination and Servicing Procedures for
Eligible Loans" and "Description of the Federal
Family Education Loan Program--Federal
Insurance and Reimbursement of Guarantee
Agencies" herein. In connection with the
offering of each Series of Notes, the
Guarantee Agencies that are expected to
guarantee 2% or more of the Financed Eligible
Loans in the portfolio of
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Financed Eligible Loans (the "Student Loan
Portfolio") will be identified in the related
Prospectus Supplement. Guarantee Agencies
which guarantee Financed Eligible Loans as
selected by the Issuer are required to be
approved by each Rating Agency. See
"Guarantee Agencies" herein.
With respect to substantially all of the
Eligible Loans, except for PLUS Loans (as
defined herein under "Description of the
Federal Family Education Loan Program"), 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
Eligible Loan. With respect to Eligible Loans
constituting Subsidized Stafford Loans, the
Department will make all interest payments
during the related Deferral Phase. For all
other Eligible Loans, interest will be paid
during the related Deferral Phase or, at the
option of the borrower, will be capitalized and
added to the principal balance of such Financed
Eligible Loan. It is expected that the Trust
Estate will consist of Financed Eligible Loans
that are in the Deferral Phase as well as
Financed Eligible Loans for which the related
borrower is required to make payments of
principal and interest (the "Repayment Phase").
The proportions of such Financed Eligible
Loans will vary through the period that the
Notes are outstanding.
The pool of Financed Eligible Loans included in
the Trust Estate from time to time is referred
to herein as the "Student Loan Portfolio."
Financed Eligible Loans may be sold and certain
events may occur with respect to individual
Financed Eligible Loans; consequently, the
Student Loan Portfolio characteristics are
expected to change during the period that the
Notes are Outstanding. See "Risk
Factors--Prepayment Considerations," "Seller
Representations and Warranties," "Description
of the Federal Family Education Loan Program"
and "Summary of Certain Provisions of the
Indenture--Sale of Financed Eligible Loans"
herein and "Certain Characteristics of the
Financed Eligible Loans" in the Prospectus
Supplement.
THE HIGHER EDUCATION ACT The Financed Eligible Loans acquired by the
Issuer and pledged to the Trustee will consist
only of Federal Loans originated pursuant to the
federal family education loan program under the
Higher Education Act of 1965, as amended (the
"Higher Education Act"). Each Financed Eligible
Loan
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will be guaranteed as to the payment of
principal and interest by a state or private
non-profit guarantor (each, a "Guarantee
Agency"). Financed Eligible Loans originated
prior to October 1, 1993 will be fully
guaranteed as to the principal amount of such
loans and accrued interest by the applicable
Guarantee Agency. Financed Eligible Loans
originated on or after October 1, 1993 will be
guaranteed as to 98% of the principal amount of
such loans and accrued interest by the
applicable Guarantee Agency. The Guarantee
Agencies each have reinsurance contracts with
the Secretary of the Department of Education
(the "Department"). The Department reimburses
to the Guarantee Agencies the claims paid by the
Guarantee Agencies. The amount of such
reinsurance payment is calculated annually and
is subject to reduction based upon the annual
claims rate of the Guarantee Agency to the
Department calculated to equal the amount of
federal reimbursement as a percentage of the
original principal amount of guaranteed loans
held by such Guarantee Agency in repayment on
the last day of the prior fiscal year.
Regardless of the level of reinsurance that the
applicable Guarantee Agency receives from the
Department, the Trustee will continue to be
entitled to reimbursement for the applicable
guaranteed portion of a Financed Eligible Loan
(either 98% or 100%, as applicable) from such
Guarantee Agency. The obligations of the
Guarantee Agencies to the holders of Federal
Loans, such as the Trustee, are payable from the
general funds available to each such Guarantee
Agency, including cash on deposit therewith,
reimbursements received from the Department and
reserve funds maintained by the Guarantee
Agencies as required by the Higher Education
Act. The Higher Education Act provides that,
subject to the provisions thereof including the
proper origination and servicing of Eligible Loans,
the full faith and credit of the United States is
pledged to the reinsurance payments by the
Department to the Guarantee Agencies. In addition,
the Higher Education Act provides that if a
Guarantee Agency is unable to meet its obligations
to holders of Federal Loans, such as the Trustee,
then the holders of Federal Loans may submit
guarantee claims directly to the Department and
the Department is required to pay to the holders
the full insurance obligation of such Guarantee
Agency until such time as the obligations are
transferred by the Department to a new Guarantee
Agency capable of meeting such obligations or
until a qualified successor Guarantee Agency
assumes such obligations. Certain delays in
receiving reimbursement could
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<PAGE>
occur if a Guarantee Agency fails to meet
its obligations. See "Risk Factors--Failure
to Comply with Loan Origination and Servicing
Procedures for Eligible Loans" and "--Unsecured
Nature of Financed Eligible Loans; Financial
Status of Guarantee Agencies" herein and
"Description of the Federal Family Educational
Loan Program" herein for a more complete
description of the Higher Education Act.
DETERMINATION OF
INTEREST RATES AUCTION RATE NOTES. Each Class of Auction Rate
Notes will bear interest at an initial rate of
interest per annum through the first Auction
Date for such Class specified in the related
Prospectus Supplement. After the Initial
Period for the Auction Rate Notes, each
Interest Period with respect to a Class of
Auction Rate Notes will initially consist of
the Auction Period set forth in the related
Prospectus Supplement, subject to adjustment as
set forth herein under "Certain Definitions and
Provisions Related to Auction Rate Notes and
Auction Procedures." The interest rates for the
Auction Rate Notes will be reset at the Auction
Rate with respect to each such Class as
described herein under "Certain Definitions and
Provisions Related to Auction Rate Notes and
Auction Procedures--Auction Procedures" (but in
no event exceeding the maximum interest rate
(the "Maximum Auction Rate") per annum).
The date on which a Class of Auction Rate Notes
is entitled to receive an interest payment is
referred to as the "Interest Payment Date" for
such Class. Payments will be made to holders
of record of the Auction Rate Notes as of the
date (the "Record Date") which is the Business
Day next preceding the respective Auction Date.
See "Description of the Notes--Auction Rate
Notes" herein. Interest on the Auction Rate
Notes will be payable on the first Business Day
following the expiration of each respective
Auction Period for such Class of Auction Rate
Notes.
INDEX RATE NOTES. The Notes of any Class of a
Series whose interest rate is determined with
respect to the London interbank offered rate
("LIBOR Rate Notes") or whose interest rate is
determined with respect to United States
Treasury securities ("Treasury Rate Notes" and
collectively, with LIBOR Rate Notes, the "Index
Rate Notes") will bear interest
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<PAGE>
at an initial rate of interest per annum through
the date specified in the related Prospectus
Supplement and will be paid at the intervals
specified in, and beginning on the date specified
in, the related Prospectus Supplement (or, if
any such date is not a Business Day, on the next
succeeding Business Day (each with respect to
such Class, an "Interest Payment Date")), until
maturity or earlier redemption or payment. The
Applicable Rate (as defined herein and in the
related Prospectus Supplement) with respect to
the LIBOR Rate Notes will be determined from
time to time as described herein under "Certain
Provisions Related to LIBOR Rate Notes" by
reference to the rate of interest described as
the LIBOR-Based Rate. The Applicable Rate with
respect to the Treasury Rate Notes will be as
described herein under "Description of the
Notes--Treasury Rate Notes" and determined as
specified in the related Prospectus Supplement.
See "Description of the Notes--LIBOR Rate Notes"
and "--Treasury Rate Notes" herein.
ACCRUAL NOTES. If specified with respect to a
Series in the related Prospectus Supplement,
the Notes thereof may consist of one or more
Classes of Accrual Notes, which Accrual Notes
will not be entitled to receive payments of
interest during the related accrual period and,
instead, interest accrued on such Accrual Notes
will be capitalized and added to the principal
balance thereof. The rate of interest to be
accrued and the accrual period will be
specified in the related Prospectus Supplement.
See "Description of the Notes--Accrual Notes"
herein.
PRINCIPAL PAYMENTS Unless otherwise specified with respect to a
Series in the related Prospectus Supplement,
the principal balance of the Notes of each
Series will be payable upon the date fixed for
payment (the "Stated Maturity") unless earlier
redeemed or repaid as described herein or in
the related Prospectus Supplement.
STATED MATURITY DATE The Stated Maturity for each Class of Offered
Notes will be specified in the related Prospectus
Supplement.
AUCTION PROCEDURES Except as may otherwise be specified with
respect to a Series containing a Class or
Classes of Auction Rate Notes in the related
Prospectus Supplement, for each Auction, the
holders of the Auction Rate Notes may submit
orders through a Broker-Dealer (as defined
under "Certain Definitions and
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<PAGE>
Provisions Related to Auction Rate Notes and
Auction Procedures--Auction-Related Definitions")
as to the principal amount of Auction Rate Notes
they wish to hold, purchase or sell at various
interest rates. If no order is received from
the holder of an Auction Rate Note, such holder
will be deemed to have submitted a hold order
for all Auction Rate Notes owned by such holder
at the new Auction Rate. As part of the
Auction Procedures, the Broker-Dealers also
solicit bids from non-holders interested in
acquiring Auction Rate Notes as to the
principal amount of Auction Rate Notes they
wish to purchase at various interest rates.
The Auction Rate for any Auction Date generally
will be the lowest interest rate at which all
sell orders are fulfilled, but in no event
greater than the Maximum Auction Rate. In
connection with each Auction, the Auction Rate
Notes are transferred at par plus accrued
interest.
The Auction Procedures are further summarized
and an example of an Auction is included herein
under "Certain Definitions and Provisions
Related to Auction Rate Notes and Auction
Procedures--Summary of Auction Procedures."
POOL CHARACTERISTICS A description of the outstanding portfolio of
Financed Eligible Loans and the portfolio
expected to be acquired by the Issuer with the
proceeds of the Notes of any Series and pledged
to the Trustee (with such changes as noted
therein) will be described in the Prospectus
Supplement of such Series. The Student Loan
Purchase Agreement with respect to each Seller
includes portfolio characteristic requirements
applicable to all Financed Eligible Loans
acquired thereunder at the respective dates of
acquisition. See "Seller Representations and
Warranties."
CUTOFF DATE With respect to the portfolio of Financed
Eligible Loans to be acquired with the proceeds
of the Notes of any Series, the close of
business on the date specified in the related
Prospectus Supplement and such other respective
dates of acquisition.
REDEMPTION PROVISIONS MANDATORY REDEMPTION. Except as may otherwise
be specified with respect to a Series in the
related Prospectus Supplement, the Offered
Notes that are Senior Notes, are subject to
mandatory redemption, NOT AT THE DISCRETION OF
THE ISSUER, in whole or in part, at a
redemption price equal to the principal amount
thereof to be redeemed plus accrued and
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<PAGE>
unpaid interest to the date of redemption: (i) on
the first Interest Payment Date subsequent to the
recycling period with respect to such Series,
in an amount equal to moneys representing
principal payments received with respect to the
Financed Eligible Loans acquired with respect
to such Series and other excess revenues
previously transferred to and then on deposit
in the Senior Note Redemption Account; and
(ii) on the Interest Payment Date as specified
with respect to a Series in the related
Prospectus Supplement in an amount equal to
moneys, if any, not previously used to acquire
Eligible Loans that then remain in the Loan
Account designated with respect to a Series of
the Student Loan Fund unless the Issuer provides
to the Trustee a certificate with respect to the
cash flow of the Financed Student Loans as
required by the Indenture (a "Cash Flow
Certificate") and an opinion of counsel as
described in "Description of the Notes--Mandatory
Redemption" and "--Notice and Partial Redemption
of Notes" herein. Such mandatory redemptions
will be made solely from moneys available
therefor in the Senior Note Redemption Account
of the Note Redemption Fund and a mandatory
redemption may only occur under the
circumstances described in clauses (i) and
(ii) of the preceding sentence. No Issuer
direction needs to be given with respect to a
mandatory redemption.
Except as may otherwise be specified with
respect to a Series in the related Prospectus
Supplement, the Offered Notes that are
Subordinate Notes are subject to mandatory
redemption, NOT AT THE DISCRETION OF THE
ISSUER, in whole or in part, at a redemption
price equal to the principal amount thereof to
be redeemed plus accrued and unpaid interest to
the date of redemption: (i) on the first
Interest Payment Date subsequent to the
recycling period with respect to such Series,
in an amount equal to moneys representing
principal payments received with respect to the
Financed Eligible Loans acquired with respect
to such Series and other excess revenues
previously transferred to and then on deposit
in the Subordinate Note Redemption Account; and
(ii) on the Interest Payment Date specified
with respect to a Series in the priority set
forth in "Description of the Notes--Notice and
Partial Redemption of Notes" herein and in the
related Prospectus Supplement, in an amount
equal to moneys, if any, not previously used to
acquire Eligible Loans that then remain in the
Loan Account designated with respect to a
Series of the Student Loan Fund unless the
Issuer provides to the Trustee
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a Cash Flow Certificate and an opinion of
counsel as described in "Description of the
Notes--Mandatory Redemption" herein. Such
mandatory redemptions will be made solely from
moneys available therefor in the Subordinate
Note Redemption Account of the Note Redemption
Fund and a mandatory redemption may only occur
under the circumstances described in clauses
(i) and (ii) of the preceding sentence. No
Issuer direction needs to be given with respect
to a mandatory redemption.
Except as may otherwise be specified with
respect to a Series in the related Prospectus
Supplement, the Offered Notes that are
Junior-Subordinate Notes are subject to
mandatory redemption, NOT AT THE DISCRETION OF
THE ISSUER, in whole or in part, at a
redemption price equal to the principal amount
thereof to be redeemed plus accrued and unpaid
interest to the date of redemption: (i) on the
first Interest Payment Date subsequent to the
recycling period with respect to such series,
in an amount equal to moneys representing
principal payments received with respect to the
Financed Eligible Loans acquired with respect
to such Series and other excess revenues
previously transferred to and then on deposit
in the Junior-Subordinate Note Redemption
Account; and (ii) on the Interest Payment
Date specified with respect to a Series, in an
amount equal to moneys, if any, not previously
used to acquire Eligible Loans that then remain
in the Loan Account established with respect
to a Series of the Student Loan Fund unless
the Issuer provides to the Trustee a Cash
Flow Certificate and an opinion of counsel
as described in "Description of the
Notes--Mandatory Redemption" herein. Such
mandatory redemptions will be made solely
from moneys available therefor in the
Junior-Subordinate Note Redemption Account
of the Note Redemption Fund and a mandatory
redemption may only occur under the
circumstances described in clauses (i) and
(ii) of the preceding sentence. No Issuer
direction needs to be given with respect to
a mandatory redemption.
OPTIONAL REDEMPTION. To the extent described
in the related Prospectus Supplement and AT THE
SOLE DISCRETION OF THE ISSUER, the Offered
Notes of any Series may be subject to optional
redemption from funds received by the Trustee
constituting interest on Financed Eligible
Loans remaining in the Revenue Fund after all
other required payments have been made from the
Revenue Fund, in whole or in part, on any
Interest
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<PAGE>
Payment Date occurring with respect to
any Class ON OR AFTER THE DATE SET FORTH IN
SUCH PROSPECTUS SUPPLEMENT, at a redemption
price equal to the principal amount thereof to
be redeemed, plus interest accrued, if any, to
the date of redemption. Issuer direction must
be given with respect to an optional
redemption. See "Description of the
Notes--Optional Redemption" herein.
EXTRAORDINARY OPTIONAL REDEMPTION. The Notes
of any Series shall, unless otherwise specified
in the related Prospectus Supplement, be subject
to extraordinary optional redemption, AT THE
DISCRETION OF THE ISSUER, in whole or in part,
from any unallocated and available moneys in the
Trust Estate, on any Interest Payment Date at a
redemption price equal to the principal amount
of the Notes of any Series being redeemed, plus
accrued interest, if any, to the date of
redemption, if the Issuer reasonably determines
that it is unable to acquire Financed Eligible
Loans, that the rate of return on Financed
Eligible Loans has materially decreased, or
that the costs of administering the Trust
Estate have placed unreasonable burdens upon
the ability of the Issuer to perform its
obligations under the Indenture. In
determining whether to exercise the
extraordinary optional redemption provision,
the Issuer will consider all of the facts and
circumstances existing at the time with respect
to any changes to the Higher Education Act
which would be materially adverse to the Trust
Estate such that the Noteholders of any or all
Series, in the Issuer's reasonable
determination, would suffer a loss or material
delay in the receipt of principal or interest
payments when due if the Trustee were to
continue acquiring Financed Eligible Loans from
moneys on deposit in the Recycling Account. An
extraordinary optional redemption will benefit
the Noteholders of any Series if the Higher
Education Act is amended in such a way that
would have a material adverse affect on the
Trust Estate and the Noteholders and will be a
risk to the Noteholders of any Series if the
Notes are redeemed earlier than anticipated by
the Noteholders.
OPTIONAL PURCHASE. The Issuer may purchase or
cause to be purchased, AT ITS DISCRETION, all
of the Notes ON ANY INTEREST PAYMENT DATE on
which the aggregate current principal balance
of the Notes shall be less than or equal to 10%
of the initial aggregate principal balance of
the Notes on their respective date of original
issuance under the Indenture (the "Date of
Issuance"), at a purchase price equal to the
aggregate
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current principal balance of such
Notes, plus accrued interest on the Notes
through the day preceding the Interest Payment
Date on which the purchase occurs. See
"Description of the Notes--Optional Purchase"
herein. The Optional Purchase differs from an
Optional Redemption in that an Optional
Purchase would relate to all Series and Classes
of Notes and an Optional Redemption would
relate to a Series or Classes within a Series.
PARTIAL REDEMPTION. If less than all of the
Notes of any Series are to be redeemed or
purchased pursuant to a mandatory redemption,
an optional redemption or an extraordinary
optional redemption, the Classes of Notes to be
redeemed shall be determined as directed in an
order of the Issuer (an "Issuer Order");
provided, however, that the Class B Notes may
only be redeemed prior to the Class A Notes of
any Series and, the Prior Class A Notes and the
Prior Class B Notes may only be redeemed prior
to the Class A Notes of any Series, as
described in "Description of the Notes--Notice
and Partial Redemption of Notes" herein and in
the related Prospectus Supplement.
SUBORDINATED NOTES The rights of the Registered Owners of the
Subordinate Notes, including the Class B Notes
of each Series, to receive payments with
respect to principal and interest shall be
subordinated to such rights of the Registered
Owners of the Senior Notes, including the Class
A Notes of each Series and the Prior Class A
Notes, to the extent described herein or in the
related Prospectus Supplement. In addition, the
rights of the Registered Owners of the
Junior-Subordinate Notes of any Series to
receive payments with respect to principal and
interest shall be subordinated to such rights
of the Registered Owners of the Subordinate
Notes to the extent described herein or in the
related Prospectus Supplement. This
subordination is intended to enhance the
likelihood of regular receipt by the more
senior Registered Owners of the full amount of
scheduled payments of principal and interest
due them and to protect such Registered Owners
against losses. The protection afforded to the
more senior Registered Owners from the
subordination feature will be effected by the
preferential right of such Registered Owners to
receive on any Interest Payment Date, at Stated
Maturity or upon acceleration, before any
payments to subordinate Registered Owners,
current payments of principal and interest then
due. The Indenture provides that a failure to
pay principal or
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interest to the Registered Owners of the
Subordinate Notes as due while any Senior Notes
remain Outstanding shall not constitute an
Event of Default while any Senior Notes remain
Outstanding. See "Security and Sources of Payment
for the Notes" and "Summary of Certain Provisions
of the Indenture" herein.
ADDITIONAL PARITY NOTES The Issuer may, upon complying with the
provisions of the Indenture, authenticate and
deliver from time to time Additional Notes
secured by the Trust Estate on a parity with or
subordinate to the Class A Notes of any Series
offered with respect to the related Prospectus
Supplement and the Prior Class A Notes or the
Class B Notes of any Series offered with
respect to the related Prospectus Supplement
and the Prior Class B Notes and the Class C
Notes of any Series. In addition, while the
Indenture provides that the Issuer may enter
into any swap agreements as it deems necessary
or desirable with respect to and on a parity
with any or all of the Notes, the Issuer has
not and will not enter into any such
agreements. See "Summary of Certain
Provisions of the Indenture" herein.
SALES AND REPURCHASES OF
CERTAIN ELIGIBLE LOANS Under certain circumstances, the Financed
Eligible Loans may be sold by the Issuer.
Pursuant to each Student Loan Purchase
Agreement, the respective Seller will be
obligated to repurchase any Financed Eligible
Loan if: (i) any representation or warranty
made or furnished by such Seller in or pursuant
to the Student Loan Purchase Agreement shall
prove to have been materially incorrect as to
such Financed Eligible Loan; (ii) the Secretary
of the United States Department of Education
(the "Secretary") or a Guarantee Agency, as the
case may be, refuses to honor all or part of a
claim filed with respect to a Financed Eligible
Loan on account of any circumstance or event
that occurred prior to the sale of such
Financed Eligible Loan to the Issuer; or
(iii) on account of any wrongful or negligent
act or omission of such Seller or its servicing
agent that occurred prior to the sale of a
Financed Eligible Loan to the Issuer, a valid
defense that makes the Financed Eligible Loan
unenforceable is asserted by a maker (or
endorser, if any) of the Financed Eligible Loan
with respect to his or her obligation to pay
all or any part of the Financed Eligible Loan.
xxiii
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FUNDS AND ACCOUNTS Pursuant to the Indenture, there has been
established the Student Loan Fund consisting,
with respect to each Series, of a Loan Account,
a Note Account and a Recycling Account; the
Revenue Fund; the Reserve Fund; the Interest
Fund consisting of a Senior Interest Account, a
Subordinate Interest Account and a
Junior-Subordinate Interest Account; the Note
Redemption Fund consisting of the Senior Note
Redemption Account, the Subordinate Note
Redemption Account and the Junior-Subordinate
Note Redemption Account; and the Student Loan
Holding Fund. In addition, there are certain
other funds established under the Indenture as
described herein under "Security and Sources of
Payment for the Notes."
Generally, all funds received with respect to
the Financed Student Loans first are deposited
by the Trustee into the Student Loan Holding
Fund. Upon receipt, such deposits are allocated
between principal and interest, and the
principal portion further allocated among
Series with respect to the Financed Eligible
Loans acquired in connection with such Series.
Thereafter, the interest portion is deposited
into the Revenue Fund and the principal portion
with respect to each Series deposited into the
Recycling Account of the Student Loan Fund with
respect to such Series until April 1, 1999 with
respect to the Series 1996A Notes and the
Series 1996B Notes, and, with respect to the
Offered Notes, until the date specified in the
related Prospectus Supplement with respect to
each related Series. Funds in the Recycling
Account of any Series generally will be used to
acquire additional Financed Eligible Loans for
the period specified with respect to such
Series. After such dates, the principal
portion with respect to a Series will be
deposited to the Note Redemption Fund and used
to pay principal on the Notes; provided, that
if with respect to an Interest Payment Date,
there exists an insufficiency of funds in the
Revenue Fund to make payments or transfers as
described herein under "Security and Sources of
Payments for the Notes," then such
insufficiency existing in the Revenue Fund
shall be transferred to the Revenue Fund from
the Note Redemption Fund. Funds on deposit
in the Loan Account with respect to a Series
will be used to acquire on or about the Date of
Issuance of such Series (unless otherwise
specified in the related Prospectus Supplement),
the Eligible Loans identified in the related
Prospectus Supplement, and funds on deposit in the
Recycling Account with respect to a Series will
be used after the Date of Issuance of such
Series
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<PAGE>
until the date specified in the related
Prospectus Supplement to acquire additional
Eligible Loans. Funds on deposit in the Revenue
Fund (generally representing the interest portion
of receipts with respect to the Financed
Eligible Loans) are paid or transferred daily or
monthly as indicated below under "--Revenue
Fund," which are generally for the purpose of
funding the payment of certain fees and expenses
of the Trust Estate, the payment of interest on
the Notes, shortfalls in funds required to
redeem Notes, shortfalls in principal receipts
due to Net Losses, and shortfalls in the
Reserve Fund requirement. After payment of the
foregoing, any remaining funds will be used at
the option of the Issuer to redeem Notes, add
to funds in the Recycling Account or for payment
to the Issuer.
REVENUE FUND. Generally, the funds on deposit
in the Revenue Fund shall be used (A) on any
date to pay when due the fees and expenses of
the Servicer, the Trustee, the Auction Agent,
the Broker-Dealers, the Rating Agencies and any
other expenses of the Trust Estate, and (B)
monthly to make payments or transfers in the
order of priority described under "Security and
Sources of Payment for the Notes--Revenue Fund"
(i) to the Interest Fund to pay interest due
on the Notes in the order of their priority,
(ii) to the Operating Fund to pay expenses of
the Issuer incurred in connection with the
Trust Estate ("Maintenance and Operating
Expenses"), (iii) to pay amounts necessary to
redeem any Notes to the extent deficiencies
therefor exist in the Note Redemption Account,
(iv) to transfer the amount of any losses on
the Financed Eligible Loans to the Recycling
Account or Note Redemption Fund, as
appropriate, (v) to transfer to the Reserve
Fund an amount to maintain the Reserve Fund
requirement, (vi) to transfer amounts as
determined by the Issuer for deposit to the
Note Redemption Fund, and (vii) except in the
case of an Event of Default, remaining amounts,
if any, for transfer to the General Fund for
use by the Issuer as described herein for
"Security and Source of Payments for the
Notes."
STUDENT LOAN FUND. An amount will be deposited
into the Loan Account of the Student Loan Fund
designated with respect to a Series on the Date
of Issuance of such Series as specified in
the related Prospectus Supplement. Funds on
deposit in each Loan Account shall be used to
acquire the Eligible Loans identified with
respect to such Series in the
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<PAGE>
related Prospectus Supplement on or about the Date
of Issuance of such Series unless otherwise
specified in the related Prospectus Supplement. In
addition, subsequent to the Date of Issuance of any
Series and except upon the occurrence of
an Event of Default or as otherwise specified
with respect to such Series in the related
Prospectus Supplement, there shall be deposited
into the Recycling Account of the Student Loan
Fund designated with respect to such Series
principal payments received with respect to the
Financed Eligible Loans acquired with respect
to such Series until the date specified with
respect to a Series in the related Prospectus
Supplement. Funds on deposit in each Recycling
Account shall be used prior to the date
specified with respect to a Series in the
related Prospectus Supplement solely to acquire
additional Eligible Loans on an ongoing basis.
If, on any of January 1 and July 1 of a year
(each, a "Transfer Date"), moneys have remained
in the Recycling Account designated with
respect to a Series for more than one year,
said moneys shall be transferred on such date
to the Note Redemption Fund for use as
specified therein unless (a) the market value
of the Trust Estate determined under the
Indenture (the "Aggregate Market Value") is
greater than the aggregate principal amount of
Notes Outstanding, or (b) the Aggregate Market
Value of the Trust Estate is less than the
aggregate principal amount of the Notes
Outstanding and the Issuer delivers a Cash Flow
Certificate and an opinion of counsel, in which
case said moneys shall remain in such Recycling
Account for a period of up to one additional
year. The Note Account is the account in which
the Financed Eligible Loans themselves are held.
Under certain circumstances, if moneys in the
Revenue Fund are insufficient to make certain
payments or distributions therefrom, the
remaining insufficiency may be funded from
transfers from the Student Loan Fund but only
after application first of amounts available to
be transferred therefor from the Note
Redemption Fund, the Student Loan Holding Fund
and the Reserve Fund. Except as may otherwise
be specified with respect to a Series in the
related Prospectus Supplement, on the date
specified with respect to a Series in the
related Prospectus Supplement, all moneys
remaining in the Loan Account designated with
respect to a Series of the Student Loan Fund
shall be transferred to the Note Redemption
Fund.
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<PAGE>
INTEREST FUND AND NOTE REDEMPTION FUND.
Amounts deposited into the Interest Fund and
Note Redemption Fund will be applied to pay
interest due and payable on the Notes and to
redeem or make principal payments on the Notes,
respectively, as further described under
"Security and Sources of Payment for the Notes"
herein.
OPERATING FUND AND COST OF ISSUANCE FUND.
Amounts will be deposited into the Operating
Fund and the Cost of Issuance Fund on the Date
of Issuance with respect to any Series as
specified in the related Prospectus Supplement.
Such amounts will be applied to pay certain
administrative costs of the Issuer and to pay
the issuance costs with respect to each Series,
respectively, as further described under
"Security and Sources of Payment for the Notes"
herein.
RESERVE FUND. An amount will be deposited into
the Reserve Fund on the Date of Issuance with
respect to any Series as specified in the
related Prospectus Supplement. At any time
thereafter, the amount required to be deposited
in the Reserve Fund (the "Reserve Fund
Requirement") with respect to the Notes shall
be, unless otherwise specified with respect to
a Series in the related Prospectus Supplement,
the greater of an amount equal to 2% of the
aggregate principal amount of the Notes then
outstanding or $750,000.
Moneys in the Reserve Fund shall be used (a) on
any Interest Payment Date for the payment of
any interest insufficiency, first, with respect
to the Senior Notes, and second, with respect
to the Subordinate Notes, and (b) at Stated
Maturity to pay principal, if funds in the Note
Redemption Fund are insufficient, first, with
respect to the Senior Notes, and second, with
respect to the Subordinate Notes. See
"Security and Sources of Payment for the Notes"
herein.
CREDIT ENHANCEMENT To the extent specified in the related
Prospectus Supplement, credit enhancement, in
the form of insurance policies or bonds,
subordination of certain Classes or subclasses,
one or more reserve funds, letters of credit,
guarantees or other arrangements acceptable to
each Rating Agency rating the Offered Notes may
be used to provide for coverage of certain
risks of defaults or losses. Such other credit
enhancement, if any, will be described in the
related Prospectus Supplement. See
"Description of the Credit Enhancement" herein.
xxvii
<PAGE>
REGISTRATION OF NOTES The Notes of each Class of any Series initially
will, unless specified in the related
Prospectus Supplement, be represented by a
single certificate registered in the name of
Cede & Co. ("Cede"), as a nominee of The
Deposit Trust Corporation ("DTC"). No person
acquiring an interest in such Notes will be
entitled to a definitive certificate
representing such person's interest, except in
the event that definitive securities are issued
under the limited circumstances described herein.
See "Book Entry Registration" herein.
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES The Notes of each Class of any Series will,
unless specified in the related Prospectus
Supplement, be treated as debt of the Issuer
rather than as an interest in the Financed
Eligible Loans, for federal income tax
purposes. As such, the owners of such Notes
will be required to include in income interest
on such Notes as paid or accrued, in accordance
with their respective accounting methods and
the provisions of the Code, including, if
applicable, provisions regulating original
issue discount. See "Certain Federal Income
Tax Consequences" herein.
ERISA CONSIDERATIONS Assuming that the Notes of any Class should be
treated as indebtedness without substantial
equity features under the plan asset
regulations issued by the Department of Labor
(as set forth in 29 CFR Section 2510.3-101),
such Notes are eligible for purchase by or on
behalf of employee benefit plans, retirement
arrangements, individual retirement accounts
and Keogh Plans, subject to certain
considerations discussed under "ERISA
Considerations" herein or as otherwise
described in the related Prospectus Supplement.
RATINGS It is a condition to the issuance of the
Offered Notes that each Class being publicly
offered be rated no less than investment grade
by at least one nationally recognized
statistical rating organization at the time of
issuance. Any such rating agency or agencies
are referred to herein as a "Rating Agency" or
collectively, as the "Rating Agencies." See
"Rating" herein.
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<PAGE>
RISK FACTORS
In connection with the Notes offered hereby, prospective investors should
consider, among other things, the following factors regarding the purchase of
the Notes.
NATURE OF THE NOTES
The Issuer is a special purpose corporation and the Notes represent
obligations solely of the Issuer. The Notes are not insured or guaranteed by
any government agency or instrumentality, by any affiliate of the Issuer, by
any insurance company or by any other person or entity. The Issuer will have
no significant assets other than its interest in the Financed Eligible Loans
and the other property granted to the Trustee for the benefit of the
Registered Owners. Payments on the Notes will depend solely on the amount
and timing of payments and collections in respect of the Financed Eligible
Loans, interest paid or earnings on the various accounts established pursuant
to the Indenture, the payment priority of Notes previously issued and any
Additional Notes to be issued in the future, and amounts on deposit in the
Reserve Fund and other Funds and Accounts and any other form of credit
enhancement described in the related Prospectus Supplement. There will be no
additional recourse to the Issuer or any other Person if such proceeds are
insufficient. As a result, except as may be specified with respect to a
Series in the related Prospectus Supplement, Registered Owners must depend on
the cash flow with respect to the Financed Eligible Loans and funds on
deposit in the Reserve Fund and other Funds and Accounts for payment of
principal of and interest on the Notes.
Generally, after each required payment of Trustee fees and expenses,
servicing fees and expenses and interest on the Notes, and other required
fees, expenses, taxes and indemnities, including any required deposits to the
Reserve Fund have been made in full, any balance remaining from payments with
respect to the Financed Eligible Loans generally will be: (i) prior to the
date specified in the related Prospectus Supplement, applied to acquire
Financed Eligible Loans, (ii) on and after such date specified in the related
Prospectus Supplement, applied to the amortization of the Notes, until the
aggregate outstanding principal amount of Financed Eligible Loans exceeds the
aggregate Outstanding principal balance of the Notes; and (iii) thereafter,
remitted to the Issuer. If the payments with respect to the Financed
Eligible Loans and amounts on deposit in the Reserve Fund and other Funds and
Accounts (including any applicable credit enhancement) are insufficient to
make payments on the Subordinate Notes, other assets of the Issuer will not
be available for payment of any such deficiency.
SUBORDINATION; LIMITED ASSETS
Payments of interest and principal on the Subordinate Notes are subordinated
in priority of payment to payments of interest and principal due on the Senior
Notes and payments of interest and principal on the Junior-Subordinate Notes are
subordinated in priority of payments of interest and principal due on the
Subordinate Notes. Under certain redemption situations, as set forth herein and
as may be set forth in the related Prospectus Supplement with respect to any
Series, principal on certain Classes of the Subordinate Notes may be redeemed
while the Senior Notes and certain Prior Notes remain Outstanding and the
principal on the Subordinate Notes
<PAGE>
may be redeemed while the Senior Notes and certain of the Subordinate Notes
remain Outstanding. See "Description of the Notes--Notice and Partial
Redemption of Notes." The Subordinate Notes are also subordinated to the
Senior Notes and the Junior-Subordinate Notes are also subordinate to the
Subordinate Notes as to the direction of remedies upon an Event of Default.
The Trust Estate will not have, nor is it permitted or expected to have, any
significant assets or sources of funds other than from payments with respect
to the Financed Eligible Loans, the Reserve Fund and other Funds and Accounts.
FAILURE TO COMPLY WITH LOAN ORIGINATION
AND SERVICING PROCEDURES FOR ELIGIBLE LOANS
The Higher Education Act of 1965, as amended (the "Higher Education Act"),
including the respective implementing regulations thereunder, require lenders
and their assignees making and servicing Eligible Loans and guarantors
guaranteeing Eligible Loans to follow specified procedures, including due
diligence procedures, to ensure that the Eligible 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 "Issuer's Student Loan Purchase
Program" and "Description of the Federal Family Education Loan Program" herein.
Generally, those 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 SERVICER HAS AGREED PURSUANT TO THE SERVICING AGREEMENT TO PERFORM (OR
PROVIDE FOR THIRD PARTY SERVICER TO PERFORM) SERVICING AND COLLECTION PROCEDURES
ON BEHALF OF THE ISSUER. HOWEVER, FAILURE TO FOLLOW THESE PROCEDURES OR FAILURE
OF ANY SELLER OR ANY OTHER ORIGINATOR OF THE FINANCED ELIGIBLE LOANS TO FOLLOW
PROCEDURES RELATING TO THE ORIGINATION OF ANY ELIGIBLE LOANS MAY RESULT IN THE
DEPARTMENT'S REFUSAL TO MAKE REINSURANCE PAYMENTS TO THE GUARANTEE AGENCIES OR
TO MAKE SPECIAL ALLOWANCE PAYMENTS TO THE TRUSTEE WITH RESPECT TO SUCH ELIGIBLE
LOANS OR IN THE GUARANTEE AGENCIES' REFUSAL TO HONOR THEIR GUARANTEE AGREEMENTS
WITH THE TRUSTEE WITH RESPECT TO SUCH ELIGIBLE LOANS. FAILURE OF THE GUARANTEE
AGENCIES TO RECEIVE REINSURANCE PAYMENTS FROM THE DEPARTMENT COULD ADVERSELY
AFFECT THE GUARANTEE AGENCIES' ABILITY OR LEGAL OBLIGATION TO MAKE PAYMENTS
UNDER THE GUARANTEE AGREEMENTS ("GUARANTEE PAYMENTS") TO THE TRUSTEE. LOSS OF
ANY SUCH GUARANTEE PAYMENTS, SPECIAL ALLOWANCE PAYMENTS OR FEDERAL INTEREST
SUBSIDY PAYMENTS WITH RESPECT TO ELIGIBLE LOANS, COULD ADVERSELY AFFECT THE
AMOUNT OF REVENUES AND THE ISSUER'S ABILITY TO PAY PRINCIPAL AND INTEREST ON THE
NOTES. SEE "DESCRIPTION OF THE FEDERAL FAMILY EDUCATION LOAN PROGRAM" HEREIN.
2
<PAGE>
RELIANCE UPON SELLERS
The Issuer expects to acquire additional Financed Eligible Loans from the
Sellers from time to time, all pursuant to the Student Loan Purchase
Agreement under which each Seller has agreed to sell to the Issuer Eligible
Loans which comply with certain representations and warranties with respect
to each Financed Eligible Loan and certain overall portfolio characteristics
in connection with such acquisitions. No assurance can be given that the
Issuer would be able to acquire Eligible Loans in an equivalent amount, with
similar characteristics or at comparable prices from sources other than the
Sellers in the event that the Sellers were unable to sell additional Eligible
Loans to the Issuer or in the event that any Seller was required to
repurchase Financed Eligible Loans. See "Risk Factors--Certain Legal
Aspects," "--Failure to Comply with Loan Origination and Servicing Procedures
for Eligible Loans" and "Seller Representations and Warranties" herein.
PERFECTION OF SECURITY
INTEREST IN FINANCED ELIGIBLE LOANS
As required by the Uniform Commercial Code, the perfection of the security
interest in the Financed Eligible Loans granted by the Issuer to the Trustee is
to be accomplished by possession of the promissory notes evidencing the Financed
Eligible Loans by the Trustee and by the filing of financing statements. Under
the Uniform Commercial Code, possession may be either by the secured party or by
an agent on the secured party's behalf. With respect to the Indenture,
possession by the Trustee, as secured party, is to be accomplished by delivery
of such promissory notes to UNIPAC, acting as custodial agent for the Trustee.
UNIPAC is an affiliate of Union Bank. In the event UNIPAC acted contrary to its
obligations under the Custodian Agreement, by reason of such affiliate
relationship or otherwise, and relinquished possession of the promissory notes
to any party other than the Trustee or the Trustee's agent, the security
interest of the Trustee in the Financed Eligible Loans released may become
unperfected. In addition, while the Issuer has received an opinion of counsel,
subject to the assumptions and limitations set forth therein, that the Trustee
has a first priority perfected security interest in the Financed Eligible Loans,
because of the affiliation between UNIPAC and Union Bank, the perfection of the
Trustee's security interest in the Financed Eligible Loans by UNIPAC taking
possession is not entirely free from doubt and such perfection may be challenged
by a receiver or other creditor of Union Bank in the event of Union Bank's
insolvency or otherwise. See "Certain Relationships Among Financing
Participants" herein.
CERTAIN INSOLVENCY CONCERNS
The Issuer has taken steps in structuring the transactions contemplated
hereby that are intended to ensure that the voluntary or involuntary
application for relief by a Seller or Union Financial Services, Inc. (the
"Sponsor") under the United States Bankruptcy Code or other insolvency laws,
as the case may be ("Insolvency Laws") will not result in consolidation of
the assets and liabilities of the Issuer with those of any Seller or the
Sponsor. These steps include the creation of the Issuer as a separate,
limited-purpose subsidiary of the Sponsor pursuant to a certificate of
incorporation containing certain limitations (including restrictions on the
nature
3
<PAGE>
of the Issuer's business and a restriction on the Issuer's ability to
commence a voluntary case or proceeding under any Insolvency Law without the
prior unanimous affirmative vote of all of its directors, including at least
one director who must be Independent of the Issuer and its affiliates).
However, there can be no assurance that the activities of the Issuer would
not result in a court concluding that the asset and liabilities of the Issuer
should be consolidated with those of any Seller or the Sponsor in a
proceeding under any Insolvency Law. If a court were to reach such a
conclusion or a filing were made under any Insolvency Law by or against the
Issuer, or if an attempt were made to litigate any of the foregoing issues,
then delays in distributions on the Notes could occur or reductions in the
amounts of such distributions could result. See "The Issuer."
It is intended by the Issuer that the transfer of the Financed Eligible
Loans by any Seller to the Issuer constitute a true sale of the Student Loans to
the Issuer. If the transfer constitutes such a true sale, the Financed Eligible
Loans and the proceeds thereof would not be the property of the respective
Seller should it become the subject of any Insolvency Law subsequent to the
transfer of the Financed Eligible Loans to the Issuer.
Each Seller will warrant to the Issuer in the related Student Loan Purchase
Agreement that the sale of the Financed Eligible Loans by such Seller to the
Issuer is a valid sale of the Financed Eligible Loans by such Seller to the
Issuer. Notwithstanding the foregoing, if a Seller were to become subject to an
Insolvency Law and a creditor or trustee-in-bankruptcy of such Seller itself
were to take the position that the sale of Financed Eligible Loans by such
Seller to the Issuer should instead be treated as a pledge of such Financed
Eligible Loans to secure a borrowing of such Seller, delays in payments of
collections of Financed Eligible Loans to the related Noteholders could occur or
(should the court rule in favor of such Seller or such trustee or creditor),
reductions or delays in the amounts of such payments could result. If the
transfer of Financed Eligible Loans by a Seller to the Issuer is treated as a
pledge instead of a sale, a tax or government lien on the property of such
Seller arising before the transfer of such Financed Eligible Loans to the Issuer
may have priority over the Trust Estate's interest in such Financed Eligible
Loans.
If an Insolvency Event occurs with respect to the Issuer, the Financed
Eligible Loans will be liquidated after the date of such Insolvency Event or as
otherwise specified in the related Prospectus Supplement. The proceeds from any
such sale, disposition or liquidation of Financed Eligible Loans will be treated
as collections on the Financed Eligible Loans and deposited in the Student Loan
Holding Fund. If the proceeds from the liquidation of the Financed Eligible
Loans and any amounts on deposit in the Reserve Fund (if any) and any amounts
available from any credit enhancement, if any, are not sufficient to pay the
Notes of the related Series in full, the distributions of principal to such
Noteholders will be reduced and Noteholders will incur a loss. See "Summary of
Certain Provisions of the Indenture--Events of Default."
4
<PAGE>
CHANGING ASSETS OF THE TRUST ESTATE
During the period beginning on the Date of Issuance and ending no later
than the date set forth with respect to a Series in the related Prospectus
Supplement, the Issuer intends to purchase Financed Eligible Loans from the
Sellers. Each Financed Eligible Loan must meet certain characteristics and each
portfolio of Financed Eligible Loans added to the Financed Eligible Loans
portfolio in accordance with the terms of the Student Loan Purchase Agreement
and the Indenture must, as of the applicable Cutoff Date, together with each
portfolio previously added to the Financed Eligible Loans portfolio, as of their
respective Cutoff Dates, meet certain pool characteristics set forth in the
Student Loan Purchase Agreement. However, the actual characteristics of the
Financed Eligible Loans portfolio will change from time to time due to factors
such as adjustments made in the normal course of business, changes in the
classifications of Eligible Loans, sale or purchase of Eligible Loans by the
Issuer, scheduled amortization, prepayment or the occurrence of delinquencies or
defaults.
VARIABILITY OF REVENUES
Amounts received with respect to the Financed Eligible Loans for a
particular period may vary in both timing and amount from the payments actually
due on the Financed Eligible Loans 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 Eligible Loans. Failures by borrowers
to pay timely the principal and interest on the Financed Eligible Loans will
affect the amount of Revenues, which may reduce the amount of principal and
interest available to be paid to the Registered Owners. In addition, failures
by borrowers of student loans generally to pay timely the principal and interest
due on such student loans could obligate the Guarantee Agencies to make payments
thereon, which could adversely affect the solvency of the Guarantee Agencies and
their ability to meet their guarantee obligations (including with respect to the
Financed Eligible Loans). The inability of any Guarantee Agency to meet its
guarantee obligations could reduce the amount of principal and interest paid to
the Registered Owners. The effect of such factors, including the effect on a
Guarantee Agency's ability to meet its guarantee obligations with respect to the
Financed Eligible Loans or the Issuer's ability to pay principal and interest
with respect to the Notes, is not possible to predict. Pursuant to the 1992
amendments under Section 432(o) of the Act, if the Department has determined
that a Guarantee Agency of an Eligible 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 a Guarantee Agency of Eligible 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 Guarantee Agency 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.
5
<PAGE>
If an Event of Default occurs under the Indenture, subject to certain
conditions, the Trustee is authorized, without the consent of the Registered
Owners, to sell the Financed Eligible Loans. There can be no assurance,
however, that the Trustee will be able to find a purchaser for the Financed
Eligible Loans in a timely manner or that the market value of such Financed
Eligible Loans would, at any time, be equal to the aggregate outstanding
principal amount of the Notes then Outstanding and accrued interest thereon. If
the net proceeds of any such sale, together with amounts then on deposit in the
Reserve Fund and other Funds and Accounts, do not exceed the aggregate
outstanding principal amount of Notes then Outstanding and accrued interest
thereon, Registered Owners of any Class of Notes not paid in full will likely be
unable to recover the full amount of their investment. In addition, the amount
of principal required to be paid to Registered Owners under the Indenture is
generally limited to amounts available to be so paid. Therefore, the failure to
pay principal on any Class or Series of Notes may not result in the occurrence
of an Event of Default until the Stated Maturity date of such Class or Series of
Notes.
PREPAYMENT CONSIDERATIONS
Principal prepayments with respect to the Notes may be influenced by a
variety of economic, geographic, social and other factors. The Financed
Eligible Loans may be prepaid at any time without penalty. The Issuer believes
that in a fluctuating interest rate environment a factor affecting the
prepayment rate on a large pool of loans similar to the Financed Eligible Loans
is the difference between the interest rates on the loans (giving consideration
to the cost of any refinancing) and prevailing interest rates generally. In
general, if interest rates fall below the interest rates on the Financed
Eligible Loans, the rate of prepayment would be expected to increase.
Conversely, if interest rates rise above the interest rates on the Financed
Eligible Loans, the rate of prepayment would be expected to decrease. The
Issuer does not have available sufficient prepayment information on Financed
Eligible Loans similar to those to be included in the Trust Estate to estimate
the rate of prepayment with respect to the Financed Eligible Loans in the
Financed Eligible Loans portfolio. Other factors affecting prepayment of loans
include changes in the borrower's job, transfers, unemployment and servicing
decisions, and refinancing opportunities which may provide more favorable
repayment terms such as those offered under various consolidation loan programs,
including the federal direct consolidation loan programs. In addition, the rate
of the payments of principal on the Notes will be directly related to the actual
amortization schedule of the Financed Eligible Loans. See "Risk
Factors--Changes in Legislation" herein.
The rate of principal payments on the Notes, the amount of principal and
interest payments on the Notes and the yield to maturity of the Notes will be
directly related to the rate of payments of principal on the Financed Eligible
Loans. The timing of changes in the rate of prepayments may significantly
affect an investor's actual yield to maturity, even if the average rate of
principal prepayments is consistent with an investor's expectations. In
general, the earlier a prepayment of principal of a Financed Eligible Loan, the
greater the effect on an investor's yield to maturity. The effect on an
investor's yield as a result of principal payments occurring at a rate higher
(or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Offered Notes will not be offset by a
subsequent like
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reduction (or increase) in the rate of principal payments. See "Weighted
Average Life of the Notes" herein.
PRINCIPAL BALANCE OF NOTES MAY EXCEED AGGREGATE PRINCIPAL BALANCE OF FINANCED
ELIGIBLE LOANS
As may be specified with respect to a Series in the related Prospectus
Supplement, on the Date of Issuance of such Series, the aggregate initial
principal amount of the Notes together with all other Notes outstanding may
be greater than the sum of the aggregate principal balance of the Financed
Eligible Loans and other assets on deposit in the Funds and Accounts in the
Trust Estate as of the Cutoff Date with respect thereto. Each Financed
Eligible Loan with respect to such Series may be purchased by the Issuer for
an amount greater than the principal balance thereof (including any accrued
interest thereon expected to be capitalized upon repayment) as of such Cutoff
Date. In addition, under the existing Loan Purchase Agreements with Union
Bank each Eligible Loan acquired during the recycling period with respect
thereto will be purchased by the Issuer for an amount greater than the
principal balance thereof (including any accrued interest thereon expected to
be capitalized upon repayment) as of the related Cutoff Date. As a result, if
an Event of Default should occur under the Indenture and the Financed
Eligible Loans were liquidated at a time when the outstanding principal
amount of such Notes exceeded the aggregate principal balance of the Financed
Eligible Loans and other assets on deposit in the Funds and Accounts in the
Trust Estate, unless such Financed Eligible Loans are liquidated at a
premium, Noteholders may suffer a loss as a result thereof. However, in the
absence of any such default, any excess Note principal balance is expected to
be reduced from interest payments received on the Financed Eligible Loans.
UNSECURED NATURE OF FINANCED ELIGIBLE LOANS;
FINANCIAL STATUS OF GUARANTEE AGENCIES
The Higher Education Act requires all Financed Eligible Loans to be
unsecured. As a result, the only security for payment of the Financed
Eligible Loans are the Guarantee Agreements between the Trustee and each
Guarantee Agency. A deterioration in the financial status of the Guarantee
Agencies and their ability to honor guarantee claims with respect to the
Financed Eligible Loans could result in a delay in making or a failure to
make Guarantee Payments to the Trustee. One of the primary causes of a
possible deterioration in a Guarantee Agency's financial status is directly
related to the amount and percentage of defaulting Financed Eligible Loans
guaranteed by a Guarantee Agency. Moreover, with respect to Eligible Loans,
to the extent that the Department pays reimbursement claims submitted by a
Guarantee Agency for any fiscal year exceeding certain specified levels, the
Department's obligation to reimburse the Guarantee Agency for losses will be
reduced on a sliding scale from a maximum of 98% to a minimum of 78% of
Guarantee Agency payments. Under Section 432(o) of the Act, if the
Department has determined that a Guarantee Agency is unable to meet its
guarantee obligations, the loan holder may submit claims directly to the
Department and the Department is required to pay the full guaranty claim
amount due with respect thereto in accordance with guaranty claim
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processing standards no more stringent than those of the Guarantee Agency.
See "Description of the Federal Family Education Loan Program" herein.
CHANGES IN LEGISLATION
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 matter that will
adversely impact the programs described herein and the loans made thereunder,
including the Financed Eligible Loans, or the Guarantee Agencies. 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 effect expenditures by the Department, the Secretary or the
financial condition of the Guarantee Agencies.
Under the Omnibus Budget Conciliation Act of 1993, Congress made a number
of changes that may adversely affect the financial condition of the Guarantee
Agencies, 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 Guarantee Agencies are entitled to receive and/or retain and giving the
Department broad powers over Guarantee Agencies and their reserves. These
powers include the authority to require a Guarantee Agency to return all
reserve funds to the Department if the Department determines such action is
necessary to ensure an orderly termination of such Guarantee Agency, to serve
the best interests of the federal programs or to ensure the proper
maintenance of such Guarantee Agency's funds or assets. The Department is
also now authorized to direct a Guarantee Agency to return a portion of its
reserve funds which the Department determines is unnecessary to pay the
program expenses and contingent liabilities of such Guarantee Agency and/or
to cease any activities involving the use of such Guarantee Agency'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 Guarantee Agency 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 Guarantee
Agency as described herein in "Description of the Federal Family Education
Loan Program" herein. These various changes create a significant risk that
the resources available to the Guarantee Agencies 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
FEDERAL PROGRAM. AS THE FEDERAL DIRECT STUDENT LOAN PROGRAM EXPANDS, THE
SERVICER MAY EXPERIENCE INCREASED COSTS DUE TO REDUCED ECONOMIES OF SCALE TO
THE EXTENT THE VOLUME OF NEW LOANS SERVICED BY THE SERVICER IS REDUCED. SUCH
COST INCREASES COULD AFFECT THE ABILITY OF THE SERVICER TO SATISFY ITS
OBLIGATIONS TO SERVICE THE FINANCED ELIGIBLE LOANS OR TO PURCHASE FINANCED
ELIGIBLE LOANS IN THE EVENT OF
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CERTAIN BREACHES OF COVENANTS. SEE "RISK FACTORS--RELIANCE UPON SELLERS" AND
"--THE FINANCED ELIGIBLE LOANS AND THE STUDENT LOAN FUND" HEREIN. Such
volume reductions could further reduce revenues received by the Guarantee
Agencies available to pay claims on defaulted Eligible Loans. Finally, the
level of competition currently in existence in the secondary market for loans
made under the federal programs could be reduced, resulting in fewer
potential buyers of the Eligible Loans and lower prices available in the
secondary market for those loans. Further, the Department is implementing a
direct consolidation loan program, which program may further reduce the
volume of loans made under the federal programs. See "Description of the
Federal Family Education Loan Program" herein.
THE FINANCED ELIGIBLE LOANS
AND THE STUDENT LOAN FUND
The Issuer has previously acquired or will acquire Financed Eligible
Loans with the funds on deposit in the Student Loan Fund. Any conveyance of
additional Eligible Loans is subject to the following conditions, among
others: (a) each such additional Eligible Loan must satisfy the eligibility
criteria specified in the applicable Student Loan Purchase Agreement, and (b)
with respect to Financed Eligible Loans acquired on the Scheduled Sale Date
and other dates of acquisition, the additional Financed Eligible Loans, as of
the applicable Cutoff Date, together with the Financed Eligible Loans
previously added to the portfolio, as of the respective Cutoff Date, must
meet certain pool characteristics set forth in the Student Loan Purchase
Agreement. See "Seller Representations and Warranties--Representations and
Warranties--Portfolio Characteristics" and "--Representations and
Warranties--Eligible Loans" herein.
Unless otherwise specified with respect to a Series in the related
Prospectus Supplement, to the extent that amounts on deposit in the Loan
Account designated with respect to a Series of the Student Loan Fund have not
been fully applied to the acquisition of additional Eligible Loans by the
date specified in the related Prospectus Supplement, the Registered Owners of
such Notes will receive as a prepayment of principal, in the priorities
described herein or in the related Prospectus Supplement, an amount equal to
the amount remaining in the Loan Account designated with respect to a Series
of the Student Loan Fund on the respective Interest Payment Dates on or next
succeeding the date specified in the related Prospectus Supplement, with
respect to the Senior Notes of such Series, and the date specified in the
related Prospectus Supplement with respect to the Subordinate Notes and the
Junior-Subordinate Notes of such Series, after all such Senior Notes have
been redeemed. The Issuer expects that the amount of the additional Eligible
Loans to be acquired with respect to any Series will approximate 100% of the
amount deposited in the Loan Account designated with respect to a Series of
the Student Loan Fund in the related Prospectus Supplement.
ISSUANCE OF ADDITIONAL NOTES
The Issuer may, pursuant to the provisions of the Indenture, authenticate
and deliver from time to time Additional Notes secured by the Trust Estate on
a parity with or subordinate to any of the Senior Notes and senior to, on a
parity with or subordinate to the Subordinate Notes, as determined by the
Issuer; provided, however, that any such Additional Notes shall be issued
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pursuant to a Supplemental Indenture, without the consent or approval of the
Registered Owners of any Notes then Outstanding, but with, among other
things, written evidence from each Rating Agency then rating any Outstanding
Notes that such rating or ratings will not be reduced or withdrawn as a
result of the issuance of the proposed Additional Notes. See "Additional
Notes" herein.
MATURITY AND PREPAYMENT ASSUMPTIONS
Financed Eligible Loans may be prepaid by the borrowers at any time.
(For this purpose the term "prepayments" includes prepayments in full or in
part (including pursuant to Consolidation Loans) and liquidations due to
default (including receipt of Guarantee payments).) In addition, under
certain circumstances, a Seller will be obligated to repurchase, or the
Servicer will be obligated to purchase, Financed Eligible Loans from the
Trust Estate pursuant to the respective Student Loan Purchase Agreement as a
result of breaches of their respective representations, warranties or
covenants. Moreover, to the extent borrowers of Financed Eligible Loans
elect to borrow money through Consolidation Loans with respect to such
Financed Eligible Loans from a Seller or from another lender, Registered
Owners of the Notes will collectively receive as a prepayment of principal
the aggregate principal amount of such Financed Eligible Loans. There can be
no assurance that borrowers with respect to the Financed Eligible Loans will
not seek to obtain Consolidation Loans with respect to such Financed Eligible
Loans. See "Risk Factors--Changes in Legislation" herein.
Scheduled payments with respect to, and maturities of, the Financed
Eligible Loans may be extended, including pursuant to the applicable Deferral
Phase and certain other grace periods authorized by the Higher Education Act
("Grace Periods") and, under certain circumstances, periods of forbearance
("Forbearance Periods") or as a result of refinancings through Consolidation
Loans having longer maturities, which may lengthen the remaining term of the
Financed Eligible Loans and the average life of each Class of Notes. Any
reinvestment risks resulting from a faster or slower incidence of prepayment
of Financed Eligible Loans will be borne entirely by the Registered Owners.
BASIS RISK
The interest rate with respect to the Notes of various Classes may
fluctuate from one interest period to another in response to changes in LIBOR
or Treasury security rates (the "Index Rates") described in a Prospectus
Supplement. The Issuer can make no representation as to what the Index Rates
may be in the future. In addition, the Financed Eligible Loans bear interest
at the rates (the "Loan Rates") described herein under "Description of the
Federal Family Education Loan Program." To the extent that the Loan Rates
decrease or do not increase as fast as the Index Rates, the interest rates
with respect to certain Senior Notes, Subordinate Notes or Junior-Subordinate
Notes may be limited to the weighted average rate received on the Financed
Eligible Loans or may be deferred to future periods. Further, if there is a
decline in the Loan Rates, the amount of funds representing interest
deposited into the Trust Estate may be reduced and, even if there is a
similar reduction in the variable Index Rates applicable to any Series, there
may not necessarily be a similar reduction in the other amounts required to
be funded out
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of such funds (such as certain administrative expenses),
causing such amounts to be deferred to future periods. There can be no
assurances given that sufficient funds will be available in future periods to
make up for any shortfalls in the current payments of Index Rates or expenses
of the Trust Estate.
CERTAIN LEGAL ASPECTS
Each Seller will intend that the transfers of Financed Eligible Loans by
it to the Issuer under the respective Student Loan Purchase Agreement
constitute valid sales and assignments of such Financed Eligible Loans. In
the event of insolvency of such Seller, however, its affairs, if a bank,
might become subject to Federal Deposit Insurance Corporation ("FDIC")
receivership. In such case, the FDIC, as a receiver, or a court could treat
the transfer of the Financed Eligible Loans to the Issuer as an assignment of
collateral as security for the benefit of the Issuer as a creditor of such
Seller. If the transfer of the Financed Eligible Loans to the Issuer is
deemed to create a security interest therein, a tax or government lien on
property of such Seller arising before the Financed Eligible Loans were
transferred may have priority over the Issuer's interest in such Financed
Eligible Loans. If such Seller becomes subject to receivership, to the
extent that the transfer of the Financed Eligible Loans is deemed to create a
security interest, and that such interest was validly perfected before such
Seller's insolvency and was not taken in contemplation of insolvency or with
the intent to hinder, delay or defraud such Seller or its creditors, such
security interest should not be subject to avoidance and payments to the
Issuer or its assignees with respect to the Financed Eligible Loans should
not be subject to recovery by such Seller's creditors. The Issuer has
received an opinion of counsel, subject to the assumptions and limitations
set forth therein, that the provisions of the Indenture and the Custodial
Agreement and the actions required thereunder in connection with the
acquisition of Financed Eligible Loans are sufficient to create both a
perfected security interest in favor of the Trustee against any such Seller
in the Financed Eligible Loans, if the transfer of Financed Eligible Loans by
such Seller to the Issuer is considered as an assignment of collateral as
security for an obligation, which interest is prior to that of any creditor
of such Seller, as well as a perfected security interest in favor of the
Trustee against the Issuer in the Financed Eligible Loans, which interest is
prior to that of any other creditor of the Issuer. No assurance can be
given, however, that delays in receipt of funds with respect to the Financed
Eligible Loans will not occur in such circumstances. Moreover, no assurance
can be given that the FDIC would not seek to effect the release of the
Financed Eligible Loans to it, as receiver, by accelerating such Seller's
"debt" and repaying the outstanding amount thereof. See "Risk
Factors--Reliance Upon Seller" and "--Perfection of Security Interest in
Financed Eligible Loans" herein.
With respect to a Seller that is not a bank or an insurance company, the
Issuer will structure the sale of the Financed Eligible Loans of such Seller
to the Issuer as a "true sale" for purposes of any voluntary or involuntary
petition for relief under the United States Bankruptcy Code or any similar
applicable federal or state law of such Seller (an "Insolvency Proceeding"),
such that upon the occurrence of any such Insolvency Proceeding, such
Financed Eligible Loans would not be consolidated into the bankruptcy estate
of such Seller. No assurance can be given, however, that such a
consolidation would not occur. A court might, however, treat the sale as an
assignment of collateral with respect to the Financed Eligible Loans as
security for the benefit
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of the Noteholders. If such sale is deemed to create a security interest in
the Financed Eligible Loans, a tax or governmental lien on property of such
Seller arising before the Financed Eligible Loans came into existence may
have priority over the Trustee's interest in such loans. If the Seller
becomes subject to an Insolvency Proceeding, to the extent that the transfer
of the Financed Eligible Loans is deemed to create a security interest and
that interest was validly perfected before such Seller's insolvency or
bankruptcy and was not taken in contemplation of insolvency or bankruptcy or
with the intent to hinder, delay or defraud such Seller or its creditors,
such security interest should not be subject to avoidance, and payments to
the Trustee with respect to the Financed Eligible Loans should not be subject
to recovery by such Seller's creditors. No assurance can be given, however,
that delays in receipt of funds with respect to the Financed Eligible Loans
of such Seller will not occur in such circumstances. See "Risk
Factors--Reliance Upon Seller" and "--Perfection of Security Interest in
Financed Eligible Loans" herein.
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 addition to those required under federal law. These
state laws are, however, to a large part, preempted by the Higher Education
Act.
BOOK-ENTRY REGISTRATION
Unless otherwise specified with respect to a Series in the related
Prospectus Supplement, it is expected that each Class of Notes of any Series
will be initially represented by one or more certificates registered in the
name of Cede & Co., 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 securities are issued, holders of such Notes will
not be recognized by the Trustee as "Registered Owners" (as such terms are
used in the Indenture). Hence, until definitive securities are issued,
holders of such Series of Notes will only be able to exercise the rights of
Registered Owners indirectly through DTC and its participating organizations.
See "Book Entry Registration" herein.
REPURCHASE OF FINANCED ELIGIBLE LOANS
Upon the occurrence of a breach of representations and warranties with
respect to a Financed Eligible Loan, the respective Seller is obligated to
repurchase the related Financed Eligible Loan from the Issuer. If such
Seller were to become insolvent or otherwise be unable to repurchase such
Financed Eligible Loan, it is unlikely that a repurchase of such Financed
Eligible Loan from the Issuer would occur. The failure of such Seller to
repurchase a Financed Eligible Loan would constitute a breach of the
respective Student Loan Purchase Agreement, enforceable by the Trustee on
behalf of the Registered Owners, but would not constitute an Event of Default
under the Indenture or permit the exercise of remedies thereunder. See "Risk
Factors--Reliance Upon Sellers," "Seller Representations and Warranties" and
"The Issuer's Student Loan Purchase Program" herein.
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RATINGS OF THE NOTES
It is a condition to issuance of the Notes that they be rated as
indicated under the caption "Summary of the Offering--Ratings" in the related
Prospectus Supplement. Ratings are based primarily on the credit underlying
the Financed Eligible Loans, the level of subordination, the amount of credit
enhancement and the legal structure of the transaction. The ratings are not
a recommendation to purchase, hold or sell any Class of Notes inasmuch as
such ratings do not comment as to the market price or suitability for a
particular investor. There can be no assurance as to whether any additional
rating agency will rate the Notes, or if it does, that the rating that would
be assigned by any such other rating agency would be equivalent to the
initial rating described in the related Prospectus Supplement. There is no
assurance that the ratings will remain for any given period of time or that
ratings will not be lowered or withdrawn by any Rating Agency if in such
Rating Agency's judgment circumstances so warrant.
DESCRIPTION OF THE NOTES
The Notes of each Series will be authenticated and delivered pursuant to
the Indenture and related Supplemental Indenture of Trust by and between the
Issuer and the Trustee. The form of the Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part or
in such other form as may be described in the applicable Prospectus
Supplement.
The following summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the provisions of the
Indenture.
GENERAL
The Class A Notes and the Prior Class A Notes are also designated as
"Senior Notes" under the Indenture, and the Senior Notes include any
Additional Notes secured on a parity with the Class A Notes and the Prior
Class A Notes. The Class B Notes and the Prior Class B Notes are also
designated as "Subordinate Notes" under the Indenture, and the Subordinate
Notes include any Additional Notes secured on a parity with the Class B
Notes. Additional Notes, designated as "Junior-Subordinate Notes," may be
issued under the Indenture which Junior-Subordinate Notes would be
subordinate to the Class A Notes, the Prior Class A Notes, the Class B Notes
and the Prior Class B Notes.
AUCTION RATE NOTES
The Auction Rate Notes will have a Stated Maturity as set forth in the
applicable Prospectus Supplement. Such Notes will be dated their Date of
Issuance and will bear interest from such date at the rate per annum
specified in the Prospectus Supplement through the first date of Auction (the
"Auction Date") for such Notes. After the Initial Period for each Class of
Auction Rate Notes, the Interest Period will initially consist of a number of
days (each, an "Auction Period"), as set forth herein under "Certain
Definitions and Provisions Related to Auction Rate Notes and Auction
Procedures--Auction Procedures" and in the applicable
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Prospectus Supplement. The interest rate for the Auction Rate Notes will be
reset at the interest rate determined pursuant to the Auction (the "Auction
Rate") with respect to such Auction Rate Notes pursuant to the Auction
procedures (but in no event exceeding the maximum interest rate relating to
an Auction (the "Maximum Auction Rate") per annum). Except as may otherwise
be specified with respect to a Series containing a Class or Classes of
Auction Rate Notes in the related Prospectus Supplement, for each Auction,
the holders of the Auction Rate Notes may submit orders through a
Broker-Dealer (as defined under "Certain Definitions and Provisions Related
to Auction Rate Notes and Auction Procedures--Auction-Related Definitions")
as to the principal amount of Auction Rate Notes they wish to hold, purchase
or sell at various interest rates. If no order is received from the holder
of an Auction Rate Note, such holder will be deemed to have submitted a hold
order for all Auction Rate Notes owned by such holder at the new Auction
Rate. As part of the Auction Procedures, the Broker-Dealers also solicit
bids from non-holders interested in acquiring Auction Rate Notes as to the
principal amount of Auction Rate Notes they wish to purchase at various
interest rates. The Auction Rate for any Auction Date generally will be the
lowest interest rate at which all sell orders are fulfilled, but in no event
greater than the Maximum Auction Rate. In connection with each Auction, the
Auction Rate Notes are transferred at par plus accrued interest. See
"Certain Definitions and Provisions Related to Auction Rate Notes and Auction
Procedures--Auction Procedures--Auction Note Interest Rate" herein for a more
detailed description of the procedures for establishing the Auction Rates and
for tendering Auction Rate Notes for Auction. Interest on the Auction Rate
Notes will be payable on the first Business Day following the expiration of
each respective Interest Period for such Notes. The date on which a Class of
Auction Rate Notes is entitled to receive a payment of interest is referred
to as the "Interest Payment Date" for such Class. Payments will be made to
Registered Owners of the Auction Rate Notes as of the date (the "Record
Date") which is the Business Day next preceding the respective Auction Date.
Auction Rate Notes issued upon transfer, exchange or other replacement shall
bear interest from the most recent Interest Payment Date to which interest
has been paid, or if no interest has been paid, from the Date of Issuance.
The Issuer currently anticipates that there will be at least one
broker-dealer utilized in connection with an Auction or such other number as
may be specified with respect to a Series in the related Prospectus
Supplement.
For each Interest Period with respect to the Auction Rate Notes, the
applicable provisions relating to the Auction Date and the Auction Rate will
be determined in accordance with the auction provisions of the Indenture.
See "Certain Definitions and Provisions Related to the Auction Rate Notes and
Auction Procedures," and "Auction Rate Note--Settlement Procedures" herein
and "Appendix I--Form of Master Purchaser's Letter" attached hereto.
LIBOR RATE NOTES
The LIBOR Rate Notes will be dated their Date of Issuance and will have a
Stated Maturity set forth in the applicable Prospectus Supplement. Certain
capitalized terms used herein with respect to the LIBOR-Based Rate are
defined herein under "Certain Definitions and Provisions Related to the LIBOR
Rate Notes." Interest on the LIBOR Rate Notes shall accrue
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for each Interest Period and shall be payable in arrears on each Interest
Payment Date. An "Interest Period" with respect to the LIBOR Rate Notes,
means the period commencing on the Date of Issuance of the LIBOR Rate Notes
through and including the date specified in the related Prospectus Supplement
and each period thereafter beginning on the first day of each calendar month
and ending on the last day of such calendar month or, with respect to LIBOR
Rate Notes payable quarterly, the period commencing on the Date of Issuance
of the LIBOR Rate Notes through and including the date specified in the
related Prospectus Supplement and each quarterly period thereafter beginning
on the first day of a month and ending on the last day of the second
following month thereafter. Except as otherwise specified with respect to a
Series in the related Prospectus Supplement, an "Interest Payment Date" for
the LIBOR Rate Notes means the first Business Day of each calendar month,
commencing on the date specified in the related Prospectus Supplement or,
with respect to a LIBOR Rate Note payable quarterly, on the quarterly dates
set forth in the related Prospectus Supplement, or if any such date is not a
Business Day, the next succeeding Business Day (but only for interest accrued
through the last day of the calendar month next preceding such Interest
Payment Date).
Unless otherwise specified in the related Prospectus Supplement, the
amount of interest payable to Registered Owners of LIBOR Rate Notes in
respect of the principal amount thereof for any Interest Period or part
thereof shall be calculated by applying the Applicable Rate for such Interest
Period or part thereof to the principal amount multiplying such product by
the actual number of days in the Interest Period or part thereof concerned
divided by 360, and rounding the resultant figure to the nearest one cent.
Interest on the LIBOR Rate Notes shall be computed by the Trustee on the
basis of a 360-day year for the number of days actually elapsed. In the
event an Interest Payment Date occurs with respect to any Interest Period on
a date other than the first day of the next Interest Period, the Trustee,
after confirming the calculation required above, shall calculate the portion
of the Interest Amount payable on such Interest Payment Date and the portion
payable on the next succeeding Interest Payment Date.
Unless otherwise specified in the related Prospectus Supplement, the rate
of interest on the LIBOR Rate Notes for each Interest Period shall be
determined by a calculation agent. If a default in payment occurs, the
Applicable Rate with respect to the LIBOR Rate Notes will be the same rate
per annum calculated as if no such Payment Default had occurred. The rate
per annum at which interest is payable on the LIBOR Rate Notes for any
Interest Period is herein referred to as the "Applicable Rate." The
Applicable Rate cannot at any time exceed the maximum interest rate specified
in the related Prospectus Supplement with respect to such LIBOR Rate Notes.
See "Certain Definitions and Provisions Related to the LIBOR Rate Notes"
herein.
TREASURY RATE NOTES
Unless otherwise specified in the related Prospectus Supplement, the
Treasury Rate Notes will be dated their Date of Issuance and will have a
Stated Maturity set forth in the applicable Prospectus Supplement. Interest
on the Treasury Rate Notes shall accrue for each Interest Period and shall be
payable in arrears on each Interest Payment Date. An "Interest Period" with
respect to the Treasury Rate Notes, means the period commencing on the Date
of Issuance of
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the Treasury Rate Notes through and including the date specified in the
related Prospectus Supplement and each period thereafter beginning on the
first day of each calendar month and ending on the last day of such calendar
month or, with respect to Treasury Rate Notes payable quarterly, the period
commencing on the Date of Issuance of the Treasury Rate Notes through and
including the date specified in the related Prospectus Supplement and each
quarterly period thereafter beginning on the first day of a month and ending
on the last day of the second following month thereafter. Except as
otherwise specified with respect to a Series in the related Prospectus
Supplement, an "Interest Payment Date" for the Treasury Rate Notes means the
first Business Day of each calendar month, commencing on the date specified
in the related Prospectus Supplement or, with respect to a Treasury Rate Note
payable quarterly, on the quarterly dates set forth in the related Prospectus
Supplement, or if any such date is not a Business Day, the next succeeding
Business Day (but only for interest accrued through the last day of the
calendar month next preceding such Interest Payment Date).
Unless otherwise specified in the related Prospectus Supplement, the
amount of interest payable to Registered Owners of Treasury Rate Notes in
respect of the principal amount thereof for any Interest Period or part
thereof shall be calculated by a calculation agent to be the sum of (i) the
Bond Equivalent Yield for auctions of 91-day United States Treasury Bills on
a Rate Determination Date (i.e. the first day of each calendar week on which
the United States Treasury auctions 91-day Treasury Bills, which currently is
the United States Treasury's first business day of each week) for such
Interest Period, plus a spread described in the related Prospectus
Supplement. Interest on the Treasury Rate Notes shall be computed by the
Trustee for the actual number of days elapsed on the basis of a year
consisting of 365 or 366 days, as applicable. In the event an Interest
Payment Date occurs with respect to any Interest Period on a date other than
the first day of the next Interest Period, the Trustee, after confirming the
calculation required above, shall calculate the portion of the Interest
Amount payable on such Interest Payment Date and the portion payable on the
next succeeding Interest Payment Date.
Unless otherwise specified in the related Prospectus Supplement, the rate
of interest on the Treasury Rate Notes for each Interest Period shall be
determined by the a calculation agent or such other person as specified in
the related Prospectus Supplement and will be based upon the interest rate
described above. If a Payment Default occurs, the Applicable Rate with
respect to the Index Rate Notes will be the same per annum calculated as if
no such Payment Default had occurred. The rate per annum at which interest
is payable on the Treasury Rate Notes for any Interest Period is herein
referred to as the "Applicable Rate." The Applicable Rate cannot at any time
exceed the maximum interest rate specified in the related Prospectus
Supplement with respect to such Treasury Rate Notes. See "Certain
Definitions and Provisions Related to the Treasury Rate Notes" herein.
ACCRUAL NOTES
Unless otherwise specified in the related Prospectus Supplement,
distributions of interest in respect of the Notes of any Class (other than
any class of Notes that will be entitled to payments of accrued interest
commencing only on the Interest Payment Date, or under the circumstances
specified in the related Prospectus Supplement ("Accrual Notes")) will be
made
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on each Interest Payment Date based on the accrued interest for such Class
and such Interest Payment Date, subject to the sufficiency of the portion of
the available amount allocable to such Class on such Interest Payment Date.
Prior to the time interest is payable on any class of Accrual Notes, the
amount of accrued interest otherwise payable on such Class will be added to
the Note principal balance thereof on each Interest Payment Date. The
principal balance of the Accrual Notes will begin to be paid from available
funds received with respect to the Financed Eligible Loans after the date
that accrued interest is no longer being added to the principal balance of
such Notes. With respect to each Class of Accrual Notes, accrued interest
for each Interest Payment Date will be equal to interest at the applicable
interest rate accrued for a specified period (generally the period between
Interest Payment Dates) on the outstanding Note principal balance thereof
immediately prior to such Interest Payment Date.
PRINCIPAL PAYMENTS OF THE NOTES
The principal of the Notes due at Stated Maturity or redemption in whole
will be payable at the principal office of the Trustee upon presentation and
surrender of the Notes. Payment of interest and principal paid subject to a
partial redemption on any Note will be made to the Registered Owner thereof
by check or draft mailed on the Interest Payment Date by the Trustee to the
Registered Owner at his address as it last appears on the registration books
kept by the Trustee at the close of business on the Record Date for such
interest payment date, but any such interest not so timely paid or duly
provided for shall cease to be payable to the Registered Owner thereof at the
close of business on the Record Date and shall be payable to the Registered
Owner thereof at the close of business on a special record date (a "Special
Record Date") for the payment of any such defaulted interest. Such Special
Record Date shall be fixed by the Trustee whenever moneys become available
for payment of the defaulted interest, and notice of such Special Record Date
will be given to the Registered Owners of the Notes not less than 10 days
prior thereto by first-class mail to each such Registered Owner as shown on
the Trustee's registration books on the date selected by the Trustee, stating
the date of the Special Record Date and the date fixed for the payment of
such defaulted interest. Notwithstanding the foregoing, payment of principal
and interest to the Securities Depository or its nominee will, and at the
written request addressed to the Trustee of any other Registered Owner owning
at least $1,000,000 principal amount of the Notes, payments of principal and
interest shall, be paid by wire transfer within the United States to the bank
account number filed no later than the Record Date or Special Record Date
with the Trustee for such purpose. All payments on the Notes shall be made
in lawful money of the United States of America.
MANDATORY REDEMPTION
Unless otherwise specified with respect to a Series in the related
Prospectus Supplement, the Notes of such Series are subject to mandatory
redemption NOT AT THE DISCRETION OF THE ISSUER, in whole or in part, at a
redemption price equal to the principal amount thereof plus interest accrued,
if any, to the date of redemption thereof (i) on the first Interest Payment
Date subsequent to the recycling period with respect to such Series, in an
amount equal to moneys representing principal payments received with respect
to the Financed Eligible Loans and other excess revenues previously
transferred to and then on deposit in the Note Redemption Fund, and
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(ii) on the Interest Payment Date specified with respect to a Series in the
related Prospectus Supplement, in an amount equal to moneys, if any, not
previously used to purchase Eligible Loans that are transferred to the Note
Redemption Fund from the Student Loan Fund, (A) for the Class A Notes, on the
Interest Payment Date next succeeding the date specified in the related
Prospectus Supplement and (B) for the Class B Notes, on the next Interest
Payment Date thereafter, such anticipated excesses to be determined by
estimate as of 30 days prior to said Interest Payment Dates; provided,
however, that if (a) 30 days prior to said Interest Payment Dates, the Issuer
files with the Trustee a certificate that such balances may be invested at a
rate of return until a subsequent Interest Payment Date which, together with
other available Revenues and cash balances, will produce sufficient cash
flows to permit the timely retirement of the Notes, which cash flows shall
not assume the refunding of the Notes of such Series, and such conclusions
are approved by each Rating Agency, and (b) the Trustee shall have received
an opinion of counsel to the effect that the failure to so redeem the Notes
of such Series would not cause such Notes to fail to be characterized as
indebtedness of the Issuer for federal income tax purposes (primarily, as a
result of any change in the amount of residual interest owned by the Issuer
for failure to so redeem), then such call for redemption need not be made.
Such mandatory redemptions will be made solely from moneys available therefor
in the respective accounts of the Note Redemption Fund and only as provided
above in this paragraph. No Issuer direction needs to be given with respect
to a mandatory redemption.
In addition, unless otherwise specified with respect to any Series, the
Class A Notes of such Series are subject to mandatory redemption, in part,
from moneys deposited in the Senior Note Redemption Account as described
under clause (j) under "Security and Sources of Payment for the
Notes--Revenue Fund" herein.
See "--Notice and Partial Redemption of Notes" below for a discussion of
the order in which Notes of any Series will be redeemed.
OPTIONAL REDEMPTION
Unless otherwise specified with respect a Series in the related
Prospectus Supplement and only under the circumstances discussed herein
with respect to the Subordinate Notes, the Notes of such Series are subject
to redemption AT THE SOLE DISCRETION OF THE ISSUER from funds received by
the Trustee constituting interest on Financed Eligible Loans remaining in the
Revenue Fund after all other required payments have been made from the
Revenue Fund, in whole or in part, ON or after the date set forth in such
Prospectus Supplement at a redemption price equal to the principal amount of
the Notes being redeemed, plus interest accrued, if any, to the date of
redemption. Issuer direction must be give with respect to an optional
redemption. See "--Notice and Partial Redemption of Notes" below for a
discussion of the order in which Notes of any Series will be redeemed.
NOTES OF ANY SERIES MAY BE REDEEMED ONLY UNDER THE CIRCUMSTANCES
DISCUSSED HEREIN AND IN ACCORDANCE WITH THE PROVISIONS OF THE INDENTURE.
Certain Notes may be optionally redeemed only after a date specified in a
related Prospectus Supplement.
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EXTRAORDINARY OPTIONAL REDEMPTION
Unless otherwise specified with respect to a Series in the related
Prospectus Supplement, the Notes of such Series are also subject to
extraordinary optional redemption, AT THE DISCRETION OF THE ISSUER, at a
redemption price equal to the principal amount of the Notes being redeemed,
plus accrued interest to the date of redemption, without premium, in whole or
in part, from any unallocated and available moneys remaining in the Trust
Estate, on any Interest Payment Date, if the Issuer reasonably determines
that it is unable to acquire Financed Eligible Loans, that the rate of return
on Financed Eligible Loans has materially decreased, or that the costs of
administering the Trust Estate have placed unreasonable burdens upon the
ability of the Issuer to perform its obligations under the Indenture. See
"--Notice and Partial Redemption of Notes" below for a discussion of the
order in which such Notes will be redeemed. The Issuer expects to redeem
Notes pursuant to this paragraph only if changes are made to the Higher
Education Act or changes occur in the financial markets or student loan
markets which the Issuer deems to be materially adverse to the Trust Estate.
An extraordinary optional redemption made pursuant to this paragraph may
cause the Notes to be redeemed earlier than anticipated by the Noteholder.
In determining whether to exercise the extraordinary optional redemption
provision, the Issuer will consider all of the facts and circumstances
existing at the time with respect to any changes to the Higher Education Act
which would be materially adverse to the Trust Estate such that the
Noteholders of any or all Series, in the Issuer's reasonable determination,
would suffer a loss or material delay in the receipt of principal or interest
payments when due if the Trustee were to continue acquiring Financed Eligible
Loans from moneys on deposit in the Recycling Account.
OPTIONAL PURCHASE
Unless otherwise specified with respect to a Series in the related
Prospectus Supplement, the Issuer may purchase or cause to be purchased, AT
ITS DISCRETION, all of the Notes of such Series on any Interest Payment Date
on which the aggregate current principal balance of the Notes shall be less
than or equal to 10% of the initial aggregate principal balance of the Notes
on their respective Date of Issuance, at a purchase price equal to the
aggregate current principal balance of such Notes, plus accrued interest on
the Notes through the day preceding the Interest Payment Date on which the
purchase occurs. The amount deposited by the Issuer pursuant to this
paragraph shall be paid to the Registered Owners on the related Interest
Payment Date following the date of such deposit. All Notes which are
purchased pursuant to this paragraph shall be delivered by the Issuer upon
such purchase to, and be canceled by, the Trustee and be disposed of in a
manner satisfactory to the Trustee and the Issuer.
NOTICE AND PARTIAL REDEMPTION OF NOTES
The Trustee shall cause notice of any redemption or purchase to be given
by mailing a copy of the redemption or purchase notice to the Registered
Owner of any Note being redeemed or purchased, and to the Auction Agent with
respect to the Auction Rate Notes, designated for
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redemption or purchase in whole or in part, at their address as the same
shall last appear upon the registration books, in each case not less than 15
days, with respect to the Auction Rate Notes, and 15 days, with respect to
Index Rate Notes, prior to the redemption or purchase date; provided,
however, that failure to give such notice, or any defect therein, shall not
affect the validity of any proceedings for the redemption or purchase of such
Notes for which no such failure or defect occurs.
If less than all of the Notes of any Series are to be redeemed or
purchased pursuant to a mandatory redemption, an optional redemption, an
extraordinary optional redemption or an optional purchase, the Notes of each
Class of such Series to be redeemed or purchased shall be redeemed or
purchased from such Class as directed in an Issuer Order; provided, however,
that the Class B Notes may only be redeemed prior to the Class A Notes and
the Prior Class A Notes and the Prior Class B Notes may only be redeemed
prior to the Class A Notes, as described below. NOTWITHSTANDING THE
FOREGOING, CLASS B NOTES OF A SERIES MAY BE REDEEMED PRIOR TO ANY CLASS OR
SUBCLASS OF THE NOTES OF ANY OTHER SERIES AS SPECIFIED IN THE RELATED
PROSPECTUS SUPPLEMENT. EXCEPT AS OTHERWISE SPECIFIED WITH RESPECT TO A
SERIES, THE ISSUER, PURSUANT TO AN ISSUER ORDER, MAY DESIGNATE THAT A
SPECIFIED AMOUNT OF MONEYS OR INVESTMENTS TO BE TRANSFERRED TO THE NOTE
REDEMPTION FUND PURSUANT TO THE TERMS AND PROVISIONS OF THE INDENTURE BE
DEPOSITED TO THE JUNIOR-SUBORDINATE NOTE REDEMPTION ACCOUNT OF THE NOTE
REDEMPTION FUND IF AFTER THE REDEMPTION OF JUNIOR-SUBORDINATE NOTES FROM THE
MONEYS AND INVESTMENTS TRANSFERRED TO THE JUNIOR-SUBORDINATE ACCOUNT OF THE
NOTE REDEMPTION FUND AND THE REDEMPTION OF SENIOR NOTES AND SUBORDINATE
NOTES, IF ANY, FROM THE MONEYS AND INVESTMENTS TRANSFERRED TO THE SENIOR NOTE
REDEMPTION ACCOUNT AND THE SUBORDINATE NOTE REDEMPTION ACCOUNT OF THE NOTE
REDEMPTION FUND, THE AGGREGATE MARKET VALUE OF THE TRUST ESTATE WILL EQUAL AT
LEAST 110% OF THE AGGREGATE PRINCIPAL AMOUNT OF ALL SENIOR NOTES OUTSTANDING
AND AT LEAST 102% OF THE AGGREGATE PRINCIPAL AMOUNT OF ALL SENIOR AND
SUBORDINATE NOTES OUTSTANDING. See "Security and Sources of Payment for the
Notes--Note Redemption Fund" herein. Additional Notes to be redeemed in part
shall be redeemed in accordance with the provisions of the Supplemental
Indenture authorizing the issuance and delivery of such Additional Notes.
ACCELERATED MATURITY OF NOTES
If an Event of Default shall have occurred and be continuing, the Trustee
may declare, or upon the written direction (a) by the Registered Owners of at
least 51% of the collective aggregate principal amount of the Outstanding
Senior Notes (or if no Senior Notes are Outstanding under the Indenture, then
upon the written direction of the Registered Owners of at least 51% of the
collective aggregate principal amount of the Outstanding Subordinate Notes,
(or if no Senior Notes or Subordinate Notes are Outstanding hereunder, then
upon the written direction of the Registered Owners of at least 51% of the
collective aggregate principal amount of the Outstanding Junior-Subordinate
Notes), shall declare, the principal of all Notes issued under the Indenture,
or any supplement thereto, and then Outstanding, and the interest thereon, if
not previously due, immediately due and payable, anything in the Notes or in
the Indenture to the contrary notwithstanding; provided, however, that a
declaration of acceleration upon a default described in subsection (g) of
"Summary of Certain Provisions of the Indenture--Events
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of Default" herein shall require the consent of 100% of the Registered Owners
of the collective aggregate principal amount of the appropriate Series of
Notes, as described above.
SECURITY AND SOURCES OF PAYMENT FOR THE NOTES
GENERAL
The Notes are limited obligations of the Issuer secured by and payable
solely from Revenues and other assets pledged under the Indenture for the
payment of the principal of and interest on the Notes (referred to in the
Indenture as the "Trust Estate"). Subject to the provisions of the Indenture
permitting the application of such assets and except as otherwise specified
with respect to a Series in the related Prospectus Supplement, the following
assets serve as security for the Notes: (a) the Revenues (defined in the
Indenture as all principal payments, proceeds, charges and other income
received by the Trustee or the Issuer on account of any Financed Eligible
Loan (including, but not limited to, scheduled, delinquent and advance
payments of and any insurance proceeds with respect to, interest, including
Interest Benefit Payments, on Financed Eligible Loans and any Special
Allowance Payments received by the Issuer or the Trustee with respect to any
Financed Eligible Loan) and investment income from all Funds and Accounts,
and any proceeds from the sale of other disposition of such Financed Eligible
Loans), (b) all moneys and investments held in the Funds, excluding the
Operating Fund, the General Fund and the Cost of Issuance Fund, and (c)
Financed Eligible Loans purchased with money from the Student Loan Fund or
otherwise acquired or originated and pledged or credited to the Student Loan
Fund. In addition, the Trust Estate with respect to any Series may also
consist of certain rights regarding credit enhancement (for example, the
right to draw under any letter of credit or guarantee insurance) as described
herein and in the related Prospectus Supplement.
FUNDS AND ACCOUNTS AND FLOW OF REVENUES
There are created and established by the Indenture the following Funds to
be held and maintained by the Trustee for the benefit of the Registered
Owners:
(a) Student Loan Fund, including a Loan Account designated with
respect to a Series, a Note Account designated with respect to a Series,
and a Recycling Account designated with respect to a Series,
(b) Revenue Fund,
(c) Reserve Fund,
(d) Interest Fund, including a Senior Interest Account, a Subordinate
Interest Account and a Junior-Subordinate Interest Account therein,
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(e) Note Redemption Fund, including a Senior Note Redemption Account,
a Subordinate Note Redemption Account and a Junior-Subordinate Note
Redemption Account therein, and
(f) Student Loan Holding Fund.
There is created and established by the Indenture, the Cost of Issuance
Fund to be held and maintained by the Trustee in which neither the Issuer
(except as described under "--Cost of Issuance Fund" below) nor the Registered
Owners has any right, title or interest.
The following funds have previously been established by the Issuer, do
not constitute Funds within the meaning of the Indenture, and are held by a
depository bank of the Issuer for the benefit of the Issuer and neither the
Trustee nor the Registered Owners shall have any right, title or interest
therein: (a) the Operating Fund; and (b) the General Fund.
The Trustee is authorized for the purpose of facilitating the
administration of the Trust Estate and for the administration of any
Additional Notes issued under the Indenture to create Accounts or subaccounts
in any of the various Funds and Accounts established under the Indenture
which are deemed necessary or desirable; provided, however, that the
obligation of the Issuer to provide such Funds and Accounts is not altered or
amended.
Generally and as more specifically described below, all funds received
with respect to the Financed Student Loans first are deposited by the Trustee
into the Student Loan Holding Fund. Upon receipt, such deposits are
allocated between principal and interest, and the principal portion further
allocated among Series with respect to the Financed Eligible Loans acquired
in connection with such Series. Thereafter, the interest portion is
deposited into the Revenue Fund and the principal portion with respect to
each Series deposited into the Recycling Account of the Student Loan Fund
with respect to such Series until April 1, 1999 with respect to the Series
1996A Notes and the Series 1996B Notes, and, with respect to the Offered
Notes, until the date specified in the related Prospectus Supplement with
respect to each related Series. Funds in the Recycling Account of any Series
generally will be used to acquire additional Financed Eligible Loans. After
such dates, the principal portion with respect to a Series will be deposited
to the Note Redemption Fund; provided, that if with respect to an Interest
Payment Date, there exists an insufficiency of funds in the Revenue Fund to
make payments or transfers as described herein under "Security and Sources of
Payments under the Notes," then such insufficiency existing shall be
transferred to the Revenue Fund from the Student Loan Holding Fund but only
after first transferring any such deficiency from the Note Redemption Fund.
Funds on deposit in the Revenue Fund (generally representing the interest
portion of receipts with respect to the Financed Eligible Loans) are paid or
transferred daily or monthly as indicated below under "--Revenue Fund."
Set forth on the following page is a diagram of the flow of Revenues
received on the Financed Eligible Loans subsequent to the Date of Issuance
with respect to any Series. Proceeds received from original Note proceeds
with respect to any Series will be deposited into the funds and accounts of
the Trust Estate as set forth in the related Prospectus Supplement.
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[Flow Chart of Cash Flows]
The graph inserted here describes cash flows of principal and interest
payments received with respect to Financed Eligible Loans. The graph will be
consistent with the narrative discussion of cash flows under "Security and
Sources of Payment for the Notes."
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STUDENT LOAN FUND
On the Date of Issuance with respect to any Series of Notes, there will
be deposited to the Loan Account designated with respect to a Series of the
Student Loan Fund the amount specified in the related Prospectus Supplement.
In addition, there shall be deposited from time to time into the Recycling
Account designated with respect to a Series of the Student Loan Fund, moneys
transferred thereto from the Student Loan Holding Fund. Moneys transferred
to the Loan Account designated with respect to a Series of the Student Loan
Fund or to the Recycling Account designated with respect to a Series of the
Student Loan Fund shall be used solely to acquire Eligible Loans. Financed
Eligible Loans acquired with moneys contained in the Loan Account designated
with respect to a Series or the Recycling Account designated with respect to
a Series shall be held by the Trustee or its agent or bailee (including the
Servicer) and pledged to and accounted for as part of the Note Account
designated with respect to a Series of the Student Loan Fund.
So long as no Event of Default has occurred and is continuing, moneys
held in the Recycling Account designated with respect to a Series of the
Student Loan Fund may be used, subject to satisfying certain conditions set
forth in the Indenture, to acquire Eligible Loans (other than Consolidation
Loans), in their respective order of receipt, for a period of up to one year
from the date of deposit therein. In connection with the purchase of any
Eligible Loans, the Trustee will release to the respective Seller the
aggregate Purchase Price for such Eligible Loans. If on any Transfer Date
moneys have remained in the Recycling Account designated with respect to a
Series of the Student Loan Fund for more than one year, said moneys shall be
immediately transferred to the Note Redemption Fund unless: (i) the Aggregate
Market Value of the Trust Estate is greater than the aggregate principal
amount of Notes Outstanding, or (ii) the Aggregate Market Value of the Trust
Estate is less than the aggregate principal amount of Notes Outstanding and
the Issuer prepares a Cash Flow Certificate and the Trustee shall receive an
opinion of Note Counsel to the effect that the failure to redeem Notes of
such Series would not cause such Notes to fail to be characterized as debt
for federal income tax purposes, in which case said moneys shall remain in
the Recycling Account designated with respect to a Series of the Student Loan
Fund for a period of up to one additional year. If such Cash Flow
Certificate is not delivered to the Trustee, said moneys in the Recycling
Account designated with respect to a Series of the Student Loan Fund shall be
immediately transferred to the Note Redemption Fund.
No Eligible Loan shall be acquired, after the Date of Issuance with
respect to any Series, if, Congress has, in the judgment of the Issuer,
materially adversely changed any of the following characteristics of Eligible
Loans: (A) the Special Allowance Payments, (B) the loan interest yield
formula, (C) the guaranty obligation of the Guarantee Agency, (D) the federal
interest subsidies, or (E) federal reinsurance of Eligible Loans, or makes
any other economic change in such loans, which, in each instance, would have
a materially adverse effect on the return to the holder of such loans. The
Trustee shall be entitled to rely upon the certification of an Authorized
Officer of the Issuer as to the compliance with the provisions of this
paragraph in connection with the origination and acquisition of Eligible
Loans.
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Notwithstanding the foregoing and unless specified with respect to a
Series in the related Prospectus Supplement, if on the first Business Day
preceding any Interest Payment Date or Transfer Date there are not sufficient
moneys on deposit in the Revenue Fund to make the transfers described under
"--Reserve Fund" below, other than clauses (k) through (l) under "--Revenue
Fund" below, then, but only after required transfers from the Note Redemption
Fund, the Student Loan Holding Fund and the Reserve Fund, such transfers
shall be made by the Trustee upon Issuer Order, in an amount equal to any
such deficiency, directly from the Loan Account designated with respect to
each Series of the Student Loan Fund, then from the Recycling Account
designated with respect to a Series of the Student Loan Fund and then from
the proceeds from the sale of Financed Eligible Loans in the Note Account
designated with respect to each Series of the Student Loan Fund.
Notwithstanding anything in the Indenture to the contrary, on the
Business Day next preceding the date specified in the related Series
Supplement, the Trustee shall transfer to the Note Redemption Fund, moneys in
the Loan Account designated with respect to a Series of the Student Loan Fund
specified in "Description of the Notes--Mandatory Redemption" herein.
The Trustee shall, upon Issuer Order, transfer or liquidate Financed
Eligible Loans and credit the same to the General Fund of the Issuer, but
only to the extent that the conditions set forth under "--General Fund" below
shall have been satisfied.
Unless otherwise specified with respect to a Series in the related
Prospectus Supplement, on the date specified in the related Prospectus
Supplement, all moneys and investments remaining in the Recycling Account
designated with respect to each Series of the Student Loan Fund shall be
transferred to the Note Redemption Fund.
REVENUE FUND
The Trustee shall deposit into the Revenue Fund (a) all amounts required
to be transferred to the Revenue Fund from the Student Loan Holding Fund,
and (b) all amounts deposited on the Date of Issuance.
Upon Issuer Order directing the same, moneys in the Revenue Fund shall be
used, on any date, to pay fees and expenses of the Servicer and Subservicer
when due under the Servicing or the Subservicing Agreement, as the case may
be, insofar as the same relate to the Financed Eligible Loans, to pay Trustee
fees and expenses incurred under the Indenture and the Custodian Agreement,
to pay Auction Agent fees and expenses incurred under the Auction Agent
Agreement, to pay Broker-Dealer fees and expenses incurred under any
Broker-Dealer Agreement, to pay the Calculation Agent fees and expenses
incurred under the Indenture, to pay fees and expenses of the Rating Agencies
incurred under the Indenture, and other fees, taxes, including taxes related
to the Issuer's income, and expenses with respect to the Trust Estate but not
included as Maintenance and Operating Expenses. Except as otherwise
specified with respect to a Series in the related Prospectus Supplement,
payments made in satisfaction of the fees and expenses described in the
preceding sentence, other than taxes related to the Issuer's
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income and fees and expenses of the Servicer, shall not exceed the estimate
of such fees and expenses described in Exhibit E-2 to the Indenture, unless
otherwise approved by each Rating Agency and on and after such date, an
annual amount not to exceed such estimated fees and expenses described in a
Cash Flow Certificate approved by each Rating Agency for a period approved by
each Rating Agency. Moneys in the Revenue Fund shall also be used, on any
date, to pay Maintenance and Operating Expenses in excess of the Estimated
Amount, upon Issuer Order delivered to the Trustee and each Rating Agency
directing the same, but only following delivery of a Cash Flow Certificate to
the Trustee and each Rating Agency showing, among other things, that the
payments required by the Indenture, other than clauses (k) and (l) below,
will not be impaired and such amount has been approved by each Rating Agency.
Money in the Revenue Fund shall be kept separate and apart from all other
Funds and, except as otherwise specified with respect to a Series in the
related Prospectus Supplement, shall be used and transferred to (i) the
Interest Fund on the first Business Day preceding each Interest Payment Date
(other than a Transfer Date) as specified in (w), (x) and (y) below and (ii)
the Operating Fund on the first Business Day of each month as specified in
(z) below, all in the following order of precedence (any money not so
transferred or paid to remain in the Revenue Fund until subsequently applied
pursuant to the Indenture as described herein):
(w) to the Senior Interest Account of the Interest Fund an amount
necessary to pay interest, if any, due on any Senior Notes on such Interest
Payment Date, after giving effect to moneys already on deposit therein;
(x) to the Subordinate Interest Account of the Interest Fund an
amount necessary to pay interest due on any Subordinate Notes on such
Interest Payment Date, after giving effect to moneys already on deposit
therein;
(y) if any Junior-Subordinate Securities are Outstanding, to the
Junior-Subordinate Interest Account of the Interest Fund an amount
necessary to pay interest due on any Junior-Subordinate Notes on such
Interest Payment Date, after giving effect to moneys already on deposit
therein; and
(z) An amount equal to the Estimated Amount shall be used and
transferred from the Revenue Fund to the Operating Fund on the first
Business Day of each month.
Except as otherwise specified with respect to a Series in the related
Prospectus Supplement, money in the Revenue Fund shall be used and
transferred to other funds or Persons between the fifth and first Business
Day preceding each Transfer Date as specified herein and in the following
order of precedence (any money not so transferred or paid to remain in the
Revenue Fund until subsequently applied pursuant to the provisions of the
Indenture and as described herein):
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(a) if such Transfer Date is an Interest Payment Date, to the Senior
Interest Account of the Interest Fund an amount necessary to pay interest
due on any Senior Notes on such Transfer Date, after giving effect to
moneys already on deposit therein;
(b) to the Senior Note Redemption Account of the Note Redemption Fund
the amount, if any, necessary to pay the principal of or premium, if any,
on any Senior Notes due on such Transfer Date (if such Transfer Date is a
Stated Maturity or mandatory sinking fund redemption date, if any, with
respect to such Senior Notes), after giving effect to moneys already on
deposit therein and required transfers from the Reserve Fund;
(c) if such Transfer Date is an Interest Payment Date, to the
Subordinate Interest Account of the Interest Fund an amount necessary to
pay interest due on any Subordinate Notes on such Transfer Date, after
giving effect to moneys already on deposit therein;
(d) to the Subordinate Note Redemption Account of the Note Redemption
Fund the amount, if any, necessary to pay the principal of or premium, if
any, on any Subordinate Notes due on such Transfer Date (if such Transfer
Date is a Stated Maturity or mandatory sinking fund redemption date, if
any, with respect to such Subordinate Notes), after giving effect to moneys
already on deposit therein and required transfers from the Reserve Fund;
(e) if such Transfer Date is an Interest Payment Date and if any
Junior-Subordinate Notes are Outstanding, to the Junior-Subordinate
Interest Account of the Interest Fund an amount necessary to pay interest
due on any Junior-Subordinate Notes on such Transfer Date, after giving
effect to moneys already on deposit therein;
(f) if any Junior-Subordinate Notes are Outstanding, to the
Junior-Subordinate Note Redemption Account of the Note Redemption Fund the
amount, if any, necessary to pay the principal of or premium, if any, on
any Junior-Subordinate Notes due on such Transfer Date (if such Transfer
Date is a Stated Maturity or mandatory sinking fund redemption date with
respect to the Junior-Subordinate Notes), after giving effect to moneys
already on deposit therein and required transfers from the Reserve Fund;
(g) except as otherwise specified with respect to a Series in the
related Prospectus Supplement, an amount equal to the Net Losses incurred
by the Issuer since the last Transfer Date, as reported to the Trustee by
the Issuer, if any, (i) to the Recycling Account designated with respect to
each Series of the Student Loan Fund prior to the date specified in the
related Prospectus Supplement and (ii) to the Note Redemption Fund on and
after such date;
(h) to the Reserve Fund the amount, if any, required as described
under "--Reserve Fund" below;
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(i) [Reserved.];
(j) to the Senior Note Redemption Account of the Note Redemption
Fund, all remaining moneys to reduce the principal amount of the Senior
Notes until such time as the par amount of the Financed Eligible Loans
equals the aggregate principal balance of the Notes Outstanding;
(k) except as otherwise specified with respect to a Series in the
related Prospectus Supplement, at the option of the Issuer and upon Issuer
Order, to the Note Redemption Fund or, prior to the date specified in the
related Prospectus Supplement, to the Recycling Account designated with
respect to a Series of the Student Loan Fund; and
(l) at the option of the Issuer and upon Issuer Order, to the General
Fund to the extent permitted as described under "General Fund" below.
Notwithstanding the foregoing, if an Event of Default has occurred and is
continuing, other than an Event of Default described herein in paragraph
(g) under "Summary of Certain Provisions of the Indenture--Events of
Default," the Revenues otherwise scheduled to be transferred pursuant to
subsections (k) and (l) above shall be transferred instead to the Note
Redemption Fund and used to redeem Notes pursuant to a "Mandatory
Redemption." In addition, if amounts were available to transfer pursuant to
(k) and (l) above, but such transfers were not made on the dates provided
above, the Trustee shall make such transfers on a subsequent date no later
than six months from the date of required transfer upon written request of an
Authorized Officer of the Issuer, provided that no Event of Default shall
exist under the provisions of the Indenture at the time of transfer. Except
as specified with respect to a Series in the related Prospectus Supplement,
if the Auction Rate on any class of Auction Rate Notes exceeds the T-Bill
Rate +.80% for 12 consecutive months, the Trustee shall not transfer the
Estimated Amount to the Operating Fund and shall reduce the Broker-Dealer
fees to .13% until such time as each Rating Agency approves a Cash Flow
Certificate prepared by the Issuer. Any such unpaid Estimated Amount and
Broker-Dealer fees shall not be paid until one year and one day after the
Stated Maturity or earlier redemption of all Notes Outstanding.
RESERVE FUND
(a) The Trustee shall deposit to the Reserve Fund the Reserve Fund
Requirement with respect to a Series on the Date of Issuance as may be
described in the related Prospectus Supplement. The Trustee, FIRST, shall
transfer money in the Reserve Fund to the Senior Interest Account of the
Interest Fund on the first Business Day prior to each Interest Payment Date
to cure any deficiency in the Senior Interest Account of the Interest Fund
if such deficiency would cause a failure to pay or deposit accrued interest
on any Senior Notes on such Interest Payment Date, SECOND, shall transfer
money in the Reserve Fund to the Senior Note Redemption Account of the Note
Redemption Fund on the first Business Day prior to such Transfer Date to
pay the principal amount of any
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Senior Notes coming due on such Transfer Date (if such Transfer Date is a
Stated Maturity) if the money in the Senior Note Redemption Account of the
Note Redemption Fund is insufficient to do so, THIRD, shall transfer money
in the Reserve Fund to the Subordinate Interest Account of the Interest
Fund on the first Business Day prior to each Interest Payment Date to cure
any deficiency in the Subordinate Interest Account of the Interest Fund if
such deficiency would cause a failure to pay or deposit accrued interest
on any Subordinate Notes on such Interest Payment Date, FOURTH, shall
transfer money in the Reserve Fund to the Subordinate Note Redemption
Account of the Note Redemption Fund on the first Business Day prior to
such Transfer Date to pay the principal amount of any Subordinate Notes
coming due on such Transfer Date (if such Transfer Date is a Stated
Maturity) if the money in the Subordinate Note Redemption Account of
the Note Redemption Fund is insufficient to do so, FIFTH, if any
Junior-Subordinate Notes are Outstanding, shall transfer money in the
Reserve Fund to the Junior-Subordinate Interest Account of the Interest
Fund on the first Business Day prior to each Interest Payment Date to cure
any deficiency in the Junior-Subordinate Interest Account of the Interest
Fund if such deficiency would cause a failure to pay or deposit accrued
interest on any Junior-Subordinate Notes on such Interest Payment Date,
and SIXTH, if any Junior-Subordinate Notes are Outstanding, shall transfer
money in the Reserve Fund to the Junior-Subordinate Note Redemption Account
of the Note Redemption Fund on the first Business Day prior to such
Transfer Date to pay the principal amount of any Junior-Subordinate Notes
coming due on such Transfer Date (if such Transfer Date is a Stated
Maturity) if the money in the Junior-Subordinate Note Redemption Account
of the Note Redemption Fund is insufficient to do so.
(b) If the Reserve Fund is used for the purposes described in clause
(a) above the Trustee shall restore the Reserve Fund to the Reserve Fund
Requirement by transfers from the Revenue Fund on the next Transfer Date
pursuant to clause (h) of "--Revenue Fund" above. If the full amount
required to restore the Reserve Fund to the Reserve Fund Requirement is not
available in the Revenue Fund on such next succeeding Transfer Date, the
Trustee shall continue to transfer funds from the Revenue Fund as they
become available and in accordance with clause (h) of the "--Revenue Fund"
above until the deficiency in the Reserve Fund has been eliminated.
(c) The Reserve Fund shall not contain an amount in excess of the
Reserve Fund Requirement. On any day after a Transfer Date that the amount
in the Reserve Fund exceeds the Reserve Fund Requirement for any reason,
the Trustee shall transfer the excess to the Senior Note Redemption Account
of the Note Redemption Fund until all Senior Notes have been paid in full
and then to the Subordinate Note Redemption Account of the Note Redemption
Fund.
(d) The Reserve Fund shall not be used to pay (i) principal on the
Notes pursuant to a redemption or (ii) Net Losses if, after giving effect
to such payments, Notes remain Outstanding and the balance in the Reserve
Fund is less than the Reserve Fund Requirement. In addition, unless
specified with respect to a Series in the related
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Prospectus Supplement, if the balance in the Reserve Fund is less than
$750,000, the Issuer will not purchase Eligible Loans with proceeds in the
Series 1996 Recycling Account designated with respect to any Series of the
Student Loan Fund until such time as each Rating Agency approves a Cash
Flow Certificate prepared by the Issuer.
INTEREST FUND
On the first Business Day preceding each Interest Payment Date, the
Trustee shall transfer to the Interest Fund from the Revenue Fund an amount
equal to the interest due and payable on such Interest Payment Date on the
Outstanding Notes less any amounts already on deposit in the Interest Fund.
Any moneys transferred to the Interest Fund and not specifically required to
be deposited to any Account therein shall be deposited, FIRST, to the Senior
Interest Account of the Interest Fund to the extent required to increase the
amount on deposit therein to equal the interest due and payable on the next
Interest Payment Date for any Outstanding Senior Notes, SECOND, to the
Subordinate Interest Account of the Interest Fund to the extent required to
increase the amount on deposit therein to equal the interest due and payable
on the next Interest Payment Date for any Outstanding Subordinate Notes and
THIRD, if any Junior-Subordinate Notes are Outstanding, to the
Junior-Subordinate Interest Account of the Interest Fund to the extent
required to increase the amount on deposit therein to equal the interest due
and payable on the next Interest Payment Date for any Outstanding
Junior-Subordinate Notes.
If money sufficient to pay all interest due on the Senior Notes on a
particular Interest Payment Date is not available in the Senior Interest
Account of the Interest Fund for that purpose on the first Business Day
preceding an Interest Payment Date from moneys transferred from the Revenue
Fund as provided above, then the amount of any such deficiency shall be
provided from the Reserve Fund, from any other Account of the Interest Fund,
the Junior-Subordinate Note Redemption Account, if any, of the Note
Redemption Fund, the Subordinate Note Redemption Account of the Note
Redemption Fund, the Senior Note Redemption Account of the Note Redemption
Fund, the Student Loan Holding Fund and from Accounts in the Student Loan
Fund (in the order provided under "--Student Loan Fund" above), in that
order. The money in the Senior Interest Account of the Interest Fund
required for the payment of interest on any Senior Notes shall be applied by
the Trustee to the payment of such interest when due without further
authorization or direction.
If money sufficient to pay all interest due on any Subordinate Notes on a
particular Interest Payment Date is not available in the Subordinate Interest
Account of the Interest Fund for that purpose on the first Business Day
preceding an Interest Payment Date from moneys transferred from the Revenue
Fund as provided above, then the amount of any such deficiency shall be
provided from the Reserve Fund (after first making any required transfers
from the Reserve Fund to the Senior Interest Account), and then from the
Junior-Subordinate Note Redemption Account of the Note Redemption Fund, if
any, the Subordinate Note Redemption Account of the Note Redemption Fund, the
Student Loan Holding Fund and from the Accounts in the Student Loan Fund (in
the order provided under "--Student Loan Fund" above), in that order. The
money in the Subordinate Interest Account of the Interest Fund required for
the
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payment of interest on any Subordinate Notes shall be applied in accordance
with this paragraph by the Trustee to the payment of such interest when due
without further authorization or direction.
If money sufficient to pay all interest due on any Junior-Subordinate
Notes, if any, on a particular Interest Payment Date is not available in the
Junior-Subordinate Interest Account, if any, of the Interest Fund for that
purpose on the first Business Day preceding an Interest Payment Date from
moneys transferred from the Revenue Fund as provided above, then the amount
of any such deficiency shall be provided from the Reserve Fund (after first
making any required transfers from the Reserve Fund to the Senior Interest
Account and the Subordinate Interest Account), and then from the Junior-
Subordinate Note Redemption Account of the Note Redemption Fund, the Student
Loan Holding Fund and from the Accounts in the Student Loan Fund (in the
order provided under "--Student Loan Fund" above), in that order. The money
in the Junior-Subordinate Interest Account, if any, of the Interest Fund
required for the payment of interest on any Junior-Subordinate Notes shall be
applied as described herein by the Trustee to the payment of such interest
when due without further authorization or direction.
NOTE REDEMPTION FUND
The Trustee shall deposit to the Note Redemption Fund all amounts
required to be transferred to the Note Redemption Fund from the Revenue Fund,
the Reserve Fund, the Interest Fund, the Student Loan Fund and the Student
Loan Holding Fund. Any moneys transferred to the Note Redemption Fund and not
specifically required to be deposited to any Account therein shall be
deposited to the Senior Note Redemption Account of the Note Redemption Fund
unless the Trustee receives an Issuer Order designating that such amounts
shall be deposited to the Subordinate Note Redemption Account or to the
Junior-Subordinate Note Redemption Account of the Note Redemption Fund.
Subject to "Description of the Notes--Notice and Partial Redemption of
Notes" herein, the Issuer, pursuant to an Issuer Order, may designate that a
specified amount of moneys or investments to be transferred to the Note
Redemption Fund pursuant to the terms and provisions of the Indenture be
deposited to the Subordinate Note Redemption Account of the Note Redemption
Fund if after the redemption of Subordinate Notes from the moneys and
investments transferred to the Subordinate Note Redemption Account of the
Note Redemption Fund and the redemption of Senior Notes, if any, from the
moneys and investments transferred to the Senior Note Redemption Account of
the Note Redemption Fund, the Aggregate Market Value of the Trust Estate will
equal at least 110% of the aggregate principal amount of all Senior Notes
Outstanding. The Issuer, pursuant to an Issuer Order, may designate that a
specified amount of moneys or investments to be transferred to the Note
Redemption Fund pursuant to the terms and provisions of the Indenture be
deposited to the Junior-Subordinate Note Redemption Account of the Note
Redemption Fund if after the redemption of Junior-Subordinate Notes from the
moneys and investments transferred to the Junior-Subordinate Account of the
Note Redemption
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and the redemption of Senior Notes and Subordinate Notes, if any, from the
moneys and investments transferred to the Senior Note Redemption Account and
the Subordinate Note Redemption Account of the Note Redemption Fund, the
Aggregate Market Value of the Trust Estate will equal at least 110% of the
aggregate principal amount of all Senior Notes Outstanding and at least 102%
of the aggregate principal amount of all Senior and Subordinate Notes
Outstanding.
In addition, FIRST, if on the first Business Day preceding the Stated
Maturity of one or more Senior Notes, there is not available in the Senior
Note Redemption Account of the Note Redemption Fund an amount sufficient to
pay the principal of the Senior Notes coming due on such date, then an amount
equal to such deficiency shall be transferred by the Trustee to the Senior
Note Redemption Account of the Note Redemption Fund, from the Revenue Fund,
from the Student Loan Holding Fund, from the Reserve Fund, from the
Subordinate Note Redemption Account of the Note Redemption Fund, from the
Junior-Subordinate Note Redemption Account, if any, of the Note Redemption
Fund, from the Subordinate Interest Account of the Interest Fund, from the
Junior-Subordinate Interest Account, if any, of the Interest Fund and from
the Accounts in the Student Loan Fund (in the order provided under "--Student
Loan Fund" above), in that order, SECOND, if on the first Business Day
preceding the Stated Maturity of any Subordinate Notes, there is not
available in the Subordinate Note Redemption Account of the Note Redemption
Fund an amount sufficient to pay the principal of the Subordinate Notes
coming due on such date, then an amount equal to such deficiency shall be
transferred by the Trustee to the Subordinate Note Redemption Account of the
Note Redemption Fund, from the Revenue Fund, from the Student Loan Holding
Fund, from the Reserve Fund, from the Junior-Subordinate Interest Account, if
any, of the Interest Fund and from the Accounts in the Student Loan Fund (in
the order provided under "--Student Loan Fund" above), and, THIRD, if on the
first Business Day preceding the Stated Maturity of any Junior-Subordinate
Notes, there is not available in the Junior-Subordinate Note Redemption
Account, if any, of the Note Redemption Fund an amount sufficient to pay the
principal of the Junior-Subordinate Notes coming due on such date, then an
amount equal to such deficiency shall be transferred by the Trustee to the
Junior-Subordinate Note Redemption Account, if any, of the Note Redemption
Fund, from the Revenue Fund, from the Student Loan Holding Fund, from the
Reserve Fund and from the Accounts in the Student Loan Fund (in the order
provided under "--Student Loan Fund" above) in that order.
The Trustee shall use amounts in the Senior Note Redemption Account of
the Note Redemption Fund (a) to pay principal of the Senior Notes at their
Stated Maturity and (b) to pay the redemption price of any Senior Notes
pursuant to the mandatory redemption provisions of the Indenture, only to the
extent that such moneys are identified by the Servicer as being derived from
principal repayments on or with respect to the Financed Eligible Loans or
transferred to the Senior Note Redemption Account of the Note Redemption Fund
described under "--Student Loan Fund" above or under subsection (k) of
"--Revenue Fund" above and such moneys are on deposit in the Senior Note
Redemption Account of the Note Redemption Fund on the fifth Business Day
prior to the last date on which a redemption notice can be given which are in
excess of the sum of the principal due on the Senior Notes on the next Stated
Maturity which
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is within one year of the date of such transfer. Notwithstanding the
foregoing, if on the first Business Day preceding any Interest Payment Date
or Transfer Date there are not sufficient moneys on deposit in the Revenue
Fund to make the transfers required as described under "--Revenue Fund" above
other than clauses (k) and (l) thereof, then such transfers shall be made by
the Trustee, in an amount equal to any such deficiency, directly from the
Senior Note Redemption Account of the Note Redemption Fund; provided,
however, that the Subordinate Note Redemption Account and the
Junior-Subordinate Note Redemption Account, if any, of the Note Redemption
Fund has been fully depleted (except as provided therein) pursuant to similar
transfers previously made from such Accounts of the Note Redemption Fund as
described herein.
The Trustee shall use amounts in the Subordinate Note Redemption Account
of the Note Redemption Fund (a) to pay principal of any Subordinate Notes at
their Stated Maturity and (b) to pay the redemption price of Subordinate
Notes pursuant to the mandatory redemption provisions of the Indenture, only
to the extent that such moneys are identified by the Servicer as being
derived from principal repayments on or with respect to the Financed Eligible
Loans or transferred to the Subordinate Note Redemption Account of the Note
Redemption Fund as described under "--Student Loan Fund" above or under
subsection (k) of "--Revenue Fund" above and such moneys are on deposit in
the Subordinate Note Redemption Account of the Note Redemption Fund on the
fifth Business Day prior to the last date on which a redemption notice can be
given which are in excess of the sum of the principal due on the Subordinate
Notes on the next Stated Maturity which is within one year of the date of
such transfer. Notwithstanding the foregoing, if on the first Business Day
preceding any Interest Payment Date or Transfer Date there are not sufficient
moneys on deposit in the Revenue Fund to make the transfers required as
described under "--Revenue Fund" above, other than as described under clauses
(k) and (l) thereof, then such transfers shall be made by the Trustee, in an
amount equal to any such deficiency, directly from the Subordinate Note
Redemption Account of the Note Redemption Fund; provided, however, that the
Junior-Subordinate Note Redemption Account, if any, of the Note Redemption
Fund has been fully depleted (except as provided therein) pursuant to similar
transfers previously made from such Accounts of the Note Redemption Fund.
If any Junior-Subordinate Notes are Outstanding, the Trustee shall use
amounts in the Junior-Subordinate Note Redemption Account of the Note
Redemption Fund (a) to pay principal of any Junior-Subordinate Notes at their
Stated Maturity and (b) to pay the redemption price of Junior-Subordinate
Notes pursuant to the mandatory redemption provisions of the Indenture, only
to the extent that such moneys are identified by the Servicer as being
derived from principal repayments on or with respect to the Eligible Loans or
transferred to the Junior-Subordinate Note Redemption Account of the Note
Redemption Fund as described under "--Student Loan Fund" above or under
clauses (k) of "--Revenue Fund" above and such moneys are on deposit in the
Junior-Subordinate Note Redemption Account of the Note Redemption Fund on the
fifth Business Day prior to the last date on which a redemption notice can be
given which are in excess of the sum of the principal due on the
Junior-Subordinate Notes on the next Stated Maturity which is within one year
of the date of such transfer. Notwithstanding the foregoing, if on the first
Business Day preceding any Interest Payment Date or Transfer Date there are
not sufficient moneys on deposit in the Revenue Fund to make the transfers
required as described
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under "--Revenue Fund" above, other than as described under clauses (k) and
(l) thereof, then such transfers shall be made by the Trustee, in an amount
equal to any such deficiency, directly from the Junior-Subordinate Note
Redemption Account of the Note Redemption Fund.
No moneys in any Account of the Note Redemption Fund shall be transferred
to any other Fund or Account if such money is on deposit for the purpose of
redeeming Notes for which notice has been given.
STUDENT LOAN HOLDING FUND
The Trustee shall deposit to the Student Loan Holding Fund all amounts
received by the Trustee which represent payments, regardless of source, on
Financed Eligible Loans. Except as otherwise specified with respect to a
Series in the related Prospectus Supplement, upon receipt by the Trustee from
the Issuer of the Servicer's statement with a direction indicating the
portion of such payments which represents interest payments on Financed
Eligible Loans and the portion of such payment which represents principal
payments on Financed Eligible Loans, the Trustee shall promptly transfer (i)
that portion of such payment representing interest payments (including
Special Allowance Payments and Interest Subsidy Payments) on Eligible Loans
to the Revenue Fund and (ii) shall so transfer the portion of such payment
representing principal payments (including unamortized premiums) on Financed
Eligible Loans held in the Note Account designated with respect to a Series
of the Student Loan Fund to the Recycling Account designated with respect to
such Series of the Student Loan Fund and (iii) on or after the date specified
in the related Prospectus Supplement to the Note Redemption Fund.
Notwithstanding the foregoing, if on the first Business Day preceding any
Interest Payment Date or Transfer Date there are not sufficient moneys on
deposit in the Revenue Fund to make the transfers required as described under
"--Revenue Fund" above, other than subsections (k) and (l) thereof, then, but
only after required transfers from the Note Redemption Fund, if any, such
transfers shall be made by the Trustee, in an amount equal to any such
deficiency directly from the Student Loan Holding Fund.
COST OF ISSUANCE FUND
The Trustee shall deposit in the Cost of Issuance Fund on the Date of
Issuance with respect to any Series the amounts set forth in the related
Prospectus Supplement. Moneys in the Cost of Issuance Fund shall be used by
the Trustee, upon the written direction of an Authorized Officer of the
Issuer, solely for the purpose of paying costs of issuance of the Notes of
such Series, including without limitation any compensation of the Underwriter
not paid from the proceeds of the Notes. Any moneys remaining in the
Cost of Issuance Fund shall be paid by the Trustee without further direction
to the Issuer.
OPERATING FUND
The Operating Fund is a special fund created and established by an
agreement with a depository bank of the Issuer and shall be used to pay
Maintenance and Operating Expenses (as defined under "Index to and Glossary
of Certain Terms"). The Operating Fund shall be held by such depository bank
of the Issuer, and neither the Registered Owners nor the Trustee shall have
any right, title or interest in the Operating Fund.
On or before the 25th day of each month, the Issuer shall deliver an
Issuer Order to the Trustee which sets forth the Estimated Amount. If at any
time the Issuer determines that the Estimated Amount is less than the amount
required to pay expected Maintenance and Operating Expenses, the Issuer may
direct the Trustee by Issuer Order to transfer additional amounts from
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the Revenue Fund as may be needed to pay Maintenance and Operating Expenses,
subject to the second paragraph of "--Revenue Fund" above.
Upon the receipt of any such Issuer Order, the Trustee shall withdraw the
amount so directed from the Revenue Fund (or so much thereof as is then on
deposit in the Revenue Fund) and transfer the same to such depository bank of
the Issuer with instructions to deposit the same in the Operating Fund.
Interest income earned on the money held in the Operating Fund may be
retained therein or as otherwise provided in the agreement with such
depository bank of the Issuer.
GENERAL FUND
Except with respect to the Trustee's right to indemnification for any
liability incurred because of its status as an "eligible lender" under the
Act, neither the Registered Owners nor the Trustee shall have any right,
title or interest in the General Fund. Except as may otherwise be specified
with respect to a Series in the related Prospectus Supplement, transfers from
the Student Loan Fund to the General Fund shall be made as described under
"--Student Loan Fund" above and transfers from the Revenue Fund to the
General Fund shall be made as described under "Revenue Fund" above; provided,
however, that no transfer of assets to the General Fund shall be made if
there is not on deposit in the Reserve Fund an amount equal to at least the
Reserve Fund Requirement; provided however, that no transfer shall be made to
the General Fund unless, (a) immediately after taking into account any such
transfer, the Aggregate Market Value of the assets in the Trust Estate (less
an amount equal to unpaid accrued interest on the Outstanding Notes and less
an amount equal to $250,000 and less any additional amount, if any, required
by any Supplemental Indenture) will be equal to at least 103% of the unpaid
principal amount of the Outstanding Notes and (b) there shall have been
delivered to the Trustee a Cash Flow Certificate showing that after such
transfer the Aggregate Market Value of the assets in the Trust Estate (less
an amount equal to unpaid accrued interest on the Outstanding Notes and less
an amount equal to $250,000 and less any additional amount, if any, required
by any Supplemental Indenture) will continue to be equal to at least 112% of
the unpaid principal amount of the Outstanding Senior Notes and (c) there
shall have been delivered to the Trustee a Cash Flow Certificate showing that
after such transfer the Aggregate Market Value of the assets in the Trust
Estate (less an amount equal to unpaid accrued interest on the Outstanding
Notes and less an amount equal to $250,000 and less any additional amount, if
any, required by any Supplemental Indenture) will continue to be equal to at
least 103% of the unpaid principal amount of the Notes Outstanding on each
Interest Payment Date and (d) the Aggregate Market Value of the assets in the
Trust Estate (less an amount equal to unpaid accrued interest on the
Outstanding Notes and less an amount equal to $250,000 and less any
additional amount, if any, required by any Supplemental Indenture) will
continue to be equal to at least 112% of the unpaid principal amount of the
Outstanding Senior Notes on each Interest Payment Date.
The amounts held in the General Fund may be used for any proper purpose
of the Issuer and investment earnings thereon shall be the property of the
Issuer.
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INVESTMENT OF FUNDS HELD BY TRUSTEE
The Trustee shall invest money held for the credit of any Fund or Account
held by the Trustee under the Indenture as directed in writing (or orally,
confirmed in writing) by an Authorized Officer of the Issuer or a designee
appointed in writing by an Authorized Officer of the Issuer, to the fullest
extent practicable and reasonable, in Investment Securities which shall
mature or be redeemed at the option of the holder prior to the respective
dates when the money held for the credit of such Fund or Account will be
required for the purposes intended. In the absence of written direction by
an Authorized Officer of the Issuer, all uninvested moneys in any Fund or
Account held by the Trustee shall be invested in Investment Securities
described in (a), (b), (c), (d), (e) or (f) of the definition of Investment
Securities. Interest earnings on all Investment Securities shall be
transferred to the Revenue Fund on the first Business Day of each calendar
month. The Trustee and the Issuer have agreed that unless an Event of
Default shall have occurred under the Indenture, the Issuer acting by and
through an Authorized Officer shall be entitled to, and shall, provide
written direction or oral direction confirmed in writing to the Trustee with
respect to any discretionary acts required or permitted of the Trustee under
any Investment Agreement and the Trustee shall not take such discretionary
acts without such written direction.
The Investment Securities purchased shall be held by the Trustee and
shall be deemed at all times to be part of such Fund or Account or
combination of Funds or Accounts, and the Trustee shall inform the Issuer of
the details of all such investments. Upon direction in writing (or orally,
confirmed in writing) from an Authorized Officer of the Issuer, the Trustee
shall use its best efforts to sell at the best price obtainable, or present
for redemption, any Investment Securities purchased by it as an investment
whenever it shall be necessary to provide money to meet any payment from the
applicable Fund. The Trustee shall advise the Issuer in writing, on or
before the fifteenth day of each calendar month (or such later date as
reasonably consented to by the Issuer), of all investments held for the
credit of each Fund in its custody under the provisions of the Indenture as
of the end of the preceding month and the value thereof, and shall list any
investments which were sold or liquidated for less than their value at the
time thereof.
Money in any Fund constituting a part of the Trust Estate may be pooled
for the purpose of making investments and may be used to pay accrued interest
on Investment Securities purchased. Any purchase of Investment Securities
may be made by or through the Trustee or any of its affiliates.
Notwithstanding the foregoing, the Trustee shall not be responsible or
liable for any losses on investments made by it under the transaction or for
keeping all Funds held by it, fully invested at all times, its only
responsibility being to comply with the investment instructions of the Issuer
or its designee in a non-negligent manner.
RELEASE
The Trustee shall, upon Issuer Order and subject to the provisions of the
Indenture, take all actions reasonably necessary to effect the release of any
Financed Eligible Loans from the
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lien of the Indenture to the extent the terms thereof permit the sale,
disposition or transfer of such Financed Eligible Loans.
CERTAIN DEFINITIONS AND PROVISIONS RELATED
TO AUCTION RATE NOTES AND AUCTION PROCEDURES
The definitions relating to Auction Rate Notes and certain of the Auction
procedures are as set forth below, except as may otherwise be specified with
respect to a Series in the related Prospectus Supplement.
AUCTION-RELATED DEFINITIONS
"AFTER-TAX EQUIVALENT" means the "AA" Composite Commercial Paper Rate.
"ALL HOLD RATE" means the Applicable LIBOR-Based Rate less .20%; provided
that in no event shall the applicable All Hold Rate be greater than the
applicable Maximum Auction Rate.
"APPLICABLE LIBOR-BASED RATE" means, (a) for Auction Periods of 35 days
or less, One-Month LIBOR, (b) for Auction Periods of more than 35 days but
less than 91 days, Three-Month LIBOR, (c) for Auction Periods of more than 90
days but less than 181 days, Six-Month LIBOR, and (d) for Auction Periods of
more than 180 days, One-Year LIBOR.
"AUCTION" means the implementation of the Auction Procedures on an
Auction Date.
"AUCTION AGENT" means the Initial Auction Agent under the Initial Auction
Agent Agreement unless and until a Substitute Auction Agent Agreement becomes
effective, after which "Auction Agent" shall mean the Substitute Auction
Agent.
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"AUCTION AGENT AGREEMENT" means the Initial Auction Agent Agreement
unless and until a Substitute Auction Agent Agreement is entered into, after
which "Auction Agent Agreement" shall mean such Substitute Auction Agent
Agreement.
"AUCTION AGENT FEE" means the fee to be paid to the Auction Agent for
services set forth in the Auction Agent Agreement.
"AUCTION DATE" means, with respect to any Offered Notes, the date
specified in the related Prospectus Supplement, and thereafter, the Business
Day immediately preceding the first day of each Auction Period for each
respective Class, other than:
(a) each Auction Period commencing after the ownership of the
applicable Auction Rate Notes is no longer maintained in Book-entry Form by
the Securities Depository;
(b) each Auction Period commencing after and during the continuance
of a Payment Default; or
(c) each Auction Period commencing less than two Business Days after
the cure or waiver of a Payment Default.
Notwithstanding the foregoing, the Auction Date for one or more Auction
Periods may be changed pursuant to the Indenture.
"AUCTION NOTE INTEREST RATE" means each variable rate of interest per
annum borne by an Auction Note for each Auction Period and determined in
accordance with the provisions of the Indenture; provided, however, that in
the event of a Payment Default, the Auction Note Interest Rate shall equal
the applicable Non-Payment Rate; provided, further, however that such Auction
Note Interest Rate shall in no event exceed the applicable Maximum Auction
Rate.
"AUCTION PERIOD" means the Interest Period applicable to the Auction Rate
Notes during which time the Interest Rate is determined pursuant to the
Indenture, which Auction Period (after the Initial Period for such Class)
initially shall consist generally of the number of days specified with
respect to any Series in the related Prospectus Supplement, as the same may
be adjusted pursuant to the Indenture.
"AUCTION PERIOD ADJUSTMENT" means an adjustment to the Auction Period as
provided in the Indenture.
"AUCTION PROCEDURES" means the procedures set forth in the Indenture by
which the Auction Rate is determined.
"AUCTION RATE" means the rate of interest per annum that results from
implementation of the Auction Procedures and is determined as described in
the Indenture.
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"AUTHORIZED DENOMINATIONS" means $100,000 and any integral multiple
thereof.
"AVAILABLE AUCTION RATE NOTES" has the meaning set forth under "--Auction
Procedures."
"BID" has the meaning set forth under "--Auction Procedures."
"BID AUCTION RATE" has the meaning set forth under "--Auction Procedures."
"BIDDER" has the meaning set forth under "--Auction Procedures."
"BOND EQUIVALENT YIELD" means, in respect of any security the rate for
which is quoted in THE WALL STREET JOURNAL on a bank discount basis, the
"bond equivalent yield" (expressed as a percentage) for such security which
appears on Telerate's United States Treasury and Money Market Composite Page
0223, rounded up to the nearest one one-hundredth of one percent.
"BOOK-ENTRY FORM" or "BOOK-ENTRY SYSTEM" means a form or system under
which (a) the beneficial right to principal and interest may be transferred
only through a book entry, (b) physical securities in registered form are
issued only to a Securities Depository or its nominee as registered owner,
with the securities "immobilized" to the custody of the Securities
Depository, and (c) the book entry is the record that identifies the owners
of beneficial interests in that principal and interest.
"BROKER-DEALER" means Smith Barney Inc. or any other broker or dealer
(each as defined in the Securities Exchange Act of 1934, as amended),
commercial bank or other entity permitted by law to perform the functions
required of a Broker-Dealer set forth in the Auction Procedures that (a) is a
Participant (or an affiliate of a Participant), (b) has been appointed as
such by the Issuer pursuant to the Indenture and by Smith Barney Inc., if
applicable, and (c) has entered into a Broker-Dealer Agreement that is in
effect on the date of reference.
"BROKER-DEALER AGREEMENT" means each agreement between the Auction Agent
and a Broker-Dealer, and approved by the Issuer, pursuant to which the
Broker-Dealer agrees to participate in Auctions as set forth in the Auction
Procedures, as from time to time amended or supplemented. Each Broker-Dealer
Agreement shall be in substantially the form of the Broker-Dealer Agreement
dated as of November 1, 1996 among the Issuer, Bankers Trust Company, as Auction
Agent, and Smith Barney Inc., as Broker-Dealer.
"BROKER-DEALER FEE" means the fees paid to the Broker-Dealers as set
forth in the Auction Agent Agreement.
"BROKER-DEALER FEE RATE" means the rate per annum at which the fees to be
paid to the Broker-Dealers for the services rendered by them under the
Broker-Dealer Agreements in connection with the Auctions.
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<PAGE>
"BUSINESS DAY" means a day of the year on which (a) banks located in the
city in which the Principal Office of the Trustee is located are not required
or authorized to remain closed, (b) banks located in the city in which the
Principal Office of the Auction Agent, as set forth in and for purposes of
the Auction Agent Agreement, is located are not required or authorized to
remain closed and (c) The New York Stock Exchange is not closed.
"CARRY-OVER AMOUNT" means the excess, if any, of (a) the amount of
interest on an Auction Note that would have accrued with respect to the
related Interest Period at the applicable Auction Rate over (b) the amount of
interest on such Auction Note actually accrued with respect to such Auction
Note with respect to such Interest Period based on the applicable Maximum
Auction Rate (without regard to the last two clauses of the definition
thereof) together with the unreduced portion of any such excess from prior
Interest Periods; provided that any reference to "principal" or "interest" in
the Indenture and the Auction Rate Notes shall not include within the
meanings of such words any Carry-over Amount or any interest accrued on any
Carry-over Amount.
"CLOSING DATE" means, with respect to any Series, the Date of Issuance of
such Series.
"COMMERCIAL PAPER DEALER" means Smith Barney Inc., its successors and
assigns, and any other commercial paper dealer appointed pursuant to the
Indenture.
"ELIGIBLE CARRY-OVER MAKE-UP AMOUNT" means, with respect to each Interest
Period relating to the Auction Rate Notes as to which, as of the first day of
such Interest Period, there is any unpaid Carry-over Amount, an amount equal
to the lesser of (a) interest computed on the principal balance of the
Auction Rate Notes in respect to such Interest Period at a per annum rate
equal to the excess, if any, of applicable Maximum Auction Rate (without
regard to the last two clauses of the definition thereof) over the Auction
Rate, together with the unreduced portion of any such excess from prior
Interest Periods and (b) the aggregate Carry-over Amount remaining unpaid as
of the first day of such Interest Period together with interest accrued and
unpaid thereon through the end of such Interest Period.
"EXISTING OWNER" means (a) with respect to and for the purpose of dealing
with the Auction Agent in connection with an Auction, a Person who is a
Broker-Dealer listed in the Existing Owner Registry at the close of business
on the Business Day immediately preceding the Auction Date for such Auction
and (b) with respect to and for the purpose of dealing with the Broker-Dealer
in connection with an Auction, a Person who is a beneficial owner of Auction
Rate Notes.
"EXISTING OWNER REGISTRY" means the registry of Persons who are owners of
the Auction Rate Notes, maintained by the Auction Agent as provided in the
Auction Agent Agreement.
"HOLD ORDER" has the meaning set forth under "--Auction Procedures."
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"INITIAL AUCTION AGENT" means Bankers Trust Company, a New York
corporation, its successors and assigns.
"INITIAL AUCTION AGENT AGREEMENT" means the Amended and Restated Auction
Agent Agreement dated as of November 1, 1996, by and among the Issuer, the
Trustee and the Initial Auction Agent, including any amendment thereof or
supplement thereto.
"INITIAL PERIOD" means, as to Auction Rate Notes, the period commencing
on the Closing Date and continuing through the day immediately preceding the
Initial Rate Adjustment Date for such Auction Rate Notes.
"INITIAL RATE" means, with respect to a Class of any Series, the rate per
annum specified in the related Prospectus Supplement.
"INITIAL RATE ADJUSTMENT DATE" means, with respect to the Class of any
Series, the date specified in the related Prospectus Supplement.
"INTEREST PAYMENT DATE" means (a) so long as the Auction Rate Notes bear
interest at an Auction Note Interest Rate for an Interest Period of not
greater than 180 days, the Business Day immediately following the expiration
of the Initial Period for such Class, and each related Auction Period
thereafter and (b) if and for so long as the Auction Rate Notes bear interest
at an Auction Note Interest Rate for an Interest Period of greater than 180
days, each January 1 and July 1.
"INTEREST PERIOD" means, with respect to the Auction Rate Notes, the
Initial Period and each period commencing on an Interest Rate Adjustment Date
for such Class and ending on the day before (a) the next Interest Rate
Adjustment Date for such Class or (b) the Stated Maturity of such Class, as
applicable.
"INTEREST RATE ADJUSTMENT DATE" means the date on which an Auction Note
Interest Rate is effective, and means, with respect to the Auction Rate
Notes, the date of commencement of each Auction Period.
"INTEREST RATE DETERMINATION DATE" means, with respect to the Auction
Rate Notes, the Auction Date, or if no Auction Date is applicable to such
Class, the Business Day immediately preceding the date of commencement of an
Auction Period.
"MARKET AGENT" means Smith Barney Inc., New York, New York, in such
capacity hereunder, or any successor to it in such capacity hereunder.
"MAXIMUM AUCTION RATE" means the least of (a) either (i) the Applicable
LIBOR-Based Rate plus 1.50% (if the ratings assigned by each Rating Agency to
the Auction Rate Notes are "Aa3" and "AA-," respectively, or better) or (ii)
the Applicable LIBOR-Based Rate plus 2.50% (if any one of the ratings
assigned by each Rating Agency to the Auction Rate Notes is less than
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<PAGE>
"Aa3" or "AA-," respectively), (b) the Net Loan Rate, (c) 18% and (d) the
highest rate the Issuer may legally pay, from time to time, as interest on
the Auction Rate Notes. For purposes of the Auction Agent and the Auction
Procedures, the ratings referred to in this definition shall be the last
ratings of which the Auction Agent has been given written notice pursuant to
the Auction Agent Agreement.
"NET LOAN RATE" means, with respect to the Auction Rate Notes, the rate
of interest per annum (rounded to the next highest one one-hundredth of one
percent) equal to the applicable United States Treasury Security Rate plus
1.50%. For Auction Periods of 180 days or less, the applicable United States
Treasury Security Rate is for 91-day United States Treasury securities, and
for Auction Periods of more than 180 days, the applicable United States
Treasury Security Rate is for one-year United States Treasury securities.
"NON-PAYMENT RATE" means One-Month LIBOR plus 1.50%.
"ONE-MONTH LIBOR," "THREE-MONTH LIBOR," "SIX-MONTH LIBOR" or "ONE-YEAR
LIBOR," means the rate of interest per annum equal to the rate per annum at
which United States dollar deposits having a maturity of one month, three
months, six months or one year, respectively, are offered to prime banks in
the London interbank market which appear on the Reuters Screen LIBOR Page as
of approximately 11:00 a.m., London time, on the Interest Rate Determination
Date. If at least two such quotations appear, One-Month LIBOR, Three-Month
LIBOR, Six-Month LIBOR or One-Year LIBOR, respectively, will be the
arithmetic mean (rounded upwards, if necessary, to the nearest one-hundredth
of one percent) of such offered rates. If fewer than two such quotes appear,
One-Month LIBOR, Three-Month LIBOR, Six-Month LIBOR or One-Year LIBOR,
respectively, with respect to such Interest Period will be determined at
approximately 11:00 a.m., London time, on such Interest Rate Determination
Date on the basis of the rate at which deposits in United States dollars
having a maturity of one month, three months, six months or one year,
respectively, are offered to prime banks in the London interbank market by
four major banks in the London interbank market selected by (a) the Auction
Agent or (b) the Trustee, as applicable, and in a principal amount of not
less than U.S. $1,000,000 and that is representative for a single transaction
in such market at such time. The Auction Agent or the Trustee, as
applicable, will request the principal London office of each of such banks to
provide a quotation of its rate. If at least two quotations are provided,
One-Month LIBOR, Three-Month LIBOR, Six-Month LIBOR or One-Year LIBOR,
respectively, will be the arithmetic mean (rounded upwards, if necessary, to
the nearest one-hundredth of one percent) of such offered rates. If fewer
than two quotations are provided, One-Month LIBOR, Three-Month LIBOR,
Six-Month LIBOR or One-Year LIBOR, respectively, with respect to such
Interest Period will be the arithmetic mean (rounded upwards, if necessary,
to the nearest one-hundredth of one percent) of the rates quoted at
approximately 11:00 a.m., New York City time on such Interest Rate
Determination Date by three major banks in New York, New York selected by (i)
the Auction Agent or (ii) the Trustee, as applicable, for loans in United
States dollars to leading European banks having a maturity of one month,
three months, six months or one year, respectively, and in a principal amount
equal to an amount of not less than U.S. $1,000,000 and that is
representative for a single transaction in such market at such time;
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<PAGE>
provided, however, that if the banks selected as aforesaid are not quoting as
mentioned in this sentence, One-Month LIBOR, Three-Month LIBOR, Six-Month
LIBOR or One-Year LIBOR, respectively, in effect for the applicable Interest
Period will be One-Month LIBOR, Three-Month LIBOR, Six-Month LIBOR or
One-Year LIBOR, respectively, in effect for the immediately preceding
Interest Period.
"ORDER" has the meaning set forth under "--Auction Procedures."
"PAYMENT DEFAULT" means, with respect to a Class of the Auction Rate
Notes, (a) a default in the due and punctual payment of any installment of
interest on such Class, or (b) a default in the due and punctual payment of
any interest on and principal of such Class at their maturity.
"POTENTIAL OWNER" means any Person (including an Existing Owner that is
(a) a Broker-Dealer when dealing with the Auction Agent and (b) a potential
beneficial owner when dealing with a Broker-Dealer) who may be interested in
acquiring Auction Rate Notes (or, in the case of an Existing Owner thereof,
an additional principal amount of Auction Rate Notes).
"PSA" means the Public Securities Association, its successors and assigns.
"QUARTERLY AVERAGE AUCTION RATE" means the simple average of the Auction
Rates for the Auction Dates preceding the current Auction Date by 91 days or
less, including the current Auction Date.
"QUARTERLY AVERAGE T-BILL RATE" means the simple average of the Bond
Equivalent Yields of 91-day Treasury bills auctioned in the 91 days preceding
(but not including) the current Auction Date.
"REGULAR RECORD DATE" means the Business Day next preceding the
applicable Auction Date.
"REUTERS SCREEN LIBOR PAGE" means the display designated as page "LIBOR"
on the Reuters Monitor Money Rates Service (or such other page as may replace
the LIBOR page for the purposes of displaying London interbank offered rates
of major banks).
"S&P" means Standard & Poor's Ratings Services, a Division of The
McGraw-Hill Companies, Inc., its successors and assigns.
"SELL ORDER" has the meaning set forth under "--Auction Procedures."
"SUBMISSION DEADLINE" means 12:30 p.m., eastern time, on any Auction Date
or such other time on any Auction Date by which Broker-Dealers are required
to submit Orders to the Auction Agent as specified by the Auction Agent from
time to time.
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"SUBMITTED BID" has the meaning set forth under "--Auction Procedures."
"SUBMITTED HOLD ORDER" has the meaning set forth under "--Auction
Procedures."
"SUBMITTED ORDER" has the meaning set forth under "--Auction Procedures."
"SUBMITTED SELL ORDER" has the meaning set forth under "--Auction
Procedures."
"SUBSTITUTE AUCTION AGENT" means the Person with whom the Issuer and the
Trustee enter into a Substitute Auction Agent Agreement.
"SUBSTITUTE AUCTION AGENT AGREEMENT" means an auction agent agreement
containing terms substantially similar to the terms of the Initial Auction
Agent Agreement, whereby a Person having the qualifications required by the
Indenture agrees with the Trustee and the Issuer to perform the duties of the
Auction Agent under the Indenture.
"SUFFICIENT BIDS" has the meaning set forth under "--Auction Procedures."
"UNITED STATES TREASURY SECURITY RATE" means, for purposes of calculating
the Net Loan Rate applicable to the Auction Rate Notes, that rate of interest
per annum equal to the Bond Equivalent Yield on the applicable United States
Treasury securities sold at the last auction thereof that immediately
precedes the Interest Rate Adjustment Date for the Auction Rate Notes.
"VARIABLE RATE" means the variable rate of interest per annum, including
the Initial Rate, borne by each Class of Auction Rate Notes during the
Initial Period for such Class, and each Interest Period thereafter as such
rate of interest is determined in accordance with the provisions of the
Indenture.
SUMMARY OF AUCTION PROCEDURES
The following summarizes certain procedures that will be used in
determining the interest rates on the Auction Rate Notes. Immediately
following this summary is a more detailed description of these procedures.
Prospective investors in the Auction Rate Notes should read carefully the
following summary, along with the more detailed description.
The interest rate on each class of Auction Rate Notes will be determined
periodically (generally, for periods ranging from 7 days to one year) by
means of a "Dutch Auction." In this Dutch Auction, investors and potential
investors submit orders through an eligible Broker/Dealer as to the principal
amount of Auction Rate Notes such investors wish to buy, hold or sell at
various interest rates. The Broker/Dealers submit their clients' orders to
the Auction Agent, who processes all orders submitted by all eligible
Broker/Dealers and determines the interest rate for the upcoming interest
period. The Broker/Dealers are notified by the Auction Agent of the interest
rate for the upcoming interest period and are provided with settlement
instructions relating to purchases and sales of Auction Rate Notes.
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In the auction procedures, the following types of orders may be submitted:
(i) "Bid/Hold Orders" - the minimum interest rate that a current
investor is willing to accept in order to continue to hold some
or all of its Auction Rate Notes for the upcoming interest
period;
(ii) "Sell Orders" - an order by a current investor to sell a
specified principal amount of Auction Rate Notes, regardless of
the upcoming interest rate; and
(iii) "Potential Bid Orders" - the minimum interest rate that a
potential investor (or a current investor wishing to purchase
additional Auction Rate Notes) is willing to accept in order to
buy a specified principal amount of Auction Rate Notes.
If an existing investor does not submit orders with respect to all its
Auction Rate Notes of the applicable Class, the investor will be deemed to
have submitted a Hold Order at the new interest rate for that portion of the
Auction Rate Notes for which no order was received.
In connection with each Auction, Auction Rate Notes will be purchased and
sold between investors and potential investors at a price equal to their
then-outstanding principal balance (i.e., par) plus any accrued interest.
The following example helps illustrate how the above-described procedures are
used in determining the interest rate on the Auction Rate Notes.
(a) Assumptions:
1. Denominations (Units) = $100,000
2. Interest Period = 28 days
3. Principal Amount Outstanding = $50 Million (500 Units)
(b) Summary of All Orders Received for the Auction
BID/HOLD ORDERS SELL ORDERS POTENTIAL BID ORDERS
- --------------- ----------- --------------------
10 Units at 2.90% 50 Units Sell 20 Units at 2.95%
30 Units at 3.02% 50 Units Sell 30 Units at 3.00%
60 Units at 3.05% 100 Units Sell 50 Units at 3.05%
100 Units at 3.10% 200 Units 50 Units at 3.10%
100 Units at 3.12% 50 Units at 3.11%
300 Units 50 Units at 3.14%
100 Units at 3.15%
350 Units
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Total units under existing Bid/Hold Orders and Sell Orders always equal
issue size (in this case 500 units).
(c) Auction Agent organizes Orders in Ascending Order
<TABLE>
ORDER NUMBER CUMULATIVE ORDER NUMBER OF CUMULATIVE
NUMBER OF UNITS TOTAL (UNITS) PERCENT NUMBER UNITS TOTAL (UNITS) PERCENT
- ------ -------- ------------- ------- ------ --------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1. 10(W) 10 2.90% 7. 100(W) 300 3.10%
2. 20(W) 30 2.95% 8. 50(W) 350 3.10%
3. 30(W) 60 3.00% 9. 50(W) 400 3.11%
4. 30(W) 90 3.02% 10. 100(W) 500 3.12%
5. 50(W) 140 3.05% 11. 50(L) 3.14%
6. 60(W) 200 3.05% 12. 100(L) 3.15%
</TABLE>
(W) Winning Order (L) Losing Order
Order #10 is the order that clears the market of all available units.
All winning orders are awarded the winning rate (in this case, 3.12%) as the
interest rate for the next Interest Period, when another auction will be
held. Multiple orders at the winning rate are allocated units on a pro rata
basis. Notwithstanding the foregoing, in no event will the interest rate
exceed the lesser of the Net Loan Rate or the Maximum Auction Rate (each as
described above).
The above example assumes that a successful auction has occurred (i.e.,
all Sell Orders and all Bid/Hold Orders below the new interest rate were
fulfilled). In certain circumstances, there may be insufficient Potential Bid
Orders to purchase all the Auction Rate Notes offered for sale. In such
circumstances, the interest rate for the upcoming Interest Period will equal
the lesser of the Net Loan Rate and the Maximum Auction Rate. Also, if all
the Auction Rate Notes are subject to Hold Orders (i.e., each holder of
Auction Rate Notes wishes to continue holding its Auction Rate Notes,
regardless of the interest rate), the interest rate for the upcoming Interest
Period will equal the lesser of the Net Loan Rate and the All Hold Rate.
As stated above, the foregoing is only a summary of the Auction
Procedures. The following section is a more detailed description of these
procedures.
AUCTION PROCEDURES
The Initial Rate Adjustment Date for the Notes shall be specified in the
related Prospectus Supplement.
During the Initial Period, each Class of the Auction Rate Notes shall
bear interest at the Initial Rate for such Class. Thereafter, and except
with respect to an Auction Period Adjustment, the Auction Rate Notes of any
Class shall bear interest at an Auction Note Interest Rate based on the
Auction Period for such Class, as determined below.
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For each Class of the Auction Rate Notes during the Initial Period for
such Class and each Auction Period thereafter, interest at the applicable
Auction Rate Notes Interest Rate shall accrue daily and shall be computed for
the actual number of days elapsed on the basis of a year consisting of 360
days.
The Auction Rate Notes Interest Rate to be borne by each Class of the
Auction Rate Notes after such Initial Period for each Auction Period until an
Auction Period Adjustment, if any, shall be determined as described below.
Each such Auction Period after the Initial Period shall commence on and
include the day following the expiration of the immediately preceding Auction
Period and terminate on and include the first Business Day of the week in
which the immediately following Auction Period occurs; provided, however,
that in the case of the Auction Period that immediately follows the Initial
Period for a Class of the Auction Rate Notes, such Auction Period shall
commence on the Initial Rate Adjustment Date for such Class. The Auction
Note Interest Rate on each Class of the Auction Rate Notes for each Auction
Period shall be the Auction Rate in effect for such Auction Period as
determined in accordance with "--Auction Note Interest--Determining the
Auction Note Interest Rate" below; provided that if, on any Interest Rate
Determination Date, an Auction is not held for any reason, then the Auction
Note Interest Rate on such Auction Rate Notes for the next succeeding Auction
Period shall be the applicable Maximum Auction Rate.
Notwithstanding the foregoing:
(i) if the ownership of an Auction Note is no longer maintained in
Book-entry Form, the Auction Note Interest Rate on the Auction Rate Notes
of such Class for any Interest Period commencing after the delivery of
certificates representing Auction Rate Notes of such Class pursuant to the
Indenture shall equal the applicable Maximum Auction Rate on the Business
Day immediately preceding the first day of such subsequent Interest Period;
or
(ii) if a Payment Default shall have occurred, the Auction Note
Interest Rate on a Class of the Auction Rate Notes for the Interest Period
for such Class commencing on or immediately after such Payment Default, and
for each Interest Period thereafter, to and including the Interest Period,
if any, during which, or commencing less than two Business Days after, such
Payment Default is cured, shall equal the applicable Non-Payment Rate on
the first day of each such Interest Period.
The Auction Agent shall promptly give written notice to the Trustee and
the Issuer of each Auction Note Interest Rate (unless the Auction Note
Interest Rate is the applicable Non-Payment Rate) and the Maximum Auction
Rate when such rate is not the Auction Note Interest Rate, applicable to each
Class of the Auction Rate Notes. The Trustee shall notify the Registered
Owners of Auction Rate Notes of the applicable Auction Note Interest Rate
applicable to each such Class of Auction Rate Notes for each Auction Period
not later than the third Business Day of such Auction Period.
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Notwithstanding any other provision of the Auction Rate Notes or the
Indenture and except for the occurrence of a Payment Default, interest
payable on each Class of the Auction Rate Notes for an Auction Period shall
never exceed for such Auction Period the amount of interest payable at the
applicable Maximum Auction Rate in effect for such Auction Period.
If the Auction Rate for a Class of Auction Rate Notes is greater than the
applicable Maximum Auction Rate, then the Variable Rate applicable to such
Auction Rate Notes for that Interest Period will be the applicable Maximum
Auction Rate. If the Variable Rate applicable to such Auction Rate Notes for
any Interest Period is the applicable Maximum Auction Rate (without regard to
the last two clauses of the definition thereof), the Trustee shall determine
the Carry-over Amount, if any, with respect to such Auction Rate Notes for
such Interest Period. Such determination of the Carry-over Amount shall be
made separately for each Class of the Auction Rate Notes. Such Carry-over
Amount shall bear interest calculated at a rate equal to One-Month LIBOR (as
determined by the Auction Agent, provided the Trustee has received notice of
One-Month LIBOR from the Auction Agent, and if the Trustee shall not have
received such notice from the Auction Agent, then as determined by the
Trustee) from the Interest Payment Date for the Interest Period with respect
to which such Carry-over Amount was calculated, until paid. Any payment in
respect of Carry-over Amount shall be applied, first, to any accrued interest
payable thereon and, second, in reduction of such Carry-over Amount. Any
reference to "principal" or "interest" herein shall not include within the
meaning of such words Carry-over Amount or any interest accrued on any such
Carry-over Amount. Such Carry-over Amount shall be separately calculated for
each Auction Note of such Class by the Trustee during such Interest Period in
sufficient time for the Trustee to give notice to each Registered Owner of
such Carry-over Amount as required in the next succeeding sentence. Not less
than four days before the Interest Payment Date for an Interest Period with
respect to which such Carry-over Amount has been calculated by the Trustee,
the Trustee shall give written notice to each Registered Owner of the
Carry-over Amount applicable to each Registered Owner's Auction Note of such
Class, which written notice may accompany the payment of interest by check
made to each such Registered Owner on such Interest Payment Date or otherwise
shall be mailed on such Interest Payment Date by first-class mail, postage
prepaid, to each such Registered Owner at such Registered Owner's address as
it appears on the registration records maintained by the Registrar. Such
notice shall state, in addition to such Carry-over Amount, that, unless and
until an Auction Note of such Class has been redeemed (other than by optional
redemption), after which all accrued Carry-over Amounts (and all accrued
interest thereon) that remains unpaid shall be canceled and no Carry-over
Amount (and interest accrued thereon) shall be paid with respect to an
Auction Note of such Class, (a) the Carry-over Amount (and interest accrued
thereon calculated at a rate equal to One-Month LIBOR) shall be paid by the
Trustee on a Auction Note of such Class on the earliest of (i) the date of
defeasance of any of the Auction Rate Notes of such Class or (ii) the first
occurring Interest Payment Date (or on the date of any such optional
redemption) if and to the extent that (A) the Eligible Carry-over Make-Up
Amount with respect to such subsequent Interest Period is greater than zero,
and (B) moneys are available pursuant to the terms described under "Certain
Definitions and Provisions Related to Auction Rate Notes and Auction
Procedures" in an amount sufficient to pay all or a portion of such
Carry-over Amount (and interest accrued thereon), and (b) interest shall
accrue on the Carry-over Amount at a rate equal to One-Month LIBOR until such
Carry-over Amount is paid in full or is cancelled.
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The Carry-over Amount (and interest accrued thereon) for a Class of
Auction Rate Notes shall be paid by the Trustee on Outstanding Auction Rate
Notes of such Class on the earliest of (a) the date of defeasance of any of
the Auction Rate Notes of such Class or (b) the first occurring Interest
Payment Date if and to the extent that (i) the Eligible Carry-over Make-Up
Amount with respect to such Interest Period is greater than zero, and (ii) on
such Interest Payment Date there are sufficient moneys in the Senior Interest
Account of the Revenue Fund to pay all interest due on the Auction Rate Notes
on such Interest Payment Date. Any Carry-over Amount (and any interest
accrued thereon) on any Auction Note which is due and payable on an Interest
Payment Date, which Auction Note is to be redeemed (other than by optional
redemption) on said Interest Payment Date, shall be paid to the Registered
Owner thereof on said Interest Payment Date to the extent that moneys are
available therefor in accordance with the provisions described under "Certain
Definitions and Provisions Related to Auction Rate Notes and Auction
Procedures"; provided, however, that any Carry-over Amount (and any interest
accrued thereon) which is not yet due and payable on said Interest Payment
Date shall be cancelled with respect to said Auction Note that is to be
redeemed (other than by optional redemption) on said Interest Payment Date
and shall not be paid on any succeeding Interest Payment Date. To the extent
that any portion of the Carry-over Amount (and any interest accrued thereon)
remains unpaid after payment of a portion thereof, such unpaid portion shall
be paid in whole or in part as required hereunder until fully paid by the
Trustee on the earliest of (a) the date of defeasance of any of the Auction
Rate Notes of such Class or (b) the next occurring Interest Payment Date or
Dates, as necessary, if and to the extent that the conditions in the second
preceding sentence are satisfied. On any Interest Payment Date on which the
Trustee pays only a portion of the Carry-over Amount (and any interest
accrued thereon) on Auction Rate Notes of such Class, the Trustee shall give
written notice in the manner set forth in the immediately preceding paragraph
to the Registered Owner of such Auction Note receiving such partial payment
of the Carry-over Amount remaining unpaid on such Auction Note.
The Interest Payment Date or other date on which such Carry-over Amount
(or any interest accrued thereon) for a Class of Auction Rate Notes shall be
paid shall be determined by the Trustee in accordance with the provisions of
the immediately preceding paragraph, and the Trustee shall make payment of
the Carry-over Amount (and any interest accrued thereon) in the same manner
as, and from the same Account from which, it pays interest on the Auction
Rate Notes on an Interest Payment Date. Any payment of Carry-over Amounts
(and interest accrued thereon) shall reduce the amount of Eligible Carry-Over
Make-Up Amount.
In the event that the Auction Agent no longer determines, or fails to
determine, when required, the Auction Note Interest Rate with respect to a
Class of Auction Rate Notes, or, if for any reason such manner of
determination shall be held to be invalid or unenforceable, the Auction Note
Interest Rate for the next succeeding Interest Period, which Interest Period
shall be an Auction Period, for such Class of Auction Rate Notes shall be the
applicable Maximum Auction Rate as determined by the Auction Agent for such
next succeeding Auction Period, and if the Auction Agent shall fail or refuse
to determine the Maximum Auction Rate, the Maximum Auction Rate shall be
determined by the securities dealer appointed by the Issuer capable of making
such a determination in accordance with the provisions hereof and written
notice of such determination shall be given by such securities dealer to the
Trustee.
AUCTION NOTE INTEREST RATE
DETERMINING THE AUCTION NOTE INTEREST RATE. By purchasing Auction
Rate Notes, whether in an Auction or otherwise, each purchaser of the
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Auction Rate Notes, or its Broker-Dealer, must agree and shall be deemed by
such purchase to have agreed (x) to participate in Auctions on the terms
described herein, (y) to have its beneficial ownership of the Auction Rate
Notes maintained at all times in Book-entry Form for the account of its
Participant, which in turn will maintain records of such beneficial
ownership and (z) to authorize such Participant to disclose to the Auction
Agent such information with respect to such beneficial ownership as the
Auction Agent may request.
So long as the ownership of a Class of Auction Rate Notes is
maintained in Book-entry Form by the Securities Depository, an Existing
Owner may sell, transfer or otherwise dispose of Auction Rate Notes of such
Class only pursuant to a Bid or Sell Order placed in an Auction or
otherwise sell, transfer or dispose of Auction Rate Notes through a Broker-
Dealer, provided that, in the case of all transfers other than pursuant to
Auctions, such Existing Owner, its Broker-Dealer or its Participant advises
the Auction Agent of such transfer. Auctions shall be conducted on each
Auction Date, if there is an Auction Agent on such Auction Date, in the
following manner (such procedures to be applicable separately to each Class
of the Auction Rate Notes):
(i) (A) Prior to the Submission Deadline on each Auction Date;
(1) each Existing Owner of Auction Rate Notes may
submit to a Broker-Dealer by telephone or otherwise any
information as to:
a. the principal amount of Outstanding Auction
Rate Notes, if any, owned by such Existing Owner which
such Existing Owner desires to continue to own without
regard to the Auction Note Interest Rate for the next
succeeding Auction Period;
b. the principal amount of Outstanding Auction
Rate Notes, if any, which such Existing Owner offers to
sell if the Auction Note Interest Rate for the next
succeeding Auction Period shall be less than the rate
per annum specified by such Existing Owner; and/or
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c. the principal amount of Outstanding Auction
Rate Notes, if any, owned by such Existing Owner which
such Existing Owner offers to sell without regard to
the Auction Note Interest Rate for the next succeeding
Auction Period;
and
(2) one or more Broker-Dealers may contact Potential
Owners to determine the principal amount of Auction Rate
Notes which each Potential Owner offers to purchase, if the
Auction Note Interest Rate for the next succeeding Auction
Period shall not be less than the rate per annum specified
by such Potential Owner.
The statement of an Existing Owner or a Potential Owner referred to in
(1) or (2) of this paragraph (A) is herein referred to as an "Order," and
each Existing Owner and each Potential Owner placing an Order is herein
referred to as a "Bidder"; an Order described in clause (1)a is herein
referred to as a "Hold Order"; an Order described in clauses (1)b and
(2)is herein referred to as a "Bid"; and an Order described in clause (1)c
is herein referred to as a "Sell Order."
(B) (1) Subject to the provisions of (a)(ii) hereof, a Bid
by an Existing Owner shall constitute an irrevocable offer
to sell:
a. the principal amount of Outstanding Auction
Rate Notes specified in such Bid if the Auction Note
Interest Rate determined as provided in this Section
(a) shall be less than the rate specified therein; or
b. such principal amount, or a lesser principal
amount of Outstanding Auction Rate Notes to be
determined as set forth in (a)(iv)(A)(4) hereof, if the
Auction Note Interest Rate determined as provided in
this Section (a) shall be equal to the rate specified
therein; or
c. such principal amount, or a lesser principal
amount of Outstanding Auction Rate Notes to be
determined as set forth in (a)(iv)(B)(3) hereof, if the
rate specified therein shall be higher than the
applicable Maximum Auction Rate and Sufficient Bids
have not been made.
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(2) Subject to the provisions of (a)(ii) hereof, a
Sell Order by an Existing Owner shall constitute an
irrevocable offer to sell:
a. the principal amount of Outstanding Auction
Rate Notes specified in such Sell Order; or
b. such principal amount, or a lesser principal
amount of Outstanding Auction Rate Notes set forth in
(a)(iv)(B)(3) hereof, if Sufficient Bids have not been
made.
(3) Subject to the provisions of (a)(ii) hereof, a Bid
by a Potential Owner shall constitute an irrevocable offer
to purchase:
a. the principal amount of Outstanding Auction
Rate Notes specified in such Bid if the Auction Note
Interest Rate determined as provided in this
Section (a) shall be higher than the rate specified in
such Bid; or
b. such principal amount, or a lesser principal
amount of Outstanding Auction Rate Notes set forth in
(a)(iv)(A)(5) hereof, if the Auction Note Interest Rate
determined as provided in this Section (a) shall be
equal to the rate specified in such Bid.
(ii) (A) Each Broker-Dealer shall submit in writing to the
Auction Agent prior to the Submission Deadline on each Auction
Date all Orders obtained by such Broker-Dealer and shall specify
with respect to each such Order:
(1) the name of the Bidder placing such Order;
(2) the aggregate principal amount of Auction Rate
Notes that are the subject of such Order;
(3) to the extent that such Bidder is an Existing
Owner:
a. the principal amount of Auction Rate Notes,
if any, subject to any Hold Order placed by such
Existing Owner;
b. the principal amount of Auction Rate Notes,
if any, subject to any Bid placed by such Existing
Owner and the rate specified in such Bid; and
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c. the principal amount of Auction Rate Notes,
if any, subject to any Sell Order placed by such
Existing Owner;
and
(4) to the extent such Bidder is a Potential Owner,
the rate specified in such Potential Owner's Bid.
(B) If any rate specified in any Bid contains more than
three figures to the right of the decimal point, the Auction
Agent shall round such rate up to the next higher one thousandth
of 1%.
(C) If an Order or Orders covering all Outstanding Auction
Rate Notes owned by an Existing Owner is not submitted to the
Auction Agent prior to the Submission Deadline, the Auction Agent
shall deem a Hold Order to have been submitted on behalf of such
Existing Owner covering the principal amount of Outstanding
Auction Rate Notes owned by such Existing Owner and not subject
to an Order submitted to the Auction Agent.
(D) Neither the Issuer, the Trustee nor the Auction Agent
shall be responsible for any failure of a Broker-Dealer to submit
an Order to the Auction Agent on behalf of any Existing Owner or
Potential Owner.
(E) If any Existing Owner submits through a Broker-Dealer
to the Auction Agent one or more Orders covering in the aggregate
more than the principal amount of Outstanding Auction Rate Notes
owned by such Existing Owner, such Orders shall be considered
valid as follows and in the following order of priority:
(1) All Hold Orders shall be considered valid, but
only up to the aggregate principal amount of Outstanding
Auction Rate Notes owned by such Existing Owner, and if the
aggregate principal amount of Auction Rate Notes subject to
such Hold Orders exceeds the aggregate principal amount of
Auction Rate Notes owned by such Existing Owner, the
aggregate principal amount of Auction Rate Notes subject to
each such Hold Order shall be reduced pro rata so that the
aggregate principal amount of Auction Rate Notes subject to
such Hold Order equals the aggregate principal amount of
Outstanding Auction Rate Notes owned by such Existing Owner.
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(2) a. Any Bid shall be considered valid up to an
amount equal to the excess of the principal amount of
Outstanding Auction Rate Notes owned by such Existing
Owner over the aggregate principal amount of Auction
Rate Notes subject to any Hold Order referred to in
clause (A) of this paragraph (v);
b. subject to subclause (1) of this clause (B),
if more than one Bid with the same rate is submitted on
behalf of such Existing Owner and the aggregate
principal amount of Outstanding Auction Rate Notes
subject to such Bids is greater than such excess, such
Bids shall be considered valid up to an amount equal to
such excess;
c. subject to subclauses (1) and (2) of this
clause (B), if more than one Bid with different rates
are submitted on behalf of such Existing Owner, such
Bids shall be considered valid first in the ascending
order of their respective rates until the highest rate
is reached at which such excess exists and then at such
rate up to the amount of such excess; and
d. in any such event, the amount of Outstanding
Auction Rate Notes, if any, subject to Bids not valid
under this clause (B) shall be treated as the subject
of a Bid by a Potential Owner at the rate therein
specified; and
(3) All Sell Orders shall be considered valid up to an
amount equal to the excess of the principal amount of
Outstanding Auction Rate Notes owned by such Existing Owner
over the aggregate principal amount of Auction Rate Notes
subject to Hold Orders referred to in clause (1) of this
paragraph (v) and valid Bids referred to in clause (2) of
this paragraph (E).
(F) If more than one Bid for Auction Rate Notes is
submitted on behalf of any Potential Owner, each Bid submitted
shall be a separate Bid with the rate and principal amount
therein specified.
(G) An Existing Owner that offers to purchase additional
Auction Rate Notes is, for purposes of such offer, treated as a
Potential Owner.
(H) Any Bid or Sell Order submitted by an Existing Owner
covering an aggregate principal amount of Auction Rate Notes not
equal
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to an Authorized Denomination shall be rejected and shall
be deemed a Hold Order. Any Bid submitted by a Potential Owner
covering an aggregate principal amount of Auction Rate Notes not
equal to an Authorized Denomination shall be rejected.
(I) Any Bid specifying a rate higher than the applicable
Maximum Auction Rate will (1) be treated as a Sell Order if
submitted by an Existing Owner and (2) not be accepted if
submitted by a Potential Owner.
(J) Any Order submitted in an Auction by a Broker-Dealer to
the Auction Agent prior to the Submission Deadline on any Auction
Date shall be irrevocable.
(iii) (A) Not earlier than the Submission Deadline on each
Auction Date, the Auction Agent shall assemble all valid Orders
submitted or deemed submitted to it by the Broker-Dealers (each
such Order as submitted or deemed submitted by a Broker-Dealer
being herein referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order," and collectively as
"Submitted Hold Orders," "Submitted Bids" or "Submitted Sell
Orders," as the case may be, or as "Submitted Orders") and shall
determine:
(1) the excess of the total principal amount of
Outstanding Auction Rate Notes over the sum of the aggregate
principal amount of Outstanding Auction Rate Notes subject
to Submitted Hold Orders (such excess being herein referred
to as the "Available Auction Rate Notes"), and
(2) from the Submitted Orders whether:
a. the aggregate principal amount of Outstanding
Auction Rate Notes subject to Submitted Bids by
Potential Owners specifying one or more rates equal to
or lower than the applicable Maximum Auction Rate;
exceeds or is equal to the sum of:
b. the aggregate principal amount of Outstanding
Auction Rate Notes subject to Submitted Bids by
Existing Owners specifying one or more rates higher
than the applicable Maximum Auction Rate; and
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c. the aggregate principal amount of Outstanding
Auction Rate Notes subject to Submitted Sell Orders;
(in the event such excess or such equality exists, other
than because all of the Outstanding Auction Rate Notes are
subject to Submitted Hold Orders, such Submitted Bids
described in subclause a. above shall be referred to
collectively as "Sufficient Bids"); and
(3) if Sufficient Bids exist, the Bid Auction Rate,
which shall be the lowest rate specified in such Submitted
Bids such that if:
a. (x) each Submitted Bid from Existing Owners
specifying such lowest rate and (y) all other Submitted
Bids from Existing Owners specifying lower rates were
rejected, thus entitling such Existing Owners to
continue to own the principal amount of Auction Rate
Notes subject to such Submitted Bids; and
b. (x) each such Submitted Bid from Potential
Owners specifying such lowest rate and (y) all other
Submitted Bids from Potential Owners specifying lower
rates were accepted;
the result would be that such Existing Owners described in
subclause a. above would continue to own an aggregate principal
amount of Outstanding Auction Rate Notes which, when added to the
aggregate principal amount of Outstanding Auction Rate Notes to
be purchased by such Potential Owners described in subclause b.
above, would equal not less than the Available Auction Rate
Notes.
(B) Promptly after the Auction Agent has made the
determinations pursuant to (a)(iii)(A), the Auction Agent shall
advise the Trustee, the Broker-Dealers and the Issuer of the
Maximum Auction Rate and the All Hold Rate and the components
thereof on the Auction Date and, based on such determinations,
the Auction Rate for the next succeeding Interest Period as
follows:
(1) if Sufficient Bids exist, that the Auction Rate
for the next succeeding Interest Period shall be equal to
the Bid Auction Rate so determined;
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(2) if Sufficient Bids do not exist (other than
because all of the Outstanding Auction Rate Notes are
subject to Submitted Hold Orders), that the Auction Rate for
the next succeeding Interest Period shall be equal to the
applicable Maximum Auction Rate; or
(3) if all Outstanding Auction Rate Notes are subject
to Submitted Hold Orders, that the Auction Rate for the next
succeeding Interest Period shall be equal to the applicable
All Hold Rate.
(C) Promptly after the Auction Agent has determined the
Auction Rate, the Auction Agent shall determine and advise the
Trustee of the Auction Note Interest Rate, which rate shall be
the Auction Rate; provided, however, that in no event shall the
Auction Note Interest Rate exceed the applicable Maximum Auction
Rate.
(iv) Existing Owners shall continue to own the principal amount
of Auction Rate Notes that are subject to Submitted Hold Orders. If
Sufficient Bids have been received by the Auction Agent, the Bid
Auction Rate will be the Auction Note Interest Rate, and Submitted
Bids and Submitted Sell Orders will be accepted or rejected and the
Auction Agent will take such other action as described below in
subparagraph (A).
If the Auction Rate is greater than the applicable Maximum
Auction Rate, the Auction Note Interest Rate shall be equal to the
applicable Maximum Auction Rate. If the Auction Agent has not
received Sufficient Bids (other than because all of the Outstanding
Auction Rate Notes are subject to Submitted Hold Orders), the Auction
Note Interest Rate will be the applicable Maximum Auction Rate. In
any of the cases described above, Submitted Orders will be accepted or
rejected and the Auction Agent will take such other action as
described below in subparagraph (B).
(A) If Sufficient Bids have been made and if the applicable
Maximum Auction Rate does not apply (in which case the Auction
Note Interest Rate shall be the Bid Auction Rate), all Submitted
Sell Orders shall be accepted and, subject to the provisions of
clauses (4) and (5) of this (a)(iv), Submitted Bids shall be
accepted or rejected as follows in the following order of
priority, and all other Submitted Bids shall be rejected:
(1) Existing Owners' Submitted Bids specifying any
rate that is higher than the Auction Note Interest Rate
shall be accepted, thus requiring each such Existing Owner
to sell the
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aggregate principal amount of Auction Rate Notes subject to
such Submitted Bids;
(2) Existing Owners' Submitted Bids specifying any
rate that is lower than the Auction Note Interest Rate shall
be rejected, thus entitling each such Existing Owner to
continue to own the aggregate principal amount of Auction
Rate Notes subject to such Submitted Bids;
(3) Potential Owners' Submitted Bids specifying any
rate that is lower than the Auction Note Interest Rate shall
be accepted;
(4) Each Existing Owners' Submitted Bid specifying a
rate that is equal to the Auction Note Interest Rate shall
be rejected, thus entitling such Existing Owner to continue
to own the aggregate principal amount of Auction Rate Notes
subject to such Submitted Bid, unless the aggregate
principal amount of Outstanding Auction Rate Notes subject
to all such Submitted Bids shall be greater than the
principal amount of Auction Rate Notes (the "remaining
principal amount") equal to the excess of the Available
Auction Rate Notes over the aggregate principal amount of
Auction Rate Notes subject to Submitted Bids described in
clauses (2) and (3) of this (a)(iv)(D)(1), in which event
such Submitted Bid of such Existing Owner shall be rejected
in part, and such Existing Owner shall be entitled to
continue to own the principal amount of Auction Rate Notes
subject to such Submitted Bid, but only in an amount equal
to the aggregate principal amount of Auction Rate Notes
obtained by multiplying the remaining principal amount by a
fraction, the numerator of which shall be the principal
amount of Outstanding Auction Rate Notes owned by such
Existing Owner subject to such Submitted Bid and the
denominator of which shall be the sum of the principal
amount of Outstanding Auction Rate Notes subject to such
Submitted Bids made by all such Existing Owners that
specified a rate equal to the Auction Note Interest Rate,
subject to the provisions of (a)(iv)(D) hereof; and
(5) Each Potential Owner's Submitted Bid specifying a
rate that is equal to the Auction Note Interest Rate shall
be accepted, but only in an amount equal to the principal
amount of Auction Rate Notes obtained by multiplying the
excess of the aggregate principal amount of Available
Auction Rate Notes over the aggregate principal amount of
Auction Rate Notes subject to
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Submitted Bids described in clauses (2), (3) and (4) of
(a)(iv)(A) hereof by a fraction the numerator of which
shall be the aggregate principal amount of Outstanding
Auction Rate Notes subject to such Submitted Bid and the
denominator of which shall be the sum of the principal
amount of Outstanding Auction Rate Notes subject to
Submitted Bids made by all such Potential Owners that
specified a rate equal to the Auction Note Interest Rate,
subject to the provisions of (a)(iv)(D) hereof.
(B) If Sufficient Bids have not been made (other than
because all of the Outstanding Auction Rate Notes are subject to
submitted Hold Orders), or if the applicable Maximum Auction Rate
applies, subject to the provisions of (a)(iv)(D) hereof,
Submitted Orders shall be accepted or rejected as follows in the
following order of priority and all other Submitted Bids shall be
rejected:
(1) Existing Owners' Submitted Bids specifying any
rate that is equal to or lower than the Auction Note
Interest Rate shall be rejected, thus entitling such
Existing Owners to continue to own the aggregate principal
amount of Auction Rate Notes subject to such Submitted Bids;
(2) Potential Owners' Submitted Bids specifying (x)
any rate that is equal to or lower than the Auction Note
Interest Rate shall be accepted and (y) any rate that is
higher than the Auction Note Interest Rate shall be
rejected; and
(3) each Existing Owner's Submitted Bid specifying any
rate that is higher than the Auction Note Interest Rate and
the Submitted Sell Order of each Existing Owner shall be
accepted, thus entitling each Existing Owner that submitted
any such Submitted Bid or Submitted Sell Order to sell the
Auction Rate Notes subject to such Submitted Bid or
Submitted Sell Order, but in both cases only in an amount
equal to the aggregate principal amount of Auction Rate
Notes obtained by multiplying the aggregate principal amount
of Auction Rate Notes subject to Submitted Bids described in
clause (2)(x) of this (a)(iv)(B) by a fraction the numerator
of which shall be the aggregate principal amount of
Outstanding Auction Rate Notes owned by such Existing Owner
subject to such submitted Bid or Submitted Sell Order and
the denominator of which shall be the aggregate principal
amount of Outstanding Auction Rate Notes subject to all such
Submitted Bids and Submitted Sell Orders.
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(C) If all Auction Rate Notes are subject to Submitted Hold
Orders, all Submitted Bids shall be rejected.
(D) If, as a result of the procedures described in
paragraph (A) or (B) of this Section (a)(iv), any Existing Owner
would be entitled or required to sell, or any Potential Owner
would be entitled or required to purchase, a principal amount of
Auction Rate Notes that is not equal to an Authorized
Denomination, the Auction Agent shall, in such manner as in its
sole discretion it shall determine, round up or down the
principal amount of Auction Rate Notes to be purchased or sold by
any Existing Owner or Potential Owner so that the principal
amount of Auction Rate Notes purchased or sold by each Existing
Owner or Potential Owner shall be equal to an Authorized
Denomination.
(E) If, as a result of the procedures described in
paragraph (B) of this (a)(iv), any Potential Owner would be
entitled or required to purchase less than an Authorized
Denomination of Auction Rate Notes, the Auction Agent shall, in
such manner as in its sole discretion it shall determine,
allocate Auction Rate Notes for purchase among Potential Owners
so that only Auction Rate Notes in Authorized Denominations are
purchased by any Potential Owner, even if such allocation results
in one or more of such Potential Owners not purchasing any
Auction Rate Notes.
(v) Based on the result of each Auction, the Auction Agent shall
determine the aggregate principal amount of Auction Rate Notes to be
purchased and the aggregate principal amount of Auction Rate Notes to
be sold by Potential Owners and Existing Owners on whose behalf each
Broker-Dealer submitted Bids or Sell Orders and, with respect to each
Broker-Dealer, to the extent that such aggregate principal amount of
Auction Rate Notes to be sold differs from such aggregate principal
amount of Auction Rate Notes to be purchased, determine to which other
Broker-Dealer or Broker-Dealers acting for one or more purchasers such
Broker-Dealer shall deliver, or from which other Broker-Dealer or
Broker-Dealers acting for one or more sellers such Broker-Dealer shall
receive, as the case may be, Auction Rate Notes.
(vi) Any calculation by the Auction Agent or the Trustee, as
applicable, of the Auction Note Interest Rate, the Maximum Auction
Rate, the All Hold Rate and the Non-Payment Rate shall, in the absence
of manifest error, be binding on all other parties.
(vii) Notwithstanding anything to the contrary, (A) no Auction
for the Auction Rate Notes for an Auction Period of less than
180 days will be held on any Auction Date hereunder on which there are
insufficient moneys in the Senior Interest Account of the Revenue Fund
and the Senior Redemption Account of the
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Note Redemption Fund to pay, or otherwise held by the Trustee under
the Indenture and available to pay, the principal of and interest due
on the Auction Rate Notes on the Interest Payment Date immediately
following such Auction Date, and (B) no Auction will be held on any
Auction Date hereunder during the continuance of a Payment Default.
The Trustee shall promptly notify the Auction Agent of any such
occurrence.
APPLICATION OF INTEREST PAYMENTS FOR THE AUCTION RATE NOTES.
(i) The Trustee shall determine not later than 2:00 p.m.,
eastern time, on the Business Day next succeeding an Interest Payment
Date, whether a Payment Default has occurred. If a Payment Default
has occurred, the Trustee shall, not later than 2:15 p.m., eastern
time, on such Business Day, send a notice thereof to the Auction Agent
by telecopy or similar means and, if such Payment Default is cured,
the Trustee shall immediately send a notice to the Auction Agent by
telecopy or similar means.
(ii) Not later than 2:00 p.m., eastern time, on each anniversary
of the Closing Date, the Trustee shall pay to the Auction Agent, in
immediately available funds out of amounts in the Revenue Fund, an
amount equal to the Auction Agent Fee as set forth in the Auction
Agent Agreement. Not later than 2:00 p.m., eastern time, on each
Auction Date, the Trustee shall pay to the Auction Agent, in
immediately available funds out of amounts in the Revenue Fund, an
amount equal to the Broker-Dealer Fee as calculated in the Auction
Agent Agreement. The Trustee shall, from time to time at the request
of the Auction Agent and at the direction of an Authorized Officer,
reimburse the Auction Agent for its reasonable expenses as provided in
the Auction Agent Agreement, such expenses to be paid out of amounts
in the Revenue Fund.
CALCULATION OF MAXIMUM AUCTION RATE, ALL HOLD RATE AND NON-PAYMENT RATE.
The Auction Agent shall calculate the applicable Maximum Auction Rate and All
Hold Rate, as the case may be, on each Auction Date and shall notify the Trustee
and the Broker-Dealers of the applicable Maximum Auction Rate and All Hold Rate,
as the case may be, as provided in the Auction Agent Agreement; provided, that
if the ownership of the Auction Rate Notes is no longer maintained in Book-entry
Form, or if a Payment Default has occurred, then the Trustee shall determine the
applicable Maximum Auction Rate, All Hold Rate and Non-Payment Rate for each
such Interest Period. The Market Agent shall calculate the Index (if the Index
is other than the PSA Municipal Swap Index) on each Interest Rate Determination
Date and shall notify the Trustee and the Auction Agent of the Index prior to
9:30 a.m., eastern time, on each Interest Rate Determination Date. If the
ownership of the Auction Rate Notes is no longer maintained in Book-entry Form
by the Securities Depository, the Trustee shall calculate the applicable Maximum
Auction Rate on the Business Day immediately preceding the first day of each
Interest Period after the delivery of certificates representing the Auction Rate
Notes pursuant to the Indenture. If a Payment Default shall have occurred, the
Trustee shall calculate the Non-
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Payment Rate on the Interest Rate Determination Date for (i) each Interest
Period commencing after the occurrence and during the continuance of such
Payment Default and (ii) any Interest Period commencing less than two
Business Days after the cure of any Payment Default. The determination by
the Trustee or the Auction Agent, as the case may be, of the applicable
Maximum Auction Rate, All Hold Rate and Non-Payment Rate shall (in the
absence of manifest error) be final and binding upon all parties. If
calculated or determined by the Auction Agent, the Auction Agent shall
promptly advise the Trustee of the applicable Maximum Auction Rate and All
Hold Rate. The determination by the Market Agent of the Index shall (in the
absence of manifest error) be final and binding upon all parties.
If the Federal Reserve Bank of New York does not make available its
30-day commercial paper rate for purposes of determining the "AA" Composite
Commercial Paper Rate, the Auction Agent shall notify the Trustee of such
fact and the Trustee shall thereupon request that an Authorized Officer
promptly appoint at least two Commercial Paper Dealers (in addition to Smith
Barney Inc.) to provide commercial paper quotes for purposes of determining
the "AA" Composite Commercial Paper Rate. Pending appointment of both such
additional Commercial Paper Dealers, Smith Barney Inc. and any other
Commercial Paper Dealer appointed and serving as such shall provide the
required quotations, and such quotations shall be used for purposes of this
Exhibit III. Smith Barney Inc. has been appointed as a Commercial Paper
Dealer to provide commercial paper quotes for purposes of determining the
"AA" Composite Commercial Paper Rate as provided above.
NOTIFICATION OF RATES, AMOUNTS AND PAYMENT DATES. By 12:00 noon, eastern
time, on the Business Day following each Regular Record Date, the Trustee
shall determine the aggregate amounts of interest distributable on the next
succeeding Interest Payment Date to the beneficial owners of Auction Rate
Notes.
At least four days prior to any Interest Payment Date, the Trustee shall:
(a) confirm with the Auction Agent, so long as no Payment Default has
occurred and is continuing and the ownership of the Auction Rate Notes is
maintained in Book-entry Form by the Securities Depository, (i) the date of
such next Interest Payment Date and (ii) the amount payable to the Auction
Agent on the Auction Date pursuant to "--Application of Interest Payments
for the Auction Rate Notes" above.
(b) advise the Registered Owners of a Class of Auction Rate Notes of
any Carry-over Amount accruing on such Auction Rate Notes; and
(c) advise the Securities Depository, so long as the ownership of the
Auction Rate Notes is maintained in Book-entry Form by the Securities
Depository, upon request, of the aggregate amount of interest distributable
on such next Interest Payment Date to the beneficial owners of each Class
of the Auction Rate Notes.
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If any day scheduled to be an Interest Payment Date shall be changed
after the Trustee shall have given the notice or confirmation referred to
above, the Trustee shall, not later than 11:15 a.m., eastern time, on the
Business Day next preceding the earlier of the new Interest Payment Date or
the old Interest Payment Date, by such means as the Trustee deems
practicable, give notice of such change to the Auction Agent, so long as no
Payment Default has occurred and is continuing and the ownership of the
Auction Rate Notes is maintained in Book-entry Form by the Securities
Depository.
AUCTION AGENT. Bankers Trust Company has been appointed as Initial
Auction Agent to serve as agent for the Issuer in connection with Auctions.
The Trustee and the Issuer will, and the Trustee is hereby directed to, enter
into the Initial Auction Agent Agreement with Bankers Trust Company, as the
Initial Auction Agent. Any Substitute Auction Agent shall be (a) a bank,
national banking association or trust company duly organized under the laws
of the United States of America or any state or territory thereof having its
principal place of business in the Borough of Manhattan, New York, or such
other location as approved by the Trustee in writing and having a combined
capital stock or surplus of at least $50,000,000, or (b) a member of the
National Association of Securities Dealers, Inc., having a capitalization of
at least $50,000,000, and, in either case, authorized by law to perform all
the duties imposed upon it hereunder and under the Auction Agent Agreement.
The Auction Agent may at any time resign and be discharged of the duties and
obligations created by the Indenture by giving at least 90 days' notice to
the Trustee, the Market Agent and the Issuer. The Auction Agent may be
removed at any time by the Trustee upon the written direction of an
Authorized Officer or the Registered Owners of 51% of the aggregate principal
amount of the Auction Rate Notes then Outstanding, and if by such Registered
Owners, by an instrument signed by such Registered Owners or their attorneys
and filed with the Auction Agent, the Issuer and the Trustee upon at least 90
days' notice. Neither resignation nor removal of the Auction Agent pursuant
to the preceding two sentences shall be effective until and unless a
Substitute Auction Agent has been appointed and has accepted such
appointment. If required by the Issuer, a Substitute Auction Agent Agreement
shall be entered into with a Substitute Auction Agent. Notwithstanding the
foregoing, the Auction Agent may terminate the Auction Agent Agreement if,
within 25 days after notifying the Trustee, the Market Agent and the Issuer
in writing that it has not received payment of any Auction Agent Fee due it
in accordance with the terms of the Auction Agent Agreement, the Auction
Agent does not receive such payment.
If the Auction Agent shall resign or be removed or be dissolved, or if
the property or affairs of the Auction Agent shall be taken under the control
of any state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the Trustee at the direction of an
Authorized Officer, shall use its best efforts to appoint a Substitute
Auction Agent.
The Auction Agent is acting as agent for the Issuer in connection with
Auctions. In the absence of bad faith, negligent failure to act or
negligence on its part, the Auction Agent shall not be liable for any action
taken, suffered or omitted or any error of judgment made by it in the
performance of its duties under the Auction Agent Agreement and shall not be
liable for any
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error of judgment made in good faith unless the Auction Agent shall have been
negligent in ascertaining (or failing to ascertain) the pertinent facts.
BROKER-DEALERS. The Auction Agent will enter into a Broker-Dealer
Agreement with Smith Barney Inc., as the initial Broker-Dealer. An
Authorized Officer may, from time to time, approve one or more additional
persons to serve as Broker-Dealers under Broker-Dealer Agreements and shall
be responsible for providing such Broker-Dealer Agreements to the Trustee and
the Auction Agent, provided, however that while Smith Barney Inc. is serving
as a Broker-Dealer, Smith Barney Inc. shall have the right to consent to the
approval of any additional Broker-Dealers, which consent will not be
unreasonably withheld. Any Broker-Dealer may be removed at any time, at the
request of an Authorized Officer, but there shall, at all times, be at least
one Broker-Dealer appointed and acting as such.
CHANGES IN AUCTION PERIOD OR PERIODS AND CERTAIN PERCENTAGES. While any
of the Auction Rate Notes are Outstanding, the Issuer may, from time to time,
change the length of one or more Auction Periods (an "Auction Period
Adjustment"), in order to conform with then current market practice with
respect to similar securities or to accommodate economic and financial
factors that may affect or be relevant to the length of the Auction Period
and the interest rate borne by the Auction Rate Notes. The Issuer shall not
initiate an Auction Period Adjustment unless it shall have received the
written consent of the Market Agent, which consent shall not be unreasonably
withheld, not later than nine days prior to the Auction Date for such Auction
Period. The Issuer shall initiate the Auction Period Adjustment by giving
written notice by Issuer Order to the Trustee, the Auction Agent, the Market
Agent, each Rating Agency and the Securities Depository at least 10 days
prior to the Auction Date for such Auction Period. Any such adjusted Auction
Period shall not be less than 7 days nor more than 366 days.
An Auction Period Adjustment shall take effect only if (A) the Trustee
and the Auction Agent receive, by 11:00 a.m., eastern time, on the Business
Day before the Auction Date for the first such Auction Period, an Issuer
Certificate authorizing the Auction Period Adjustment specified in such
certificate along with a copy of the written consent of the Market Agent and,
(B) Sufficient Bids exist as of the Auction on the Auction Date for such
first Auction Period. If the condition referred to in (A) above is not met,
the applicable Auction Note Interest Rate for the next Auction Period shall
be determined pursuant to the above provisions and the Auction Period shall
be the Auction Period determined without reference to the proposed change.
If the condition referred to in (A) is met but the condition referred in (B)
above is not met, the applicable Auction Note Interest Rate for the next
Auction Period shall be the applicable Maximum Auction Rate and the Auction
Period shall be the Auction Period determined without reference to the
proposed change. In connection with any Auction Period Adjustment, the
Auction Agent shall provide such further notice to such parties as is
specified in the Auction Agent Agreement.
CHANGES IN THE AUCTION DATE. The Market Agent, with the written consent
of an Authorized Officer and, if applicable, upon receipt of the opinion of
Note Counsel as required below, may specify an earlier Auction Date (but in
no event more than five Business Days earlier) than the Auction Date that
would otherwise be determined in accordance with the definition of "Auction
Date" herein with respect to one or more specified Auction Periods in order
to conform with then current market practice with respect to similar
securities or to accommodate economic and financial factors that may affect
or be relevant to the day of the week constituting an Auction Date and the
interest rate borne on the Auction Rate Notes. The Market Agent shall
deliver a written request for consent to such change in the length of the
Auction Date to the Issuer at least 14 days prior to the effective date of
such change. If the Issuer shall have delivered such written consent to the
Market Agent, the Market Agent shall provide notice of its determination to
specify an earlier Auction Date for one or more Auction Periods by means of a
written notice delivered at least 10 days prior to the proposed changed
Auction Date to the Trustee, the Auction Agent, the Issuer, each Rating
Agency and the Securities Depository. In connection with any change
described in the preceding paragraph, the Auction Agent shall provide such
further notice to such parties as is specified in the Auction Agent Agreement.
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ADDITIONAL PROVISIONS REGARDING THE INTEREST RATES ON THE AUCTION RATE
NOTES. The determination of a Variable Rate by the Auction Agent or any
other Person shall be conclusive and binding on the Registered Owners of the
Class of Auction Rate Notes to which such Variable Rate applies, and the
Issuer and the Trustee may rely thereon for all purposes.
In no event shall the cumulative amount of interest paid or payable on a
Class of Auction Rate Notes (including interest calculated as provided
herein, plus any other amounts that constitute interest on the Auction Rate
Notes of such Class under applicable law, which are contracted for, charged,
reserved, taken or received pursuant to the Auction Rate Notes of such Class
or related documents) calculated from the date of issuance of the Auction
Rate Notes of such Class through any subsequent day during the term of the
Auction Rate Notes of such Class or otherwise prior to payment in full of the
Auction Rate Notes of such Class exceed the amount permitted by applicable
law. If the applicable law is ever judicially interpreted so as to render
usurious any amount called for under the Auction Rate Notes of such Class or
related documents or otherwise contracted for, charged, reserved, taken or
received in connection with the Auction Rate Notes of such Class, or if the
redemption or acceleration of the maturity of the Auction Rate Notes of such
Class results in payment to or receipt by the Registered Owner or any former
Registered Owner of the Auction Rate Notes of such Class of any interest in
excess of that permitted by applicable law, then, notwithstanding any
provision of the Auction Rate Notes of such Class or related documents to the
contrary, all excess amounts theretofore paid or received with respect to the
Auction Rate Notes of such Class shall be credited on the principal balance
of the Auction Rate Notes of such Class (or, if the Auction Rate Notes of
such Class have been paid or would thereby be paid in full, refunded by the
recipient thereof), and the provisions of the Auction Rate Notes of such
Class and related documents shall automatically and immediately be deemed
reformed and the amounts thereafter collectible hereunder and thereunder
reduced, without the necessity of the execution of any new document, so as to
comply with the applicable law, but so as to permit the recovery of the
fullest amount otherwise called for under the Auction Rate Notes of such
Class and under the related documents.
QUALIFICATIONS OF MARKET AGENT. The Market Agent shall be a member of
the National Association of Securities Dealers, Inc., have a capitalization
of at least $50,000,000 and be authorized by law to perform all the duties
imposed upon it by the Indenture. The Market Agent may resign and be
discharged of the duties and obligations created under the Indenture by
giving at least 30 days' notice to the Issuer and the Trustee, provided that
such resignation shall not be effective until the appointment of a successor
market agent by the Issuer and the acceptance of such appointment by such
successor market agent. The Market Agent may be replaced at the direction of
the Issuer, by an instrument signed by an Authorized Officer, filed with the
Market Agent and the Trustee at least 30 days before the effective date of
such replacement, provided that such replacement shall not be effective until
the appointment of a successor market agent by the Issuer and the acceptance
of such appointment by such successor market agent.
In the event that the Market Agent shall be removed or be dissolved, or
if the property or affairs of the Market Agent shall be taken under the
control of any state or federal court or administrative body because of
bankruptcy or insolvency, or for any other reason, and there is no Market
Agent and the Issuer shall not have appointed its successor as Market Agent,
the Trustee, notwithstanding the provisions of the preceding paragraph, shall
be deemed to be the Market Agent for all purposes of the Indenture until the
appointment by the Issuer of the successor Market Agent. Nothing in the
Indenture shall be construed as conferring on the Trustee additional duties
other than as set forth in the Indenture.
AUCTION RATE NOTE SETTLEMENT PROCEDURES
Capitalized terms used herein shall have the respective meanings
specified herein under "Certain Definitions and Provisions Related to Auction
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Rate Notes and Auction Procedures." These settlement procedures apply to all
Auction Rate Notes except as may otherwise be specified with respect to a
Series in the related Prospectus Supplement.
(a) Not later than 3:00 p.m. on each Auction Date, the Auction Agent
is required to notify by telephone the Broker-Dealers that participated in
the Auction held on such Auction Date and submitted an Order on behalf of
any Existing Owner or Potential Owner of:
(i) the Auction Rate fixed for the next Interest Period;
(ii) whether there were Sufficient Clearing Bids in such Auction;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer")
submitted a Bid or a Sell Order on behalf of an Existing Owner,
whether such Bid or Sell Order was accepted or rejected, in whole or
in part, and the principal amount of Auction Rate Notes, if any, to be
sold by such Existing Owner;
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(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted
a Bid on behalf of a Potential Owner, whether such Bid was accepted
or rejected, in whole or in part, and the principal amount of Auction
Rate Notes, if any, to be purchased by such Potential Owner;
(v) if the aggregate principal amount of Auction Rate Notes to
be sold by all Existing Owners on whose behalf such Broker-Dealer
submitted Bids or Sell Orders is different than the aggregate
principal amount of Auction Rate Notes to be purchased by all
Potential Owners on whose behalf such Broker-Dealer submitted a Bid,
the name or names of one or more other Buyer's Broker-Dealers (and the
Participant, if any, of each such other Buyer's Broker-Dealer) acting
for one or more purchasers of such excess principal amount of Auction
Rate Notes and the principal amount of Auction Rate Notes to be
purchased from one or more Existing Owners on whose behalf such
Broker-Dealer acted by one or more Potential Owners on whose behalf
each of such other Buyer's Broker-Dealers acted; and
(vi) if the principal amount of Auction Rate Notes to be
purchased by all Potential Owners on whose behalf such Broker-Dealer
submitted a Bid exceeds the amount of Auction Rate Notes to be sold by
all Existing Owners on whose behalf such Broker-Dealer submitted a
Bid or a Sell Order, the name or names of one or more Seller's
Broker-Dealers (and the name of the agent member, if any, of each such
Seller's Broker-Dealer) acting for one or more sellers of such excess
principal amount of Auction Rate Notes and the principal amount of
Auction Rate Notes to be sold to one or more Potential Owners on
whose behalf such Broker-Dealer acted by one or more Existing Owners
on whose behalf each of such Seller's Broker-Dealers acted;
(vii) unless previously provided, a list of all Applicable
Auction Rate Notes Rates and related Interest Periods (or portions
thereof) since the last Interest Payment Date; and
(viii) the Auction Date for the next succeeding Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an Order
on behalf of any Existing Owner or Potential Owner shall:
(i) advise each Existing Owner and Potential Owner on whose
behalf such Broker-Dealer submitted a Bid or Sell Order in the Auction
on such Auction Date whether such Bid or Sell Order was accepted or
rejected, in whole or in part;
(ii) instruct each Potential Owner on whose behalf such Broker-
Dealer submitted a Bid that was accepted, in whole or in part, to
instruct such Bidder's
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Participant to pay to such Broker-Dealer (or its Participant) through
the Securities Depository the amount necessary to purchase the
principal amount of Auction Rate Notes to be purchased pursuant to such
Bid against receipt of such principal amount of Auction Rate Notes;
(iii) in the case of a Broker-Dealer that is a Seller's Broker-
Dealer, instruct each Existing Owner on whose behalf such Broker-
Dealer submitted a Sell Order that was accepted, in whole or in part,
or a Bid that was accepted, in whole or in part, to instruct such
Existing Owner's Participant to deliver to such Broker-Dealer (or its
Participant) through the Securities Depository the principal amount of
Auction Rate Notes to be sold pursuant to such Bid or Sell Order
against payment therefor;
(iv) advise each Existing Owner on whose behalf such Broker-
Dealer submitted an Order and each Potential Owner on whose behalf
such Broker-Dealer submitted a Bid of the Auction Rate for the next
Interest Period;
(v) advise each Existing Owner on whose behalf such Broker-
Dealer submitted a Bid that was accepted, in whole or in part, of the
next Auction Date; and
(vi) advise each Potential Owner on whose behalf such Broker-
Dealer submitted a Bid that was accepted, in whole or in part, of the
next Auction Date.
(c) On the basis of the information provided to it pursuant to
paragraph (a) above, each Broker-Dealer that submitted a Bid or Sell Order
in an Auction is required to allocate any funds received by it pursuant to
paragraph (b)(ii) above, and any Auction Rate Notes received by it pursuant
to paragraph (b)(iii) above, among the Potential Owners, if any, on whose
behalf such Broker-Dealer submitted Bids, the Existing Owners, if any, on
whose behalf such Broker-Dealer submitted Bids or Sell Orders in such
Auction, and any Broker-Dealers identified to it by the Auction Agent
following such Auction pursuant to paragraph (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Owner and Existing Owner with an Order in
the Auction on such Auction Date shall instruct its Participant as
provided in (b)(ii) or (b)(iii) above, as the case may be;
(ii) each Seller's Broker-Dealer that is not a Participant in the
Securities Depository shall instruct its Participant to (A) pay
through the Securities Depository to the Participant of the Existing
Owner delivering Auction Rate Notes to such Broker-Dealer following
such Auction pursuant to (b)(iii) above the amount necessary,
including accrued interest, if any, to purchase such Auction Rate
Notes against receipt of such Auction Rate Notes, and (B) deliver such
Auction Rate Notes through the Securities Depository to a Buyer's
Broker-Dealer (or its Participant) identified to such Seller's Broker-
Dealer pursuant to (a)(v) above against payment therefor; and
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(iii) each Buyer's Broker-Dealer that is not a Participant in
the Securities Depository shall instruct its Participant to (A) pay
through the Securities Depository to a Seller's Broker-Dealer (or its
Participant) identified following such Auction pursuant to (a)(vi)
above the amount necessary, including accrued interest, if any, to
purchase the Auction Rate Notes to be purchased pursuant to (b)(ii)
above against receipt of such Auction Rate Notes, and (B) deliver such
Auction Rate Notes through the Securities Depository to the
Participant of the purchaser thereof against payment therefor.
(e) On the first Business Day of the Interest Period next succeeding
each Auction Date:
(i) each Participant for a Bidder in the Auction on such Auction
Date referred to in (d)(i) above shall instruct the Securities
Depository to execute the transactions described under (b)(ii) or
(b)(iii) above for such Auction, and the Securities Depository shall
execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant shall instruct
the Securities Depository to execute the transactions described in
(d)(ii) above for such Auction, and the Securities Depository shall
execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Participant shall instruct
the Securities Depository to execute the transactions described in
(d)(iii) above for such Auction, and the Securities Depository shall
execute such transactions.
(f) If an Existing Owner selling Auction Rate Notes in an Auction
fails to deliver such Auction Rate Notes (by authorized book-entry), a
Broker-Dealer may deliver to the Potential Owner on behalf of which it
submitted a Bid that was accepted a principal amount of Auction Rate Notes
that is less than the principal amount of Auction Rate Notes that otherwise
was to be purchased by such Potential Owner. In such event, the principal
amount of Auction Rate Notes to be so delivered shall be determined solely
by such Broker-Dealer. Delivery of such lesser principal amount of Auction
Rate Notes shall constitute good delivery. Notwithstanding the foregoing
terms of this paragraph (f), any delivery or nondelivery of Auction Rate
Notes which shall represent any departure from the results of an Auction,
as determined by the Auction Agent, shall be of no effect unless and until
the Auction Agent shall have been notified of such delivery or nondelivery
in accordance with the provisions of the Auction Agent and the Broker-
Dealer Agreement.
CERTAIN DEFINITIONS AND PROVISIONS
RELATED TO LIBOR RATE NOTES
The definitions and provisions relating to LIBOR Rate Notes are, unless
otherwise specified with respect to a Series in the related Prospectus
Supplement, set forth below.
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LIBOR-RELATED DEFINITIONS
"APPLICABLE RATE" shall mean, with respect to the LIBOR Rate Notes of any
Class for the first Interest Period, the rate per annum specified in the related
Prospectus Supplement and, with respect to the LIBOR Rate Notes of any Class for
each subsequent Interest Period, the LIBOR-Based Rate as determined by the
Calculation Agent on the LIBOR Determination Date; provided, however, that the
Applicable Rate cannot exceed the Maximum Interest Rate.
"AUTHORIZED DENOMINATIONS" shall mean $100,000 and any multiple thereof, or
any other amount as may be specified with respect to a Series in the related
Prospectus Supplement.
"BOND-EQUIVALENT YIELD" shall mean, in respect of any security with a
maturity of six months or less the rate for which is quoted in THE WALL STREET
JOURNAL on a bank discount basis, a yield (expressed as a percentage) calculated
in accordance with the following formula and rounded up to the nearest one
one-hundredth of one percent:
Q x N
Bond Equivalent Yield = ----------------------- x 100
360 - (T x Q)
where "Q" refers to the per annum rate for the security quoted on a bank
discount basis and expressed as a decimal, "N" refers to 365 or 366 (days),
as the case may be, and "T" refers to the number of days to maturity.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday, holiday
or day on which banks in New York, New York, or the New York Stock Exchange,
the Trustee or the Calculation Agent, are authorized or permitted by law or
executive order to close.
"CALCULATION AGENT" shall mean any person appointed as such to make
calculations of interest and other matters pursuant to the Indenture.
"DEPOSITORY" or "SECURITIES DEPOSITORY" shall mean The Depository Trust
Company or any successor securities depository selected or approved by the
Issuer.
"HOLDER" as used in this Section shall mean the beneficial owner of any
Class B-2 Note and any other beneficial owner of a LIBOR Rate Note.
"INITIAL INTEREST PAYMENT DATE" shall mean the date specified in the
related Prospectus Supplement.
"INITIAL INTEREST PERIOD" shall mean the period from and including the
date of delivery of the LIBOR Rate Notes of any Class and ending on the date
specified in the related Prospectus Supplement.
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"INITIAL PERIOD INTEREST" shall mean, with respect to any Class, the
interest rate per annum on the LIBOR Rate Notes of such Class specified in
the related Prospectus Supplement.
"INTEREST AMOUNT" shall mean the amount of interest distributable in
respect of each $100,000 in principal amount or any other amount as may be
specified with respect to a Series in the related Prospectus Supplement
(taken, without rounding, to .0001 of one cent) of LIBOR Rate Notes for any
Interest Period or part thereof, as calculated in accordance with the
Indenture.
"INTEREST PAYMENT DATE" means the date specified in the related
Prospectus Supplement and the first day of each month thereafter, and the
maturity date for any LIBOR Note, or if any such date is not a Business Day,
the next succeeding Business Day (but only for interest accrued through the
last day of the calendar month next preceding such Interest Payment Date).
"INTEREST PERIOD" means the Initial Interest Period for the LIBOR Rate
Notes of any Class and the period beginning on the first day of each month
and ending on the last day of each month.
"LIBOR DETERMINATION DATE" shall mean the Business Day immediately
preceding the first day of each Interest Period.
"LIBOR-BASED RATE" shall mean One-Month LIBOR plus an amount specified in
the related Prospectus Supplement.
"MAXIMUM INTEREST RATE" shall mean the lesser of (a) 18% per annum or
(b) the maximum rate of interest permitted under State law for student loan
revenue bonds of the Issuer.
"ONE-MONTH LIBOR" means the rate of interest per annum equal to the rate
per annum at which United States dollar deposits having a maturity of one
month are offered to prime banks in the London interbank market which appear
on the Telerate Service LIBOR Page as of approximately 11:00 a.m., London
time, on the LIBOR Determination Date. If at least two such quotations
appear, One-Month LIBOR will be the arithmetic mean (rounded upwards, if
necessary, to the nearest one-hundredth of one percent) of such offered
rates. If fewer than two such quotes appear, One-Month LIBOR with respect to
such Interest Period will be determined at approximately 11:00 a.m., London
time, on such LIBOR Determination Date on the basis of the rate at which
deposits in United States dollars having a maturity of three months are
offered to prime banks in the London interbank market by four major banks in
the London interbank market selected by (i) the Calculation Agent (if the
Calculation Agent is other than the Trustee) or (ii) the Trustee, and in a
principal amount of not less than U.S. $1,000,000 and that is representative
for a single transaction in such market at such time. The Calculation Agent
or the Trustee, as applicable, will request the principal London office of
each of such banks to provide a quotation of its rate. If at least two
quotations are provided, One-Month LIBOR will be the arithmetic mean (rounded
upwards, if necessary, to the nearest one-hundredth of one percent) of such
offered rates. If fewer than two quotations are provided, One-Month LIBOR
with respect to such Interest Period will be the arithmetic mean (rounded
upwards, if necessary, to the nearest one-hundredth of one percent) of the
rates quoted at approximately 11:00 a.m.,
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New York City time on such LIBOR Determination Date by three major banks in
New York, New York selected by (x) the Calculation Agent or (y) the Trustee,
as applicable, for loans in United States dollars to leading European banks
having a maturity of three months and in a principal amount equal to an
amount of not less than U.S. $1,000,000 and that is representative for a
single transaction in such market at such time; provided, however, that if
the banks selected as aforesaid are not quoting as mentioned in this
sentence, One-Month LIBOR in effect for the applicable Interest Period, will
be One-Month LIBOR in effect for the immediately preceding Interest Period.
"PARTICIPANT" shall mean a member of or participant in, the Depository.
"PAYMENT DEFAULT" shall mean failure to make payment of interest on,
premium, if any, and principal of the LIBOR Rate Notes when due, by the
Issuer.
"PERSON" means and includes, unless otherwise specified, an individual,
corporation, company, trust, estate partnership or association.
"RECORD DATE" shall mean the Business Day immediately preceding the
Interest Payment Date.
"REDEMPTION DATE," when used with respect to any LIBOR Rate Notes to be
redeemed, shall mean the date fixed for such redemption.
"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended.
INTEREST ON LIBOR RATE NOTES
(a) Interest on the LIBOR Rate Notes shall accrue for each Interest
Period and shall be payable in arrears, on each Interest Payment Date.
(b) The rate of interest on the LIBOR Rate Notes of any Class for the
first Interest Period shall be Initial Period Interest specified in the
related Prospectus Supplement. The rate of interest on the LIBOR Rate
Notes for each subsequent Interest Period shall be determined by the
Calculation Agent on the LIBOR Determination Date and shall be the
LIBOR-Based Rate.
If a Payment Default occurs, the Applicable Rate (as defined below) with
respect to the LIBOR Rate Notes of any Class shall be the same rate per annum
as if no such Payment Default had occurred.
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The rate per annum at which interest is payable on the LIBOR Rate Notes
of any Class for any Interest Period is herein referred to as the "Applicable
Rate." Notwithstanding anything herein to the contrary, the Applicable Rate
cannot exceed the Maximum Interest Rate.
PAYMENTS
So long as the LIBOR Rate Notes of any Class are registered in the name
of the Depository or the nominee thereof, payment of interest (other than at
maturity) and premium, if any, on, and of principal at redemption of, such
LIBOR Rate Notes shall be made to the Depository by wire transfer provided
proper wire instructions are received. Each Holder of LIBOR Rate Notes, by
such Holder's purchase of LIBOR Rate Notes, appoints the Trustee as its agent
in connection with the payment by such Holder of its share, if any, of the
amounts payable to the Calculation Agent.
NOTICE OF PAYMENT DEFAULTS AND CURES
By 12:30 p.m. on the Business Day immediately succeeding each Interest
Payment Date, the Trustee will determine if a Payment Default has occurred.
If a Payment Default has occurred, the Trustee shall, if the Calculation
Agent is other than the Trustee, notify the Calculation Agent by 1:00 p.m. of
such Payment Default. If a Payment Default has been cured, the Trustee
shall, if the Calculation Agent is other than the Trustee, so notify the
Calculation Agent by 5:00 p.m. on the day such Payment Default is cured.
CALCULATION OF RATES;
TERMINATION OF BOOK ENTRY SYSTEM
The Calculation Agent shall calculate the LIBOR-Based Rate on the
Business Day immediately preceding the first day of each Interest Period.
The determination by the Calculation Agent of the Applicable Rate will (in
the absence of manifest error) be final and binding upon the Owners of the
LIBOR Rate Notes and all other parties.
If the ownership of the LIBOR Rate Notes of any Class is no longer
maintained in book-entry form such LIBOR Rate Notes may be exchanged for
other LIBOR Rate Notes, in Authorized Denominations, and of a like aggregate
principal amount, upon surrender of such LIBOR Rate Notes to be exchanged at
the principal office of the Trustee. LIBOR Rate Notes, upon surrender
thereof at the principal office of the Trustee, duly endorsed for transfer or
accompanied by an assignment duly executed by the Holder of its attorney duly
authorized in writing, will be transferred to a transferee or transferees, in
the form of one or more new fully registered LIBOR Rate Notes of such Class,
in Authorized Denomination, and of a like aggregate principal amount having
the same interest rate and bearing numbers not previously assigned.
In all cases in which the privilege of exchanging or transferring LIBOR
Rate Notes is exercised, the Issuer will cause to be executed and delivered
LIBOR Rate Notes in accordance
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with the provisions of the Indenture. For every such exchange or transfer of
LIBOR Rate Notes, the Trustee will require payment by the Holder of any tax
or other governmental charge required to be paid with respect to such
exchange or transfer. All expenses, other than any tax or other government
charge, incurred by the Trustee or the Issuer with respect to each such
transfer or exchange will be paid by the Issuer.
The Trustee will not be required to transfer any LIBOR Note during the
period of five Business Days next preceding the mailing of notice of
redemption as described herein. After giving of such notice of redemption,
the Trustee will not be required to transfer or exchange any LIBOR Note,
which LIBOR Note or portion thereof has been called for redemption.
COMPUTATION OF INTEREST
Except as otherwise specified in the related Prospectus Supplement, the
amount of interest distributable to Holders of LIBOR Rate Notes of any Class
in respect of each $100,000 in principal amount thereof for any Interest
Period or part thereof shall be calculated by applying the Applicable Rate
for such Interest Period or part thereof to the principal amount of $100,000,
multiplying such product by the actual number of days in the Interest Period
or part thereof concerned divided by 360, and truncating the resultant figure
to the nearest one cent. Interest on the LIBOR Rate Notes shall be computed
by the Trustee on the basis of a 360-day year for the number of days actually
elapsed. In the event an Interest Payment Date occurs in any Interest Period
on a date other than the first day of such Interest Period, the Trustee,
after confirming the calculation required above, shall calculate the portion
of the Interest Amount payable on such Interest Payment Date and the portion
payable on the next succeeding Interest Payment Date.
NOTIFICATION OF RATES, AMOUNTS AND PAYMENT DATES
(a) The Trustee shall determine the aggregate amount of interest
distributable on the next succeeding Interest Payment Date to the Holders
of the LIBOR Rate Notes. So long as the ownership of the LIBOR Rate Notes
of any Class is maintained in book-entry form by the Depository, the
Trustee shall advise the Depository of each Record Date for the LIBOR Rate
Notes at least two Business Days prior thereto.
(b) Promptly after the Date of Issue and each Interest Payment Date,
and in any event at least 10 days prior to each Interest Payment Date
following the Initial Interest Payment Date, the Trustee shall:
(i) so long as no Payment Default has occurred and is continuing
and the ownership of the LIBOR Rate Notes of any Class is maintained
in book-entry form by the Depository, confirm the Calculation Agent's
determination of (1) the date of such next Interest Payment Date and
(2) the amount payable to the Calculation Agent and notify the
Calculation Agent of any discrepancy therein; and
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(ii) advise the Depository, so long as the ownership of the LIBOR
Rate Notes of any Class is maintained in book-entry form by the
Depository, of the Applicable Rate and the Interest Amount in respect
of the next succeeding Interest Period.
CALCULATION AGENT
(a) Smith Barney Inc. shall serve as the initial Calculation Agent
for the LIBOR Rate Notes. The Calculation Agent shall be (i) a bank or
trust company duly organized under the laws of the United States of America
or any state or territory thereof, and having a combined capital stock,
surplus and undivided profits of at least $15,000,000 or (ii) a member of
the National Association of Securities Dealers, Inc., having a
capitalization of at least $15,000,000 and, in either case, authorized by
law to perform all the duties imposed upon it hereunder. The Calculation
Agent may resign and be discharged of the duties and obligations created
hereunder by giving at least 90 days' written notice to the Issuer and the
Trustee (30 days' written notice if the Calculation Agent has not been paid
its fee for more than 30 days). The Calculation Agent may be removed at any
time by the Trustee if the Calculation Agent is an entity other than the
Trustee, acting at the direction of the Issuer or the holders of 51% of the
aggregate principal amount of the LIBOR Rate Notes, by an instrument signed
by the Trustee and filed with the Calculation Agent and the Issuer upon at
least 90 days' notice. If the Calculation Agent and the Trustee are the
same entity, the Calculation Agent may be removed as described above, with
the Issuer acting in lieu of the Trustee.
(b) In the event that the Calculation Agent shall resign or be
removed or dissolved, or if the property or affairs of the Calculation
Agent shall be taken under the control of any state or federal court or
administrative body because of bankruptcy or insolvency, or for any other
reason, the Issuer shall use its best efforts to appoint a successor as
Calculation Agent, and the Trustee shall thereupon enter into an agreement
with such successor to perform the duties of the Calculation Agent as
described herein.
(c) The Calculation Agent (if other than the Trustee) shall be acting
as agent for the Trustee, as trustee, registrar and paying agent for the
LIBOR Rate Notes, in connection with its duties hereunder. In the absence
of bad faith or negligence on its part, the Calculation Agent shall not be
liable for any action taken, suffered or omitted or for any error of
judgment made by it in the performance of its duties hereunder and shall
not be liable for any error of judgment made in good faith unless the
Calculation Agent shall have been negligent in ascertaining (or failing to
ascertain) the pertinent facts necessary to make such judgment.
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CREDIT RATINGS
The Issuer shall take all reasonable action necessary to enable at least
one nationally recognized statistical rating organization (as that term is
used in the rules and regulations of the SEC under the Securities Exchange
Act) to provide credit ratings for the LIBOR Rate Notes of any Class.
NOTICE
The Issuer shall use its best efforts to provide the Trustee and, so long
as no Payment Default has occurred and is continuing and the ownership of the
LIBOR Rate Notes is maintained in book-entry form by the Depository, the
Calculation Agent with notice of any change in the maximum rate permitted by
law on the LIBOR Rate Notes.
NOTICE OF PAYMENT DEFAULT
(a) If the Issuer determines that a Payment Default has occurred the
Issuer shall promptly notify the Trustee thereof.
(b) So long as the ownership of the LIBOR Rate Notes of any Class is
maintained in book-entry form by the Depository, upon the occurrence of a
Payment Default the Trustee shall immediately send a notice thereof to the
Calculation Agent by telecopy or similar means.
(c) So long as the ownership of the LIBOR Rate Notes of any Class is
maintained in book-entry form by the Depository, the Trustee shall
immediately send notice to the Calculation Agent by telecopy or similar
means if a Payment Default is cured.
BOOK ENTRY REGISTRATION
DTC, located in New York, New York, is to act as Securities Depository
for the book entry Notes of any Series. Unless otherwise specified with
respect to a Series, the Notes of each Series are to be issued as fully
registered securities registered in the name of Cede & Co. (DTC's partnership
nominee). One fully registered bond certificate is to be issued for each
Class of the Notes or any Series, as set forth in the cover page hereof, each
in the aggregate principal amount of such Class, and is to be deposited with
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 New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act. DTC holds securities that its participants
("Participants") deposit with DTC. DTC also facilitates the settlement among
Participants of securities
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transactions, such as transfers and pledges in deposited securities, through
electronic computerized book-entry changes in Participants' accounts, thereby
eliminating the need for physical movement of securities certificates.
Direct Participants include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. DTC is
owned by a number of its direct Participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc., and the National
Association of Securities Dealers, Inc. 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
Direct Participant, either directly or indirectly ("Indirect Participants").
The rules applicable to DTC and its Participants are on file with the
Securities and Exchange Commission.
Purchases of the Notes under the DTC system must be made by or through
Direct Participants, which are to receive a credit for the Notes on DTC's
records. The ownership interest of each actual purchaser of each Series of
Notes ("Beneficial Owner") is in turn to be recorded on the Direct and
Indirect Participants' records. Beneficial Owners shall not receive written
confirmation from DTC of their purchase, but Beneficial Owners are expected
to receive written confirmations providing details of the transaction, as
well as periodic statements of their holdings, from the Direct or Indirect
Participant through which the Beneficial Owner entered into the transaction.
Transfers of ownership interests in the Notes are to be accomplished by
entries made on the books of Participants acting on behalf of Beneficial
Owners. Beneficial Owners shall not receive certificates representing their
ownership interests in the Notes, except in the event that use of the
book-entry system for the Series of any Notes is discontinued.
To facilitate subsequent transfers, all Notes deposited by Participants
with DTC are registered in the name of DTC's partnership nominee, Cede & Co.
The deposit of such Notes with DTC and their registration in the name of Cede
& Co. effect no change in beneficial ownership. DTC has no knowledge of the
actual Beneficial Owners of Notes; DTC's records reflect only the identity of
the Direct Participants to whose accounts such Notes are credited, which may
or may not be the Beneficial Owners. The Participants remain responsible for
keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners are governed by
arrangements among them, subject to any statutory or regulatory requirements
as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of a
Class of the Notes of any Series are being redeemed, DTC's practice is to
determine by lot the amount of the interest of each Direct Participant in
such Class to be redeemed.
Neither DTC nor Cede & Co. will consent or vote with respect to the Notes
of any Series. Under its usual procedures, DTC mails an omnibus proxy to the
Issuer or Trustee, as appropriate, as soon as possible after the record date.
The omnibus proxy assigns Cede & Co.'s
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consenting or voting rights to those Direct Participants to whose accounts
the Notes are credited on the record date (identified in a listing attached
to the omnibus proxy).
Principal and interest payments on the Notes are to be made to DTC.
Payments by Participants to Beneficial Owners are 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
shall be the responsibility of such Participant and not of DTC, the Trustee
or the Issuer, 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 Issuer or the Trustee, disbursement of such payments to
Direct Participants shall be the responsibility of DTC, and disbursement of
such payments to the Beneficial Owners shall be the responsibility of Direct
and Indirect Participants.
DTC may discontinue providing its services as Securities Depository with
respect to the Notes of any Series at any time by giving reasonable notice to
the Issuer or the Trustee. Under such circumstances, in the event that a
successor securities depository is not obtained, note certificates are
required to be printed and delivered.
The Issuer may decide to discontinue use of the system of book entry
transfers through DTC (or a successor securities depository). In that event,
note certificates are to be printed and delivered.
ADDITIONAL NOTES
The Issuer may, upon complying with the provisions of the Indenture,
authenticate and deliver from time to time Additional Notes with respect to a
Series secured by the Trust Estate on a parity with or subordinate to either
the Senior Notes, the Subordinate Notes or the Junior-Subordinate Notes
secured under the Indenture as shall be determined by the Issuer.
No Additional Notes shall be authenticated and delivered pursuant to the
Indenture until the following conditions have been satisfied:
(a) The Issuer and the Trustee have entered into a Supplemental
Indenture (which Supplemental Indenture will not require the approval of
the Registered Owners of any of the Outstanding Notes) providing the terms
and forms of the Additional Notes, including the designation of such
Additional Notes as Senior Notes, Subordinate Notes or Junior-Subordinate
Notes, the redemption provisions applicable to such Additional Notes and
the selection provisions applicable to such Additional Notes in the case of
partial redemptions not inconsistent with the Indenture, and which adopts
the applicable provisions of the Indenture.
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(b) The Issuer has delivered to the Trustee within 30 days prior to
the delivery of the proposed Additional Notes a Cash Flow Certificate
which, taking into account the then-existing Trust Estate as well as the
Trust Estate after giving effect to the issuance of the proposed Additional
Notes, shows, with respect to the period covered by the Cash Flow
Certificate, which period shall extend from the date of the Cash Flow
Certificate to the latest maturity of the Notes expected to be Outstanding
after the issuance of the proposed Additional Notes, (i) all Revenue
expected to be received during such period from the Trust Estate, (ii) the
application of all such Revenue in accordance with the provisions of the
Indenture and (iii) the resulting periodic balances on each Interest
Payment Date, and shows that anticipated revenue will exceed, by a margin
of $250,000 plus any additional amount, if any, required by any
Supplemental Indenture, the amount necessary to pay the principal of and
interest on the Notes, including the proposed Additional Notes, when due
and all expenses payable under the Indenture when due, under all scenarios
included in the Cash Flows.
(c) Written evidence from each Rating Agency which has assigned a
Rating or Ratings to any Series of Notes that such Rating or Ratings will
not be reduced or withdrawn as a result of the issuance of the proposed
Additional Notes; provided however, that if any of the Notes are not then
rated by any Rating Agency, such Additional Notes may not be secured on a
parity with such unrated Notes.
(d) An opinion of Note Counsel to the effect that all of the
foregoing conditions to the issuance of the proposed Additional Notes have
been satisfied.
(e) Upon the issuance of the Additional Notes, an amount shall be
deposited to the Reserve Fund to increase the amount on deposit therein to
equal the Reserve Fund Requirement.
(f) The Trustee shall have received an opinion of counsel in form and
substance acceptable to it to the effect that the issuance of the
Additional Notes, if consummated, would not cause the Notes to fail to be
characterized as the indebtedness of the Issuer for federal income tax
purposes.
Any Additional Notes shall have Stated Maturities of July 1 of any
year or years.
The Trustee is authorized pursuant to the provisions of the Indenture
to establish any additional Funds or Accounts under the Indenture which it
deems necessary or convenient in connection with the issuance and delivery
of any Additional Notes of any Series.
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SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE
The following is a summary of certain provisions of the Indenture. This
summary does not purport to be comprehensive and reference should be made to
the Indenture for a full and complete statement of the provisions thereof.
PARITY OF LIEN
The provisions, covenants and agreements set forth in the Indenture to be
performed by or on behalf of the Issuer shall be for the equal benefit,
protection and security of the Registered Owners of any and all of the Notes,
all of which, regardless of the time or times of their issuance or maturity,
shall be of equal rank without preference, priority or distinction of any of
the Notes over any other thereof, except as expressly provided in the
Indenture.
OTHER OBLIGATIONS OF THE ISSUER
The Issuer agrees not to commingle the Funds established by the Indenture
with funds, proceeds, or investment of funds relating to other issues or
series of notes heretofore or hereafter issued, except to the extent such
commingling is required by the Trustee for ease in administration of its
duties and responsibilities; provided, however, that should the Trustee
require such permitted commingling, it shall keep complete records in order
that the funds, proceeds, or investments under the Indenture may at all times
be identified by source and application, and if necessary, separated.
The Issuer agrees not to create or voluntarily permit to be created any
debt, lien, or charge which would be on a parity with, junior to, or prior to
the lien of the Indenture; shall not do or omit to do or suffer to be done or
omitted to be done any matter or things whatsoever whereby the lien of the
Indenture or the priority of such lien for the Notes thereby secured might or
could be lost or impaired; and agrees to pay or cause to be paid or to make
adequate provisions for the satisfaction and discharge of all lawful claims
and demands which if unpaid might by law be given precedence to or any
equality with the Indenture as a lien or charge upon the Financed Eligible
Loans; provided, however, that nothing in this paragraph shall require the
Issuer to pay, discharge, or make provision for any such lien, charge, claim,
or demand so long as the validity thereof shall be by it in good faith
contested, unless thereby, in the opinion of the Trustee, the same will
endanger the security for the Notes; and provided further that any
subordinate lien (i.e., subordinate to the lien securing the Senior Notes,
the Subordinate Notes and the Junior-Subordinate Notes, if any) shall be
entitled to no payment from the Trust Estate, nor may any remedy be exercised
with respect to such subordinate lien against the Trust Estate until all
Notes shall have been paid or deemed paid under the Indenture.
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PLEDGE FOR PAYMENT
The Notes and interest thereon shall be and are payable from and equally
secured (except as to priority of payment of the Senior Notes, over the
Subordinate Notes and the Junior-Subordinate Notes, if any, the priority of
payment of the Senior Notes and the Subordinate Notes over the
Junior-Subordinate Notes, if any, and the priority, if any, of payment of one
series of Junior-Subordinate Notes over any other class of Junior-Subordinate
Notes, as provided in the Indenture or as provided in any Supplemental
Indenture) by an irrevocable first lien on and pledge of the properties
constituting the Trust Estate, subject to the application thereof as
permitted by the Indenture, but in no event shall the Registered Owners have
any right to possession of any Financed Eligible Loans, which shall be held
only by the Trustee or its agent or bailee. The Issuer reserves the right to
issue, in the future, additional notes subordinate to the Subordinate Notes
offered hereby pursuant to the terms of the Indenture.
REPRESENTATIONS AND WARRANTIES OF THE ISSUER
The Issuer represents and warrants in the Indenture that it is duly
authorized under the laws of the State of Nevada (the "State") to create and
issue the Notes and to execute and deliver the Indenture and to make the
pledge to the payment of Notes thereunder, that all necessary action on the
part of the Issuer for the creation and issuance of the Notes and the
execution and delivery of the Indenture has been duly and effectively taken;
and that the Notes in the hands of the Registered Owners thereof are and will
be valid and enforceable special limited obligations of the Issuer secured by
and payable solely from the Trust Estate.
COVENANTS AS TO ADDITIONAL CONVEYANCES
At any and all times, the Issuer will duly execute, acknowledge, and
deliver, or will cause to be done, executed, and delivered, all and every
such further acts, conveyances, transfers, and assurances in law as the
Trustee shall reasonably require for the better conveying, transferring, and
pledging and confirming unto the Trustee, all and singular, the properties
constituting the Trust Estate transferred and pledged, or intended so to be
transferred and pledged by the provisions of the Indenture.
FURTHER COVENANTS OF THE ISSUER
The Issuer will cause financing statements and continuation statements
with respect thereto at all times to be filed in the office of the Secretary
of State of its state of organization and any other jurisdiction necessary to
perfect and maintain the security interest granted by the Issuer under the
Indenture.
The Issuer will duly and punctually keep, observe and perform each and
every term, covenant, and condition on its part to be kept, observed and
performed, contained in the Indenture and the other agreements, to which the
Issuer is a party pursuant to the transactions
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contemplated by the Indenture, and will punctually perform all duties
required by the Bylaws of the Issuer and laws of the State.
The Issuer shall be operated on the basis of its fiscal year established
by its board of directors from time to time (the "Fiscal Year").
The Issuer shall cause to be kept full and proper books of records and
accounts, in which full, true, and proper entries will be made of all
dealings, business, and affairs of the Issuer which relate to the Notes.
The Issuer, upon written request of the Trustee, will permit at all
reasonable times the Trustee or its agents, accountants, and attorneys, to
examine and inspect the property, books of account, records, reports, and
other data relating to the Financed Eligible Loans, and will furnish the
Trustee such other information as it may reasonably request. The Trustee
shall be under no duty to make any such examination unless requested in
writing to do so by the Registered Owners of 51% in collective aggregate
principal amount of the Notes at the time Outstanding, and unless such
Registered Owners shall have offered the Trustee security and indemnity
satisfactory to it against any costs, expenses and liabilities which might be
incurred thereby.
The Issuer shall cause an annual audit to be made by an independent
auditing firm of national reputation and file one copy thereof with the
Trustee within 150 days of the close of each Fiscal Year. The Trustee shall
be under no obligation to review or otherwise analyze such audit.
The Issuer covenants in the Indenture that in the event it intends to
transfer or sell Financed Eligible Loans which are a part of the Trust
Estate, it shall give written notice thereof to the Trustee and each Rating
Agency. The Issuer also covenants that in the event it intends to transfer
or sell Financed Eligible Loans (except in the case of a consolidation or
serialization/combination or submitting Financed Eligible Loans for claim to
a Guarantee Agency) which constitute more than 10% of the Trust Estate, it
shall give written notice thereof to each Rating Agency within ten days
of such sale. The Issuer shall not sell Financed Eligible Loans except as
permitted by the provisions of the Indenture, in which case such Financed
Eligible Loans may be sold at a price not less than the principal amount
thereof (including accrued by unpaid interest). In such case, the proceeds
thereof shall be used to either acquire Eligible Loans with the same or more
favorable characteristics or to redeem Notes. Further, there shall be no
sale of Financed Eligible Loans (except in the case of a consolidation or
serialization/combination or submitting Financed Eligible Loans for claim to
a Guarantee Agency) if the Aggregate Market Value of the Trust Estate is less
than the aggregate principal amount of the Notes Outstanding and there shall
be no sale of Financed Eligible Loans (except in the case of a consolidation
or serialization/combination or submitting Financed Eligible Loans for claim
to a Guarantee Agency) when the Aggregate Market Value of the Trust Estate is
greater than the aggregate principal amount of the Notes Outstanding unless,
immediately upon such sale, the proceeds thereof are used to acquire an equal
or greater principal amount of
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Eligible Loans or are used to redeem Notes optionally pursuant to the
provisions of the Indenture, and thereupon the Aggregate Market Value of the
Trust Estate is greater than the aggregate principal amount of all Notes
Outstanding (after giving effect to such redemption) except in the limited
circumstances set forth in the Indenture.
The Issuer covenants that all Financed Eligible Loans upon receipt
thereof shall be delivered to the Trustee or its agent or bailee to be held
pursuant to the provisions of the Indenture and pursuant to the Servicing
Agreement or a Custodian Agreement.
Notwithstanding anything to the contrary contained in the Indenture,
except upon the occurrence and during the continuance of an Event of Default
under the Indenture, the Issuer expressly reserves and retains the privilege
to receive and, subject to the terms and provisions of the Indenture, to keep
or dispose of, claim, bring suits upon or otherwise exercise, enforce or
realize upon its rights and interest in and to the Financed Eligible Loans
and the proceeds and collections therefrom, and neither the Trustee nor any
Registered Owner shall in any manner be or be deemed to be an indispensable
party to the exercise of any such privilege, claim or suit and the Trustee
shall be under no obligation whatsoever to exercise any such privilege, claim
or suit; provided, however, that the Trustee shall have and retain possession
of the Financed Eligible Loans pursuant to the provisions of the Indenture
(which Financed Eligible Loans may be held by the Trustee's agent or bailee)
so long as such loans are subject to the lien of the Indenture.
SERVICING AGREEMENT
The Issuer covenants that it will keep in force and effect a Servicing
Agreement whereby a Servicer will be responsible for the performance of
certain administrative functions in connection with the Financed Eligible
Loans.
PROCEDURES FOR TRANSFER OF FUNDS
In any instance where the Indenture requires a transfer of funds or money
from one Fund to another, a transfer of ownership in investments or an
undivided interest therein may be made in any manner agreeable to the Issuer
and the Trustee, and in the calculation of the amount transferred, interest
on the investment which has or will accrue before the date the money is
needed in the fund to which the transfer is made shall not be taken into
account or considered as money on hand at the time of such transfer.
ADDITIONAL COVENANTS WITH
RESPECT TO THE HIGHER EDUCATION ACT
The Issuer covenants that it will cause the Trustee to be, or replace the
Trustee with, an Eligible Lender under the Higher Education Act, that it will
acquire or cause to be acquired Eligible Loans only from an Eligible Lender;
that it will not dispose of or deliver any Financed Eligible Loans or any
security interest in any such Financed Eligible Loans to any party who is
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not an Eligible Lender so long as the Higher Education Act or regulations
adopted thereunder require an Eligible Lender to be the owner or holder of
guaranteed Student Loans; provided, however, that nothing above shall prevent
the Issuer from delivering the Eligible Loans to the Servicer or the related
Guarantee Agency. The Registered Owners of the Notes shall not in any
circumstances be deemed to be the owner or holder of the guaranteed Student
Loans.
The Issuer, or its designated agent, shall be responsible for each of the
following actions with respect to the Higher Education Act: (a) The Issuer
shall be responsible for dealing with the Secretary with respect to the
rights, benefits and obligations under the certificates of insurance and the
contract of insurance, and the Issuer, or its designated agent, shall be
responsible for dealing with the Guarantee Agencies with respect to the
rights, benefits and obligations under the Guarantee Agreements with respect
to the Financed Eligible Loans; (b) The Issuer, or its designated agent,
shall cause to be diligently enforced, and shall cause to be taken all
reasonable steps, actions and proceedings necessary or appropriate for the
enforcement of all terms, covenants and conditions of all Financed Eligible
Loans and agreements in connection therewith, including the prompt payment of
all principal and interest payments and all other amounts due thereunder;
(c) The Issuer, or its designated agent, shall cause the Financed Eligible
Loans to be serviced by entering into the Servicing Agreement or other
agreement with the Servicer for the collection of payments made for, and the
administration of the accounts of, the Financed Eligible Loans; (d) The
Issuer, or its designated agent, shall comply, and shall cause all of its
officers, directors, employees and agents to comply, with the provisions of
the Higher Education Act and any regulations or rulings thereunder, with
respect to the Financed Eligible Loans; and (e) The Issuer, or its designated
agent, shall cause the benefits of the Guarantee Agreements, the Interest
Subsidy Payments and the Special Allowance Payments to flow to the Trustee.
The Trustee shall have no liability for actions taken at the direction of the
Issuer, except for negligence or willful misconduct in the performance of its
express duties under the Indenture. The Trustee shall have no obligation to
administer, service or collect the loans in the Trust Estate or to maintain
or monitor the administration, servicing or collection of such loans.
STUDENT LOANS; COLLECTIONS
THEREOF; ASSIGNMENT THEREOF
The Issuer, through the Servicer, shall diligently collect all principal
and interest payments on all Financed Eligible Loans, and all Interest
Benefit Payments, insurance and default claims and Special Allowance Payments
which relate to such Financed Eligible Loans. The Issuer shall cause the
filing and assignment of such claims (prior to the timely-filing deadline for
such claims under the Regulations) by the Servicer. The Issuer will comply
with the Higher Education Act and regulations which apply to the Guaranteed
Student Loan Program and to such Financed Eligible Loans.
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APPOINTMENT OF AGENTS
The Issuer shall employ and appoint all employees, agents, consultants
and attorneys which it may consider necessary. No member of the board of
directors, neither singly nor collectively, shall be personally liable for
any act or omission not willfully fraudulent or mala fide.
CAPACITY TO SUE
The Issuer shall have the power and capacity to sue and to be sued on
matters arising out of or relating to the financing of the Financed Eligible
Loans.
CERTAIN MATTERS RELATING TO BANKRUPTCY
The Issuer will only engage in activities permitted by its Articles of
Incorporation and the Indenture. The Issuer has no intention of filing a
voluntary petition under the United States Bankruptcy Code or any similar
applicable state law so long as the Issuer is solvent and does not reasonably
foresee becoming insolvent. There can be no assurance, however, that the
Issuer, or the Seller will not become insolvent and file a voluntary petition
under the United States Bankruptcy Code or any similar applicable state law
in the future.
The voluntary or involuntary application for relief under the United
States Bankruptcy Code or any similar applicable law with respect to the
Seller should not necessarily result in a similar voluntary application with
respect to the Issuer so long as the Issuer is solvent and does not
reasonably foresee becoming insolvent either by reason of the Seller's
insolvency or otherwise. The Issuer has taken certain steps in structuring
the transaction contemplated by the Indenture that are intended to make it
unlikely that any voluntary or involuntary petition for relief by any Seller
under the insolvency laws will result in the consolidation, pursuant to the
insolvency laws, of the assets and liabilities of the Issuer with those of
such Seller. These steps include the formation of the Issuer as a special
purpose entity pursuant to its Articles of Incorporation containing certain
limitations (including restrictions on the nature of Issuer's business and on
the ability to commence a voluntary case or proceeding under any Insolvency
Law without an affirmative vote of all of the directors of the Issuer). The
Seller and the Issuer believe that (a) subject to certain assumptions
(including the assumption that the books and records relating to the assets
and liabilities of the Seller will at all times be maintained separately from
those relating to the assets and liabilities of the Issuer, the Issuer will
prepare its own balance sheets and financial statements and the Financed
Eligible Loans will not appear as assets of the Seller on its balance sheets,
and there will be no commingling of the assets of the Seller with those of
the Issuer) the assets and liabilities of the Issuer should not be
substantively consolidated with the assets and liabilities of the Seller in
the event of a petition for relief under the United States Bankruptcy Code
with respect to the Seller and (b) the transfer of Financed Eligible Loans by
any Seller should constitute an absolute transfer and, therefore, such
Financed Eligible Loans would not be property of the Seller in the event of
the filing of an application for relief by or against such Seller under the
United States Bankruptcy Code. If, however, a
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bankruptcy trustee for any Seller or a creditor of any Seller were to take
the view that such Seller and the Issuer should be substantively consolidated
or that the transfer of the Financed Eligible Loans from such Seller to the
Issuer should be recharacterized as a pledge of such Financed Eligible Loans,
then delays in payments on the Notes or (should the bankruptcy court rule in
favor of any such trustee, debtor in possession or creditor) reductions in
such payments could result.
EVENTS OF DEFAULT
For purposes of the Indenture, each of the following events are defined
as, and are declared to be, "Events of Default":
(a) default in the due and punctual payment of any interest on any of
the Senior Notes when due;
(b) default in the due and punctual payment of the principal of any
of the Senior Notes at their Maturity;
(c) if no Senior Notes are Outstanding under the Indenture, default
in the due and punctual payment of any interest on any of the Subordinate
Notes when due:
(d) if no Senior Notes are Outstanding under the Indenture, default
in the due and punctual payment of the principal of any of the Subordinate
Notes at their Maturity;
(e) if no Senior Notes or Subordinate Notes are Outstanding under the
Indenture, default in the due and punctual payment of any interest on the
Junior-Subordinate Notes, if any, when due;
(f) if no Senior Notes or Subordinate Notes are Outstanding under the
Indenture, default in the due and punctual payment of the principal of any
of the Junior-Subordinate Notes at their Maturity;
(g) default in the performance or observance of any other of the
covenants, agreements, or conditions on the part of the Issuer to be kept,
observed, and performed contained in the Indenture or in the Notes, and
continuation of such default for a period of 90 days after written notice
thereof by the Trustee to the President and Secretary of the Issuer; or
(h) the occurrence of an Event of Bankruptcy.
Any notice provided to be given to the President or Secretary of the Issuer
with respect to any default shall be deemed sufficiently given if sent by
registered mail with postage prepaid to the Person to be notified. The
Trustee may give any such notice in its discretion and shall give such notice
if requested to do so in writing by the Registered Owners of at least 51% of
the collective
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aggregate principal amount of the Senior Notes at the time Outstanding (or if
no Senior Notes are Outstanding under the Indenture at such time, then by the
Registered Owners of at least 51% of the collective aggregate principal
amount of the Subordinated Notes at the time Outstanding) (or if no Senior
Notes or Subordinate Notes are Outstanding under the Indenture at such time,
then by the Registered Owners of at least 51% of the collective aggregate
principal amount of any Junior-Subordinate Notes at the time Outstanding)
(the "Registered Owners Approval").
REMEDIES ON DEFAULT
POSSESSION OF TRUST ESTATE. Subject to the rights of the Trustee as
described under "--Right to Enforce in Trustee" below, upon the happening and
continuance of any Event of Default, the Trustee personally or by its
attorneys or agents may enter into and upon and take possession of such
portion of the Trust Estate as shall be in the custody of others, and all
property comprising the Trust Estate, and each and every part thereof, and
exclude the Issuer and its agents, servants and employees wholly therefrom,
and have, hold, use, operate, manage, and control the same and each and every
part thereof, and in the name of the Issuer or otherwise, as they shall deem
best, conduct the business thereof and exercise the privileges pertaining
thereto and all the rights and powers of the Issuer and use all of the Trust
Estate for that purpose, and collect and receive all charges, income and
Revenues of the same and of every part thereof, and after deducting therefrom
all expenses incurred thereunder and all other proper outlays in the
Indenture authorized, and all payments which may be made as just and
reasonable compensation for its own services, and for the services of its
attorneys, agents, and assistants, the Trustee shall apply the rest and
residue of the money received by the Trustee as follows:
(a) if the principal of none of the Notes shall have become due,
FIRST, to the payment of the interest in default on the Senior Notes then
due, in order of the maturity of the installments of such interest, with
interest on the overdue installments thereof at the same rates,
respectively, as were borne by the Senior Notes on which such interest
shall be in default, such payments to be made ratably to the parties
entitled thereto without discrimination or preference, SECOND, to the
payment of the interest in default on the Subordinate Notes then due, in
order of the maturity of the installments of such interest, with interest
on the overdue installments thereof at the same rates, respectively, as
were borne by the Subordinate Notes on which such interest shall be in
default, such payments to be made ratably to the parties entitled thereto
without discrimination or preference and, THIRD, to the payment of the
interest in default on the Junior-Subordinate Notes, if any, then due, in
order of the maturity of the installments of such interest, with interest
on the overdue installments thereof at the same rates, respectively, as
were borne by the Junior-Subordinate Notes on which such interest shall be
in default, such payments to be made ratably to the parties entitled
thereto without discrimination or preference, except as may be provided in
a Supplemental Indenture; and
(b) if the principal of any of the Notes shall have become due by
declaration of acceleration or otherwise, FIRST to the payment of the
interest and principal in default on the Senior Notes then due, with
interest on overdue installments of principal and
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interest then due at the same rates, respectively, as were borne by the
Senior Notes on which such interest shall be in default, such payments to
be made ratably to the parties entitled thereto without discrimination or
preference, SECOND, to the payment of the interest in default on the
Subordinate Notes then due, with interest on overdue installments of
principal and interest at the same rates, respectively, as were borne by
the Subordinate Notes on which such interest shall be in default then due
at the same rates, respectively, such payments to be made ratably to the
parties entitled thereto without discrimination or preference, THIRD, to
the payment of the principal of all Subordinate Notes then due, such
payments to be made ratably to the parties entitled thereto without
discrimination or preference, FOURTH, to the payment of the interest in
default on the Junior-Subordinate Notes, if any, then due, with interest
on overdue installments of principal and interest then due at the same
rates, respectively, as were borne by the Junior-Subordinate Notes on
which such interest shall be in default, such payments to be made ratably
to the parties entitled thereto without discrimination or preference, and
FIFTH, to the payment of the principal of all Junior-Subordinate Notes, if
any, then due, such payments to be made ratably to the parties entitled
thereto without discrimination or preference, except as may be provided
in a Supplemental Indenture.
ADVICE OF COUNSEL. Upon the happening of any Event of Default, the
Trustee may proceed to protect and enforce the rights of the Trustee and the
Registered Owners in such manner as counsel for the Trustee may advise,
whether for the specific performance of any covenant, condition, agreement or
undertaking in the Indenture contained, or in aid of the execution of any
power therein granted, or for the enforcement of such other appropriate legal
or equitable remedies as, in the opinion of such counsel, may be more
effectual to protect and enforce the rights aforesaid.
SALE OF TRUST ESTATE. Upon the happening of any Event of Default and if
the principal of all of the Outstanding Notes shall have been declared due
and payable, then and in every such case, and irrespective of whether other
remedies authorized by the Indenture shall have been pursued in whole or in
part, the Trustee may sell, with or without entry, to the highest bidder the
Trust Estate, and all right, title, interest, claim and demand thereto and
the right of redemption thereof, at any such place or places, and at such
time or times and upon such notice and terms as may be required by law. Upon
such sale the Trustee may make and deliver to the purchaser or purchasers a
good and sufficient assignment or conveyance for the same, which sale shall
be a perpetual bar both at law and in equity against the Issuer and all
Persons claiming such properties. No purchaser at any sale shall be bound to
see to the application of the purchase money or to inquire as to the
authorization, necessity, expediency or regularity of any such sale. The
Trustee is irrevocably appointed the true and lawful attorney-in-fact of the
Issuer, in its name and stead, to make and execute all bills of sale,
instruments of assignment and transfer and such other documents of transfer
as may be necessary or advisable in connection with a sale of all or part of
the Trust Estate, but the Issuer, if so requested by the Trustee, shall
ratify and confirm any sale or sales by executing and delivering to the
Trustee or to such purchaser or purchasers all such instruments as may be
necessary, or in the judgment of the Trustee, proper for the purpose which
may be designated in such request. In addition,
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the Trustee may proceed to protect and enforce the rights of the Trustee, the
Registered Owners of Notes under the Indenture in such manner as counsel for
the Trustee may advise, whether for the specific performance of any covenant,
condition, agreement or undertaking contained in the Indenture, or in aid of
the execution of any power therein granted, or for the enforcement of such
other appropriate legal or equitable remedies as may in the opinion of such
counsel, be more effectual to protect and enforce the rights aforesaid. The
Trustee shall take any such action or actions if requested to do so in
writing by the Registered Owners of at least 51% of the collective aggregate
principal amount of the Outstanding Senior Notes (or if no Senior Notes
secured on a parity with the Senior Notes are Outstanding hereunder, then by
the Registered Owners of at least 51% of the collective aggregate principal
amount of the Outstanding Subordinate Notes) (or if no Senior Notes or
Subordinate Notes are Outstanding hereunder, then by the Registered Owners of
at least 51% of the collective aggregate principal amount of such Outstanding
Junior-Subordinate Notes).
RESTORATION OF POSITION. In case the Trustee shall have proceeded to
enforce any rights under the Indenture by sale or otherwise, and such
proceedings shall have been discontinued, or shall have been determined
adversely to the Trustee, then and in every such case to the extent not
inconsistent with such adverse decree, the Issuer and the Trustee shall be
restored to their former respective positions and the rights under the
Indenture in respect to the Trust Estate, and all rights, remedies, and
powers of the Trustee and of the Registered Owners shall continue as though
no such proceeding had been taken.
PURCHASE OF PROPERTIES BY TRUSTEE OR REGISTERED OWNERS. In case of any
such sale of the Trust Estate, any Registered Owner or Registered Owners or
committee of Registered Owners or the Trustee, may bid for and purchase such
property and upon compliance with the terms of sale may hold, retain
possession, and dispose of such property as the absolute right of the
purchaser or purchasers without further accountability and shall be entitled,
for the purpose of making any settlement or payment for the property
purchased, to use and apply any Notes secured by the Indenture and any
interest thereon due and unpaid, by presenting such Notes in order that there
may be credited thereon the sum apportionable and applicable thereto out of
the net proceeds of such sale, and thereupon such purchaser or purchasers
shall be credited on account of such purchase price payable to him or them
with the sum apportionable and applicable out of such net proceeds to the
payment of or as a credit on the Notes so presented.
APPLICATION OF SALE PROCEEDS. The proceeds of any sale of the Trust
Estate, together with any funds at the time held by the Trustee and not
otherwise appropriated, shall be applied by the Trustee as set forth in the
Indenture, and then to the Issuer or whomsoever shall be lawfully entitled
thereto.
ACCELERATED MATURITY. If an Event of Default shall have occurred and be
continuing, the Trustee may declare, or upon the written direction by the
Registered Owners of at least 51% of the collective aggregate principal
amount of the Outstanding Senior Notes (or if no Senior Notes are Outstanding
under the Indenture, then upon the written direction of the Registered Owners
of at least 51% of the collective aggregate principal amount of the
Outstanding Subordinate
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Notes) (or if no Senior Notes or Subordinate Notes are Outstanding under the
Indenture, then upon the written direction of the Registered Owners of at
least 51% of the collective aggregate principal amount of any Outstanding
Junior-Subordinate Notes), and shall declare, the principal of all Notes
issued under the Indenture, or any supplement thereto, and then Outstanding,
and the interest thereon, if not previously due, immediately due and payable,
anything in the Notes or in the Indenture to the contrary notwithstanding;
provided, however, that a declaration of acceleration upon a default pursuant
to subsection (g) under "--Events of Default" above, shall require the
consent of 100% of the Registered Owners of the collective aggregate
principal amount of the appropriate series of Notes, as described above.
REMEDIES NOT EXCLUSIVE. The remedies conferred upon or reserved to the
Trustee or the Registered Owners of Notes in the Indenture are not intended
to be exclusive of any other remedy, but each remedy therein provided shall
be cumulative and shall be in addition to every other remedy given under the
Indenture or now or hereafter existing, and every power and remedy given to
the Trustee or to the Registered Owners of Notes under the Indenture, or any
supplement thereto, may be exercised from time to time as often as may be
deemed expedient. No delay or omission of the Trustee or of any Registered
Owner of Notes to exercise any power or right arising from any default under
the Indenture shall impair any such right or power or shall be construed to
be a waiver of any such default or to be acquiescence therein.
DIRECTION OF TRUSTEE. Upon the happening of any Event of Default, the
Registered Owners of at least 51% of the collective aggregate principal
amount of the Senior Notes secured by the Indenture and then Outstanding (or,
if no Senior Notes are Outstanding under the Indenture, then the Registered
Owners of at least 51% of the collective aggregate principal amount of the
Subordinate Notes secured by the Indenture and then Outstanding) (or, if no
Senior Notes or Subordinate Notes are Outstanding under the Indenture, then
the Registered Owners of at least 51% of the collective aggregate principal
amount of any Junior-Subordinate Notes secured by the Indenture and then
Outstanding), shall have the right by an instrument or instruments in writing
delivered to the Trustee to direct and control the Trustee as to the method
of taking any and all proceedings for any sale of any or all of the Trust
Estate, or for the appointment of a receiver, if permitted by law, and may at
any time cause any proceedings authorized by the terms of the Indenture to be
so taken or to be discontinued or delayed; provided, however, that such
Registered Owners, shall not be entitled to cause the Trustee to take any
proceedings which in the Trustee's opinion would be unjustly prejudicial to
non-assenting Registered Owners of Notes, but the Trustee shall be entitled
to assume that the action requested by the Registered Owners of 51% of the
collective aggregate principal amount of the Senior Notes hereby secured and
then Outstanding (or, if no Senior Notes are Outstanding under the Indenture,
then the Registered Owners of at least 51% of the collective aggregate
principal amount of the Subordinate Notes secured by the Indenture and then
Outstanding) (or, if no Senior Notes or Subordinate Notes are Outstanding
under the Indenture, then the Registered Owners of at least 51% of the
collective aggregate principal amount of any Junior-Subordinate Notes secured
by the Indenture and then Outstanding) will not be prejudicial to any
non-assenting Registered Owner. Provided, however, that anything in the
Indenture to the contrary notwithstanding, the Registered Owners of a
majority of the collective aggregate principal
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amount of the Senior Notes secured by the Indenture and then Outstanding
together with the Registered Owners of a majority of the collective aggregate
principal amount of the Subordinate Notes secured by the Indenture and then
Outstanding and the Registered Owners of a majority of the collective
aggregate principal amount of the Junior-Subordinate Notes, if any, secured
by the Indenture and then Outstanding, have the right, at any time, by an
instrument or instruments in writing executed and delivered to the Trustee,
to direct the method and place of conducting all proceedings to be taken in
connection with the enforcement of the terms and conditions of the Indenture,
or for the appointment of a receiver or any other proceedings thereunder,
provided that such direction shall not be otherwise than in accordance with
the provisions of law and of the Indenture.
RIGHT TO ENFORCE IN TRUSTEE. No Registered Owner of any Note shall have
any right as such Registered Owner to institute any suit, action, or
proceedings for the enforcement of the provisions of the Indenture or for the
execution of any trust thereunder or for the appointment of a receiver or for
any other remedy under the Indenture, all rights of action under the
Indenture being vested exclusively in the Trustee, unless and until such
Registered Owner shall have previously given to the Trustee written notice of
a default under the Indenture, and of the continuance thereof, and also
unless the Registered Owners of the requisite principal amount of the Notes
then Outstanding shall have made written request upon the Trustee and the
Trustee shall have been afforded reasonable opportunity to institute such
action, suit or proceeding in its own name, and unless the Trustee shall have
been offered reasonable indemnity and security satisfactory to it against the
costs, expenses, and liabilities to be incurred therein or thereby and the
Trustee for 30 days after receipt of such notification, request, or offer of
indemnity, shall have failed to institute any such action, suit or
proceeding. It is understood and intended that no one or more Registered
Owners of the Notes shall have the right in any manner whatever by his or
their action to affect, disturb, or prejudice the lien of the Indenture or to
enforce any right thereunder except in the manner herein provided and for the
equal benefit of the Registered Owners of not less than 60% of the collective
aggregate principal amount of the Notes then Outstanding.
THE TRUSTEE
ACCEPTANCE OF TRUST. The Trustee accepts the trusts imposed upon it by
the Indenture, and agrees to perform said trusts, but only upon and subject
to the following terms and conditions:
(a) Except during the continuance of an Event of Default, (i) the
Trustee undertakes to perform such duties and only such duties as are
specifically set forth in the Indenture, and no implied covenants or
obligations shall be read into the Indenture against the Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may conclusively
rely, as to the truth of the statements and the correctness of the opinions
expressed therein, upon certificates or opinions furnished to the Trustee
and conforming to the requirements of the Indenture; but in the case of any
such certificates or opinions which by any provisions of the Indenture are
specifically required to be furnished to the
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Trustee, the Trustee shall be under a duty to examine the same to determine
whether or not they conform as to form with the requirements of the
Indenture and whether or not they contain the statements required under
the Indenture.
(b) In case an Event of Default has occurred and is continuing, the
Trustee, in exercising the rights and powers vested in it by the Indenture,
shall use the same degree of care and skill in its exercise as a prudent
man would exercise or use under the circumstances in the conduct of his own
affairs.
(c) Before taking any action under the Indenture requested by
Registered Owners, the Trustee may require that it be furnished an
indemnity note or other indemnity and security satisfactory to it by the
Registered Owners, as applicable, for the reimbursement of all expenses to
which it may be put and to protect it against all liability, except
liability which results from the gross negligence or willful misconduct of
the Trustee and negligence with respect to moneys deposited and applied
pursuant to the Indenture, by reason of any action so taken by the Trustee.
(d) No provision of the Indenture shall require the Trustee to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties thereunder, or in the exercise of any of
its rights or powers, if it shall have reasonable grounds for believing
that repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
(e) The permissive right of the Trustee to do things enumerated in
the Indenture or under the other transaction documents shall not be
construed as a duty and the Trustee shall not be answerable for other than
its negligence or willful default.
(f) Whether or not expressly so provided, every provision of the
Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of
the Indenture.
RECITALS OF OTHERS. The recitals, statements, and representations set
forth herein and in the Notes shall be taken as the statements of the Issuer,
and the Trustee assumes no responsibility for the correctness of the same.
The Trustee makes no representations as to the title of the Issuer in the
Trust Estate or as to the security afforded thereby and hereby, or as to the
validity or sufficiency of the Indenture or of the Notes issued under the
Indenture, and the Trustee shall incur no responsibility in respect of such
matters.
MAINTAIN AND ENFORCE AGREEMENTS; NO AMENDMENTS ADVERSE TO REGISTERED
OWNERS. The Trustee will, from and after it shall have either entered into,
or succeeded to the rights and interests of any Eligible Lender under any
guarantee agreement covering Financed Eligible Loans, maintain the same and
diligently enforce its rights thereunder, and not consent to or permit any
rescission of or consent to any amendment thereto or otherwise take any
action under
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or in connection therewith which in any manner would adversely affect the
rights of the Registered Owners.
The Trustee will maintain its agreements with the Secretary and Guarantee
Agency under the Guaranteed Student Loan Program, and the Trustee will
diligently enforce its rights thereunder and will not voluntarily consent to
or permit any rescission of or consent to any amendment to or otherwise take
any action under or in connection therewith which in any manner will
adversely affect the rights of the Registered Owners.
AS TO FILING OF INDENTURE. The Trustee shall be under no duty (a) to
file or record, or cause to be filed or recorded, the Indenture or any
instrument supplemental thereto, (b) or to procure any further order or
additional instruments of further assurance, (c) to see to the delivery to it
of any personal property intended to be mortgaged or pledged under the
Indenture or thereunder, (d) or to do any act which may be suitable to be
done for the better maintenance or continuance of the lien or security
thereof, or (e) for giving notice of the existence of such lien, or for
extending or supplementing the same or to see that any rights to Revenue and
Funds intended now or hereafter to be transferred in trust under the
Indenture are subject to the lien thereof. The Trustee shall not be liable
for failure of the Issuer to pay any tax or taxes in respect of such
property, or any part thereof, or the income therefrom or otherwise, nor
shall the Trustee be under any duty in respect of any tax which may be
assessed against it or the Registered Owners of the Notes in respect of such
property or pledged Revenue and Funds.
TRUSTEE MAY ACT THROUGH AGENTS. The Trustee may execute any of the
trusts or powers under the Indenture and perform any duty thereunder, either
itself or by or through its attorneys, agents, or employees, and it shall not
be answerable or accountable for any default, neglect or misconduct of any
such attorneys, agents or employees, if reasonable care has been exercised in
the appointment thereof.
ASSUMPTION OF LIABILITY AND INDEMNIFICATION OF TRUSTEE. The Trustee
shall be under no obligation or duty to perform any act at the request of
Registered Owners of Notes or to institute or defend any suit in respect
thereof unless properly indemnified and provided with security to its
satisfaction as provided under subsection (c) of "--Acceptance of Trust"
above. The Trustee shall not be required to take notice, or be deemed to
have knowledge, of any default or Event of Default of the Issuer or the Board
under the Indenture and may conclusively assume that there has been no such
default or Event of Default (other than an Event of Default described in
subsections (a), (b), (c), (d), (e) or (f) under "--Events of Default" above)
unless and until it shall have been specifically notified in writing of such
default or Event of Default by (a) the Registered Owners of the percentages
in principal amount of the Notes then Outstanding as specified in the
Indenture or (b) an Authorized Officer of the Issuer. The Issuer agrees to
assume liability for and to indemnify the Trustee for, and to hold it
harmless against, any loss, liability, or expenses incurred without
negligence or bad faith on its part, arising out of or in connection with the
acceptance or administration of the trust or trusts under the Indenture,
including the costs and expenses of defending itself against any claim or
liability in connection
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with the exercise or performance of any of its powers or duties thereunder or
arising from the Trust Estate.
TRUSTEE'S RIGHT TO RELIANCE. The Trustee shall be protected in acting
upon any notice, resolution, request, consent, order, certificate, report,
servicer's report, appraisal, opinion, Issuer Order or other paper or
document believed by it to be genuine and to have been signed or presented by
the proper party or parties. The Trustee may consult with experts and with
counsel (who may be counsel for the Issuer, the Trustee, or for a Registered
Owner), and the opinion of such counsel shall be full and complete
authorization and protection in respect of any action taken or suffered, and
in respect of any determination made by it under the Indenture in good faith
and in accordance with the opinion of such counsel.
Whenever in the administration of the Indenture the Trustee shall deem it
desirable that a matter be proved or established prior to taking, suffering,
or omitting any action thereunder, the Trustee (unless other evidence be in
the Indenture specifically prescribed) may, in the absence of bad faith on
its part, rely upon a certificate signed by the President or the Secretary of
the Issuer; provided, however, that the Trustee may not delay any action
required thereunder because the Trustee has failed to receive such
certificate.
The Trustee shall not be liable for any action taken, suffered, or
omitted by it in good faith and believed by it to be authorized or within the
discretion or rights or powers conferred upon it by the provisions of the
Indenture; provided, however, that the Trustee shall be liable for any
negligence or willful misconduct on its part in taking such action.
The Trustee is authorized, under the Indenture, subject to the provisions
of certain provisions set forth in the Indenture, to sell, assign, transfer,
convey, or repurchase Financed Eligible Loans in accordance with an Issuer
Order, provided that no such Financed Eligible Loan may be sold, assigned,
transferred, or conveyed to any Person who is not an Eligible Lender. The
Trustee is further authorized to enter into agreements with other Persons, in
its capacity as Trustee, in order to carry out or implement the terms and
provisions of the Indenture.
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The Trustee shall not be liable with respect to any action taken,
suffered or omitted to be taken in good faith in accordance with the
provisions of the Indenture or any other transaction document or at the
direction of the Registered Owners evidencing the appropriate percentage of
the aggregate principal amount of the Outstanding Notes relating to the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred upon the Trustee, under
the Indenture or any other transaction document.
COMPENSATION OF TRUSTEE. The Issuer shall pay to the Trustee from time
to time reasonable compensation for all services rendered by it under the
Indenture, and also all of its reasonable expenses, charges, and other
disbursements and those of its attorneys, agents, and employees incurred in
and about the administration and execution of the trusts thereby created.
The Trustee may not change the amount of its annual compensation without
giving the Issuer at least 90 days' written notice prior to the beginning of
a Fiscal Year. In the event of a default in such payments by the Issuer, and
as security for such payment, the Trustee shall have a lien therefor on the
Trust Estate, the Operating Fund and the General Fund prior to any rights of
the Registered Owners of the Notes.
TRUSTEE MAY OWN NOTES. The Trustee, or any successor Trustee, in its
individual or other capacity, may become the owner or pledgee of Notes and
may otherwise deal with the Issuer, with the same rights it would have if it
were not the Trustee. The Trustee may act as depository for, and permit any
of its officers or directors to act as a member of, or act in any other
capacity in respect to, any committee formed to protect the rights of the
Registered Owners of Notes or to effect or aid in any reorganization growing
out of the enforcement of the Notes or of the Indenture, whether or not any
such committee shall represent the Registered Owners of more than 60% of the
collective aggregate principal amount of the Outstanding Notes.
RESIGNATION OF TRUSTEE. The Trustee and any successor to the Trustee may
resign and be discharged from the trust created by the Indenture by giving to
the President notice in writing which notice shall specify the date on which
such resignation is to take effect; provided, however, that such resignation
shall take effect only on the day specified in such notice if a successor
Trustee shall have been appointed pursuant to the provisions of the Indenture
(and is qualified to be the Trustee under the requirements of the provisions
of the Indenture). If no successor Trustee has been appointed by the date
specified or within a period of 90 days from the receipt of the notice by the
Issuer, whichever period is longer, the Trustee may (a) appoint a temporary
successor Trustee having the qualifications provided in the Indenture or (b)
request a court of competent jurisdiction to (i) require the Issuer to
appoint a successor, as provided in the Indenture, within three days of the
receipt of citation or notice by the court, or (ii) appoint a Trustee having
the qualifications provided in the Indenture. In no event may the
resignation of the Trustee be effective until a qualified successor Trustee
shall have been selected and appointed. In the event a temporary successor
Trustee is appointed pursuant to (a) above, the Board may remove such
temporary successor Trustee and appoint a successor thereto pursuant to the
provisions of the Indenture.
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REMOVAL OF TRUSTEE. The Trustee or any successor Trustee may be removed
(a) at any time by the Registered Owners of a majority of the collective
aggregate principal amount of the Outstanding Senior Notes (or if no Senior
Notes are then Outstanding, a majority of the collective aggregate principal
amount of the Outstanding Subordinate Notes and if no Subordinate Notes are
then Outstanding, a majority of the collective aggregate principal amount of
the Junior-Subordinate Notes, if any) by an instrument or concurrent
instruments in writing in duplicate by such Registered Owners, (b) by the
Issuer for cause or upon the sale or other disposition of the Trustee or its
trust functions or (c) by the Issuer without cause so long as no Event of
Default exists or has existed within the last 90 days, upon payment to the
Trustee so removed of all money then due to it under the Indenture and
appointment of a successor thereto by the Issuer and acceptance thereof by
said successor. One copy of any such instrument shall be filed with the
Secretary of the Issuer and the other with the Trustee so removed.
In the event a Trustee (or successor Trustee) is removed, by any person
or for any reason permitted under the provisions of the Indenture, such
removal shall not become effective until (a) in the case of removal by the
Registered Owners, such Registered Owners of Notes by instrument or
concurrent instruments in writing (signed and acknowledged by such Registered
Owners or their attorneys-in-fact) filed with the Trustee removed have
appointed a successor Trustee or otherwise the Issuer shall have appointed a
successor, and (b) the successor Trustee has accepted appointment as such.
SUCCESSOR TRUSTEE. In case at any time the Trustee or any successor
Trustee shall resign, be dissolved, or otherwise shall be disqualified to act
or be incapable of acting, or in case control of the Trustee or of any
successor Trustee or of its officers shall be taken over by any public
officer or officers, a successor Trustee may be appointed by the Board by an
instrument in writing duly authorized by resolution. In the case of any such
appointment by the Board of a successor to the Trustee, the Board shall
forthwith cause notice thereof to be mailed to the Registered Owners at the
address of each Registered Owner appearing on the note registration books
maintained by the Registrar.
Every successor Trustee appointed by the Registered Owners, by a court of
competent jurisdiction, or by the Board shall be a bank or trust company in
good standing, organized and doing business under the laws of the United
States or of a state therein, which has a reported capital and surplus of not
less than $50,000,000, be authorized under the law to exercise corporate
trust powers, be subject to supervision or examination by a federal or state
authority, and be an Eligible Lender. Every successor Trustee shall become a
party to each and every agreement described in the Indenture that the Trustee
is a party to.
MANNER OF VESTING TITLE IN TRUSTEE. Any successor Trustee appointed
under the Indenture shall execute, acknowledge, and deliver to its
predecessor Trustee, and also to the Issuer, an instrument accepting such
appointment thereunder, and thereupon such successor Trustee, without any
further act, deed, or conveyance shall become fully vested with all the
estate, properties, rights, powers, trusts, duties, and obligations of its
predecessors in trust under the Indenture (except that the predecessor
Trustee shall continue to have the benefits to
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indemnification thereunder together with the successor Trustee), with like
effect as if originally named as Trustee therein; but the Trustee ceasing to
act shall nevertheless, on the written request of an Authorized Officer of
the Issuer, or an authorized officer of the successor Trustee, execute,
acknowledge, and deliver such instruments of conveyance and further assurance
and do such other things as may reasonably be required for more fully and
certainly vesting and confirming in such successor Trustee all the right,
title, and interest of the Trustee which it succeeds, in and to pledged
Revenue and Funds and such rights, powers, trusts, duties, and obligations,
and the Trustee ceasing to act also, upon like request, shall pay over,
assign, and deliver to the successor Trustee any money or other property or
rights subject to the lien of the Indenture, including any pledged securities
which may then be in its possession. Should any deed or instrument in
writing from the Issuer be required by the successor Trustee for more fully
and certainly vesting in and confirming to such new Trustee such estate,
properties, rights, powers, and duties, any and all such deeds and
instruments in writing shall on request be executed, acknowledged and
delivered by the Issuer.
In case any of the Notes to be issued under the Indenture have been
authenticated but not delivered, any successor Trustee may adopt the
certificate of authentication of the Trustee or of any successor to the
Trustee; and in case any of the Notes shall not have been authenticated, any
successor to the Trustee may authenticate such Notes in its own name; and in
all such cases such certificate shall have the full force which it has
anywhere in the Notes or in the Indenture.
RIGHT OF INSPECTION. The Registered Owner of a Note shall be permitted
at reasonable times during regular business hours and in accordance with
reasonable regulations prescribed by the Trustee to examine at the principal
office of the Trustee a copy of any report or instrument theretofore filed
with the Trustee relating to the condition of the Trust Estate.
LIMITATION WITH RESPECT TO EXAMINATION OF REPORTS. Except as provided in
the Indenture, the Trustee shall be under no duty to examine any report or
statement or other document required or permitted to be filed with it by the
Issuer.
ADDITIONAL COVENANTS OF TRUSTEE. The Trustee, by the execution of the
Indenture, covenants, represents and agrees that: (a) it will not exercise
any of the rights, duties, or privileges under the Indenture in such manner
as would cause the Student Loans held or acquired under the terms thereof to
be transferred, assigned, or pledged as security to any person or entity
other than as permitted by the Indenture; (b) it will comply with the Higher
Education Act and the regulations and will, upon written notice from an
Authorized Officer of the Issuer, the Secretary or the Guarantee Agency, use
its reasonable efforts to cause the Indenture to be amended (in accordance
with the provisions of the Indenture) if the Higher Education Act or
regulations are hereafter amended so as to be contrary to the terms of the
Indenture; (c) it will, from and after it shall have either entered into, or
succeeded to the rights and interests of any Eligible Lender under any
guarantee agreement covering Financed Eligible Loans, maintain the same and
diligently enforce its rights thereunder, and not consent to or permit any
rescission of or consent to any amendment thereto or otherwise take any
action under or in connection therewith which in any manner would adversely
affect the rights of the Registered Owners; and
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(d) it will maintain its agreements with the Secretary and Guarantee Agency
under the Guaranteed Student Loan Program, and the Trustee will diligently
enforce its rights thereunder and will not voluntarily consent to or permit
any rescission of or consent to any amendment to or otherwise take any action
under or in connection therewith which in any manner will adversely affect
the rights of the Registered Owners.
TRUSTEE COVENANTS WITH RESPECT TO "ELIGIBLE LENDER" STATUS. The Trustee
covenants in the Indenture as follows: (a) the Trustee represents and
warrants that it satisfies the requirements to be an "eligible lender" as
that term is defined in the Higher Education Act and covenants that it will
remain an "eligible lender" so long as the Trustee remains Trustee under the
Indenture; provided, however, that the Trustee shall have no responsibility
or liability under the Indenture if it fails to remain an "eligible lender"
as a result of the actions or inactions of the Issuer or any servicer; and
(b) the Trustee shall take such actions, but only such actions, with respect
to being an "eligible lender" as shall be reasonably requested by the Issuer;
such actions do not include taking steps or instituting suits, actions or
proceedings necessary or appropriate for the enforcement of all terms,
covenants and conditions of all Financed Eligible Loans and agreements in
connection therewith, including the prompt payment of all principal and
interest payments and all other amounts due thereunder, for which the Issuer
is solely responsible.
TRUSTEE'S STATUS AS AN "ELIGIBLE LENDER." For the purposes of the
Indenture and all documents, agreements, understandings and arrangements
relating to the Indenture that are executed by the Trustee, such documents,
agreements, understandings and arrangements and the Indenture are executed by
the Trustee with the understanding that it may be deemed to be an "eligible
lender" under the Act. The Issuer acknowledges the fact that the Trustee may
be deemed an "eligible lender" under the Higher Education Act and thus may be
subject to certain liabilities because of such status and that the Trustee is
willing to accept the status of "eligible lender" thereunder as an
accommodation to the Issuer, and the Issuer agrees that it will indemnify and
hold harmless the Trustee and its officers, directors, employees and agents
for any and all liability which may be incurred because of Trustee's status
as an "eligible lender" or because of the Trustee's entering into the
Indenture or any of the other transaction documents that result from the
actions or inactions of the Issuer or any servicer from moneys available, if
any, as described herein under "Security and Sources of Payment for the
Notes--Revenue Fund," clause (l). The Issuer agrees that it will not seek
recourse or commence any action against the Trustee or its officers,
directors, employees or agents or any of their personal assets for the
performance or payment of any obligation under the Higher Education Act. The
Trustee shall have no liability or responsibility with respect to any of the
duties and obligations specifically undertaken by the Issuer pursuant to the
provisions of the Indenture.
TRUSTEE TO CAUSE INVESTMENTS TO BE MADE. As to any Funds held by the
Trustee under the Indenture, the same shall be invested by the Trustee as
directed by an Issuer Order, within the limitations prescribed in the Indenture.
DUTY OF TRUSTEE WITH RESPECT TO RATING AGENCY. It shall be the duty of
the Trustee to notify each Rating Agency then rating any series of the Notes
of (a) any change, expiration,
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extension, or renewal of the Indenture, (b) redemption or defeasance of any
or all the Notes, or (c) any change in the Trustee; provided, however, the
provisions of this section do not apply when such documents have been
previously supplied to such Rating Agency and the Trustee has received
written evidence to such effect, all as may be required by the Indenture.
The Trustee shall also promptly deliver to Fitch (if Fitch is then rating any
of the Notes) duplicate copies of all correspondence, notices, certificates,
audits, reports or other communications prepared by the Trustee and sent by
the Trustee to the Registered Owners or the Issuer in accordance with the
Indenture.
SUPPLEMENTAL INDENTURES
SUPPLEMENTAL INDENTURES NOT REQUIRING CONSENT OF REGISTERED OWNERS. The
Issuer and the Trustee may, without the consent of or notice to any of the
Registered Owners, enter into any indenture or indentures supplemental to
the Indenture for any one or more of the following purposes:
(a) To cure any ambiguity or formal defect or omission in the
Indenture;
(b) To grant to or confer upon the Trustee for the benefit of the
Registered Owners any additional benefits, rights, remedies, powers or
authorities that lawfully may be granted to or conferred upon the
Registered Owners or the Trustee;
(c) To subject to the Indenture additional revenues, properties or
collateral;
(d) To modify, amend or supplement the Indenture or any indenture
supplemental thereto in such manner as to permit the qualification of the
Indenture or any indenture supplemental thereto under the Trust Indenture
Act of 1939 or any similar federal statute hereafter in effect or to permit
the qualification of the Notes for sale under the securities laws of the
United States of America or of any of the states of the United States of
America, and, if they so determine, to add to the Indenture or any
indenture supplemental thereto such other terms, conditions and provisions
as may be permitted by said Trust Indenture Act of 1939 or similar federal
statute;
(e) To evidence the appointment of a separate or co-Trustee or a
co-registrar or transfer agent or the succession of a new Trustee under the
Indenture, or any additional or substitute Guarantee Agency or Servicer:
(f) To add such provisions to or to amend such provisions of the
Indenture as may, in Note Counsel's opinion, be necessary or desirable to
assure implementation of the Program in conformance with the Higher
Education Act if along with such Supplemental Indenture there is filed a
Note Counsel's opinion to the effect that the addition or amendment of such
provisions will in no way impair the existing security of the Registered
Owners of any Outstanding Note;
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(g) To make any change as shall be necessary in order to obtain
and/or maintain for any of the Notes an investment grade Rating from a
nationally recognized rating service, which changes, in the opinion of the
Trustee, which opinion may be supported by an opinion of counsel to the
Trustee, are not to the prejudice of the Registered Owner of any of the
Notes;
(h) To make any changes necessary to comply with the Act, the
Regulations or the Code and the regulations promulgated thereunder;
(i) To provide for the issuance of Additional Notes pursuant to the
provisions of the Indenture, including the creation of appropriate Funds
and Accounts with respect to such Additional Notes;
(j) To create any additional Funds or Accounts under the Indenture
deemed by the Trustee to be necessary or desirable;
(k) To make changes necessary to add a letter of credit to any
subseries of the Auction Rate Notes; or
(l) To make any other change which, in the judgment of the Trustee,
which judgment may be supported by an opinion of counsel to the Trustee, is
not to the material prejudice of the Registered Owners.
SUPPLEMENTAL INDENTURES REQUIRING CONSENT OF REGISTERED OWNERS.
Exclusive of Supplemental Indentures not requiring the consent of Registered
Owners, and subject to the terms and provisions set forth below, and not
otherwise, the Registered Owners of not less than 2/3 of the collective
aggregate principal amount of the Notes then Outstanding which in the opinion
of the Trustee (which opinion may be supported by an opinion of counsel to
the Trustee) are affected shall have the right, from time to time, anything
contained in the Indenture to the contrary notwithstanding, to consent to and
approve the execution by the Issuer and the Trustee of such other indenture
or indentures supplemental thereto as shall be deemed necessary and desirable
by the Trustee for the purpose of modifying, altering, amending, adding to or
rescinding, in any particular, any of the terms or provisions contained in
the Indenture or in any Supplemental Indenture; provided, however, that
nothing in this paragraph shall permit, or be construed as permitting (a)
without the consent of the Registered Owners of all then Outstanding Notes,
(i) an extension of the maturity date of the principal of or the interest on
any Note, or (ii) a reduction in the principal amount of any Note or the rate
of interest thereon, or (iii) a privilege or priority of any Note or Notes
over any other Note or Notes, or (iv) a reduction in the aggregate principal
amount of the Notes required for consent to such Supplemental Indenture, or
(v) the creation of any lien other than a lien ratably securing all of the
Notes at any time Outstanding under the Indenture or (b) any modification of
the trusts, powers, rights, obligations, duties, remedies, immunities and
privileges of the Trustee without the prior written approval of the Trustee.
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If at any time the Issuer shall request the Trustee to enter into any
such Supplemental Indenture for any of the purposes of this section, the
Trustee shall, upon being satisfactorily indemnified with respect to
expenses, cause notice of the proposed execution of such Supplemental
Indenture to be mailed by registered or certified mail to each Registered
Owner of a Note at the address shown on the registration books. Such notice
shall briefly set forth the nature of the proposed Supplemental Indenture and
shall state that copies thereof are on file at the principal corporate trust
office of the Trustee for inspection by all Registered Owners. If, within 60
days, or such longer period as shall be prescribed by the Issuer, following
the mailing of such notice, the Registered Owners representing the applicable
percentage of the collective aggregate principal amount of the Notes
Outstanding required by the Indenture at the time of the execution of any
such Supplemental Indenture shall have consented in writing to and approved
the substance of the amendments made by the Supplemental Indenture and the
execution thereof as in the Indenture provided, no Registered Owner of any
Note shall have any right to object to any of the terms and provisions
contained therein, or the operation thereof, or in any manner to question the
propriety of the execution thereof, or to enjoin or restrain the Trustee or
the Issuer from executing the same or from taking any action pursuant to the
provisions thereof. Upon the execution of any such Supplemental Indenture as
in the Indenture permitted and provided, the Indenture shall be and be deemed
to be modified and amended in accordance therewith.
ADDITIONAL LIMITATION ON MODIFICATION OF INDENTURE. None of the
provisions of the Indenture (including the provisions relating to
Supplemental Indentures) shall permit an amendment to the provisions of the
Indenture which permits the transfer of all or part of guaranteed Student
Loans or granting of a security interest therein to any Person other than an
Eligible Lender or the Servicer, unless the Higher Education Act or
regulations are hereafter modified so as to permit the same.
No amendment to the Indenture or to the indentures supplemental thereto
shall be effective unless the Trustee receives an opinion of counsel to the
effect that such amendment was adopted in conformance with the Indenture.
SATISFACTION OF INDENTURE
TRUST IRREVOCABLE. The trust created by the terms and provisions of the
Indenture is irrevocable until the indebtedness secured thereby (the Notes
and interest thereon) is fully paid or provision has been made for its
payment as provided in the Indenture and the Issuer has paid all of the fees
and expenses of the Trustee and given notice to the Trustee to terminate the
Indenture.
SATISFACTION OF INDENTURE.
(a) If the Issuer shall pay, or cause to be paid, or there shall
otherwise be paid to the Registered Owners, the principal of and interest
on the Notes, at the times and in the manner stipulated in the Indenture
then due, then the pledge of the Trust Estate, and
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all covenants, agreements, and other obligations of the Issuer to the
Registered Owners of Notes shall thereupon cease, terminate, and become
void and be discharged and satisfied, except as otherwise provided in the
Indenture. In such event, the Trustee shall execute and deliver to the
Issuer all such instruments as may be desirable to evidence such discharge
and satisfaction, and the Trustee shall pay over or deliver all money held
by it under the Indenture to the party entitled to receive the same under
the provisions of the Indenture. If the Issuer shall pay or cause to be
paid, or there shall otherwise be paid, to the Registered Owners of any
Outstanding Notes the principal of and interest on such Notes then due, at
the times and in the manner stipulated in the Indenture, such Notes shall
cease to be entitled to any lien, benefit, or security under the Indenture,
and all covenants, agreements, and obligations of the Issuer to the
Registered Owners thereof shall thereupon cease, terminate, and become void
and be discharged and satisfied.
(b) Notes or interest installments shall be deemed to have been paid
within the meaning of (a) above if money for the payment or redemption
thereof has been set aside and is being held in trust by the Trustee at the
Stated Maturity or earlier redemption date thereof. All Outstanding Notes
shall, prior to the Stated Maturity or earlier redemption thereof, be
deemed to have been paid within the meaning and with the effect expressed
in Section (a) above if (i) such Notes are to be redeemed on any date prior
to their Stated Maturity and (ii) the Issuer shall have given notice of
redemption as provided in the Indenture on said date, there shall have been
deposited with the Trustee either money (fully insured by the Federal
Deposit Insurance Issuer or fully collateralized by Governmental
Obligations) in an amount which shall be sufficient, or Governmental
Obligations (including any Governmental Obligations issued or held in
book-entry form on the books of the Department of Treasury of the United
States of America) the principal of and the interest on which when due will
provide money which, together with the money, if any, deposited with the
Trustee at the same time, shall be sufficient, to pay when due the
principal of and interest to become due on such Notes on and prior to the
redemption date or Stated Maturity thereof, as the case may be.
Notwithstanding anything in the Indenture to the contrary, however, no such
deposit shall have the effect specified in this subsection (b) if made
during the existence of an Event of Default, unless made with respect to
all of the Notes then Outstanding. Neither Governmental Obligations nor
money deposited with the Trustee pursuant to this subsection (b) nor
principal or interest payments on any such Governmental Obligations shall
be withdrawn or used for any purpose other than, and shall be held
irrevocably in trust in an escrow account for, the payment of the principal
of and interest on such Notes. Any cash received from such principal of
and interest on such Governmental Obligations deposited with the Trustee,
if not needed for such purpose, shall, to the extent practicable, be
reinvested in Governmental Obligations maturing at times and in amounts
sufficient to pay when due the principal of and interest on such Notes on
and prior to such redemption date or Stated Maturity thereof, as the case
may be, and interest earned from such reinvestments shall be paid over to
the Issuer, as received by the Trustee, free and clear of any trust, lien,
or pledge, subject to verification by a certified public accountant or firm
thereof that the remaining amounts in escrow are sufficient to pay the
principal of
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and interest on the Notes as aforesaid. Any payment for Governmental
Obligations purchased for the purpose of reinvesting cash as aforesaid
shall be made only against delivery of such Governmental
Obligations. For the purposes of this paragraph, "Governmental
Obligations" shall mean and include only non-callable direct obligations of
the Department of the Treasury of the United States of America, and such
Governmental Obligations shall be certified by an independent public
accounting firm of national reputation to be of such amounts, maturities,
and interest payment dates and to bear such interest as will, without
further investment or reinvestment of either the principal amount thereof
or the interest earnings therefrom, be sufficient to make the payments
required by the Indenture, and which obligations have been deposited in an
escrow account which is irrevocably pledged as security for the Notes.
Such term shall not include mutual funds and unit investment trusts.
(c) In no event shall the Trustee deliver over to the Issuer any
Guaranteed Student Loans unless the Issuer is an Eligible Lender, if the
Higher Education Act or regulations then in effect require the owner or
holder of Guaranteed Student Loans to be an Eligible Lender.
(d) The provisions set forth above are applicable to the Notes and
any portion of the Notes.
SELLER REPRESENTATIONS AND WARRANTIES
THE SELLERS
Union Bank and Trust Company, a Nebraska state bank ("Union Bank" or the
"Seller"), has, subject to the terms and conditions of one or more Student Loan
Purchase Agreements, sold Eligible Loans to the Issuer having an aggregate
principal balance of $235,500,000 prior to the date hereof in connection with
the Private Notes. Except as otherwise specified in the related Prospectus
Supplement, it is expected that Union Bank also will sell additional Eligible
Loans to the Issuer in connection with the issuance of the Offered Notes. Any
such seller which is not Union Bank will be an Eligible Lender which has been
approved by each Rating Agency then rating any Notes Outstanding, which other
Eligible Lenders will be specified with respect to a Series in the related
Prospectus Supplement. Union Bank and any such other seller is referred to in
such capacity herein as a "Seller" and collectively, as the "Sellers."
Each Eligible Loan will be purchased by the Issuer at the respective
Purchase Price and will simultaneously be pledged to the Trustee to secure
payment of the Notes. Certain information with respect to the Financed Eligible
Loans expected to be included in the Student Loan Portfolio as of the Date of
Issuance with respect to any Series will be included in the related Prospectus
Supplement under "--Description of the Student Loan Portfolio."
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REPRESENTATIONS AND WARRANTIES--
PORTFOLIO CHARACTERISTICS
Except as otherwise specified with respect to a Series in the related
Prospectus Supplement, each Seller will make the following representations and
warranties in the respective Student Loan Purchase Agreement on the date that
the Eligible Loans are to be sold to the Issuer (the "Scheduled Sale Date") and
each subsequent date of acquisition as to each Portfolio, as of the applicable
Cutoff Date, together with the Portfolios previously added to the Financed
Eligible Loans Portfolio, as of the applicable Cutoff Dates:
The Portfolios of Eligible Loans sold by each Seller to the Issuer
under the respective Student Loan Purchase Agreement shall have the
following characteristics: (i) the Eligible Loans shall, in the aggregate,
have an average borrower indebtedness ("ABI") of at least $3,500.00;
(ii) no more than 30% of the aggregate principal balance of all of the
Eligible Loans as of the date of sale may be attributable to Eligible Loans
the proceeds of which funded tuition to private Eligible Institutions
offering only non-baccalaureate degrees; (iii) at least 70% of the
aggregate principal balance of all of the Eligible Loans as of the date of
sale shall be attributable to Federal Stafford Loans which qualify for
Interest Benefit Payments, PLUS Loans, SLS Loans or Consolidation Loans;
(iv) no more than 30% of the aggregate principal balance of all of the
Eligible Loans as of the date of sale may be attributable to Unsubsidized
Stafford Loans, and (v) no more than 25% of the aggregate principal balance
of all of the Eligible Loans as of the date of sale may be attributable to
Consolidation Loans, unless otherwise agreed by such Seller and the Issuer.
An individual Portfolio of Eligible Loans sold pursuant to a Student Loan
Purchase Agreement may not have the characteristics described in the
preceding sentence if, immediately after the consummation of the purchase
of such Portfolio of Eligible Loans, the aggregate of all Eligible Loans
sold to the Issuer pursuant to such Student Loan Purchase Agreement shall
have such characteristics. If the Issuer does not object to the
characteristics of any Portfolio of Eligible Loans sold pursuant to the
Student Loan Purchase Agreement within 30 days of such sale, the Issuer
shall be deemed to have waived any objection to the characteristics of such
Portfolio.
REPRESENTATIONS AND WARRANTIES--ELIGIBLE LOANS
With respect to all Series, each Seller will make the following
representations, warranties and covenants with respect to the Eligible Loans
sold pursuant to its respective Student Loan Purchase Agreement:
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(a) ACCURACY OF INFORMATION. Any information furnished by such
Seller to the Issuer or its agents with respect to any Eligible Loan is
true, complete and correct.
(b) VALIDITY OF LOANS. Each Eligible Loan has been duly executed and
delivered and constitutes the legal, valid and binding obligation of the
maker (and the endorser, if any) thereof, enforceable in accordance with
its terms.
(c) NO DEFENSES AGAINST REPAYMENT OF LOANS. The amount of the unpaid
principal balance of each Eligible Loan is true and owing, and no
counterclaim, offset, defense or right to rescission exists with respect to
any Eligible Loan which can be asserted and maintained or which, with
notice, lapse of time, or the occurrence or failure to occur of any act or
event, could be asserted and maintained by the borrower against the Trustee
as assignee thereof. The rate of interest carried by each Eligible Loan is
the maximum which was allowable by law at the time the loan was made, and
no such Eligible Loan carries a rate of interest in excess of that
permitted by the provisions of the Act.
(d) OWNERSHIP AND LOCATION OF LOANS: EXISTENCE OF LIENS. Such Seller
is the sole owner and holder of each Eligible Loan and has full right and
authority to sell and assign the same free and clear of all liens, pledges
or encumbrances, and upon the endorsement and delivery of promissory notes
evidencing such Eligible Loan to the Issuer pursuant to the respective
Student Loan Purchase Agreement, the Issuer will acquire full right, title
and interest in the Eligible Loan free and clear of all liens, pledges or
encumbrances whatsoever. All documentation relating to the Eligible Loans,
including the original promissory note for each Eligible Loan, is in the
possession of UNIPAC or other designated custodian.
(e) GUARANTEE AND INSURANCE ON LOANS. With respect to all Series,
each Eligible Loan to be sold under the Student Loan Purchase Agreement is
either Insured or Guaranteed. With respect to all Insured Loans being
acquired, a Contract of Insurance is in full force and effect with respect
thereto, the applicable Certificates of Insurance are valid and binding
upon the parties thereto in all respects, such Seller is not in default in
the performance of any of its covenants and agreements made in respect
thereof, and such Insurance is freely transferable as an incident to the
sale of each Eligible Loan to be sold. With respect to all Guaranteed
Loans being acquired, a Guarantee Agreement is in full force and effect
with respect thereto and is valid and binding upon the parties thereto in
all material respects, such Seller is not in default in the performance of
any of its covenants and agreements made in such Guarantee Agreement, and
such Guarantee is freely transferable as an incident to the sale of each
Eligible Loan to be sold. All amounts due and payable to the Secretary or
the Guarantee Agency, as the case may be, have been paid in full by such
Seller, and none of the Eligible Loans to be sold to the Issuer has at any
time been tendered to either the Secretary or the Guarantee Agency for
payment.
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(f) COMPLIANCE WITH HIGHER EDUCATION ACT. Each Eligible Loan
complies in all respects with the requirements of the Higher Education Act
and is an Eligible Loan as those terms are defined in the Student Loan
Purchase Agreement.
(g) COMPLIANCE WITH FEDERAL LAWS. Each Eligible Loan was made in
compliance with all applicable local, state and federal laws, rules and
regulations, including without limitation all applicable nondiscrimination,
truth-in-lending, consumer credit and usury laws.
(h) NO DISCRIMINATION. In making each Eligible Loan to be purchased
by the Issuer pursuant to its respective Student Loan Purchase Agreement,
such Seller has not discriminated based upon the educational institutions
attended by, or the age, sex, race, national origin, color, religion,
handicapped status, income, attendance at a particular eligible
institution, length of the Student Borrower's educational program, or the
Student Borrower's academic year in school.
(i) SERIAL LOANS. The Eligible Loans to be purchased pursuant to the
respective Student Loan Purchase Agreement include all Eligible Loans of
any one borrower held by such Seller.
(j) DUE DILIGENCE IN SERVICING LOANS. Such Seller and any
independent servicer have each exercised and shall continue until the
Scheduled Sale Date to exercise due diligence and reasonable care in
making, administering, servicing and collecting the Eligible Loans and such
Seller has conducted a reasonable investigation of sufficient scope and
content to enable it duly to make the representations and warranties
contained in the respective Student Loan Purchase Agreement. Such Seller
has paid the costs and expenses incident to origination of the Eligible
Loans, and has no right of reimbursement therefor from the Issuer.
(k) ORIGINATION FEES. Such Seller has reported the amount of
origination fees (if any) authorized to be collected with respect to any
Eligible Loan pursuant to Section 438(c) of the Act to the Secretary for
the period in which such fee was authorized to be collected; and such
Seller has made any refund of an origination fee collected in connection
with any Eligible Loan which may be required pursuant to the Higher
Education Act.
(l) INSURANCE PREMIUM. For each such Seller has reported the amount
of the insurance premium authorized to be collected, and has paid said
premium to the Guarantee Agency or the Secretary with all rights therein
inuring to the Issuer.
(m) SCHEDULE OF STUDENT LOANS. The information set forth in each
Schedule of Student Loans is true and correct in all material respects as
of the opening of business on the respective Scheduled Sale Date, and no
selection procedures believed to be
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adverse to the Issuer have been utilized in selecting the Student Loans
for inclusion therein.
(n) TITLE. It is the intention of such Seller that the transfers and
assignments from such Seller to the Issuer contemplated in the respective
Student Loan Purchase Agreement constitute a true sale of the Student Loans
to the Issuer and that neither the interest in nor title to the Eligible
Loans shall become or be deemed property of such Seller's estate in the
event of the filing of a bankruptcy or insolvency petition by or against
such Seller under any bankruptcy or insolvency law.
(o) DOCUMENTS. Such Seller shall furnish and file, if appropriate,
any document reasonably requested by the Issuer to perfect the Issuer's
ownership interest in the Eligible Loans.
(p) NO FRAUDULENT CONVEYANCE. The transactions contemplated by the
respective Student Loan Purchase Agreement are and will be in the ordinary
course of such Seller's business and such Seller has valid business reasons
for transferring the Eligible Loans rather than obtaining a secured loan
with the Eligible Loans as collateral. Both before and immediately after
giving effect to any transfer: (i) such Seller transferred or will transfer
the Eligible Loans to the Issuer without any intent to hinder, delay or
defraud any current or future creditor of such Seller; (ii) such Seller was
not or will not be insolvent or did not or will not become insolvent as a
result of any transfer; (iii) such Seller was not engaged and was not about
to engage, and will not engage, in any business or transaction for which
any property remaining with such Seller was or will constitute unreasonably
small capital in relation to the business of such Seller or the
transaction; and (iv) such Seller did not intend or will not intend to
incur, and did not believe or reasonably should not have believed, or will
not believe or reasonably shall not have believed, that it would incur,
debts beyond its ability to pay as they become due.
(q) SALES NOT SUBJECT TO BULK TRANSFER. Each sale, transfer,
assignment and conveyance of the Eligible Loans by such Seller pursuant to
its respective Student Loan Purchase Agreement is not subject to the bulk
transfer or any similar statutory provisions in effect in any applicable
jurisdiction.
(r) NO TRANSFER TAXES DUE. Each sale, transfer, assignment and
conveyance of the Eligible Loans (including all payments due or to become
due thereunder) by such Seller pursuant to its respective Student Loan
Purchase Agreement is not subject to and will not result in any tax, fee or
governmental charge payable by the Issuer or such Seller to any federal,
state or local government ("Transfer Taxes") except such Transfer Taxes as
are paid by such Seller at the time of transfer, assignment and conveyance
and except UCC filing fees. In the event that the Issuer receives actual
notice of any unpaid Transfer Taxes arising out of the transfer, assignment
and conveyance of the Eligible Loans, on written demand by the Issuer, or
upon such Seller otherwise being given
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notice thereof, it shall pay, and otherwise indemnify and hold the Issuer
and the Trustee harmless therefor. Such Seller shall not be responsible
for the Issuer's or the Trustee's income taxes.
REPURCHASE OBLIGATION OF SELLER
At the request of the Issuer or the Trustee, each Seller shall repurchase
any Eligible Loan purchased by the Issuer from such Seller pursuant to its
respective Student Loan Purchase Agreement if:
(a) any representation or warranty made or furnished by such Seller
in or pursuant to its respective Student Loan Purchase Agreement shall
prove to have been materially incorrect as to such Eligible Loan;
(b) the Secretary or a Guarantee Agency, as the case may be, refuses
to honor all or part of a claim filed with respect to an Eligible Loan
(including any claim for interest subsidy, Special Allowance Payments,
insurance, reinsurance or Guarantee payments) on account of any
circumstance or event that occurred prior to the sale of such Eligible Loan
to the Issuer; or
(c) on account of any wrongful or negligent act or omission of such
Seller or its servicing agent that occurred prior to the sale of an
Eligible Loan to the Issuer, a defense that makes the Eligible Loan
unenforceable is asserted by a maker (or endorser, if any) of the Eligible
Loan with respect to his or her obligation to pay all or any part of the
Eligible Loan.
Upon the occurrence of any of the conditions set forth above and upon the
request of the Issuer or the Trustee, the respective Seller shall pay to the
Trustee, for deposit into the Student Loan Holding Fund Account, an amount equal
to 101.85% (or such other percentage as may be specified with respect to a
Series in the related Prospectus Supplement) of the then-outstanding principal
balance of such Eligible Loan, plus interest and Special Allowance Payments
accrued and unpaid with respect to such Eligible Loan from the Scheduled Sale
Date to and including the date of repurchase, plus any attorneys' fees, legal
expenses, court costs, servicing fees or other expenses incurred by the Issuer,
the Trustee or the appropriate successors or assigns in connection with such
Eligible Loans and arising out of the reasons for the repurchase. The foregoing
repurchase obligation of such Seller shall constitute the sole remedy to the
Issuer against such Seller with respect to any event described above. With
respect to any Eligible Loan repurchased by such Seller pursuant to the
respective Student Loan Purchase Agreement, the Issuer shall assign, without
recourse, representation or warranty, to such Seller all of the Issuer's right,
title and interest in and to such Eligible Loan, and all security and documents
relating thereto.
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DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more Classes of
the Notes of any Series. Credit enhancement may be in the form of a letter of
credit, the subordination of one or more Classes of Notes, the use of a pool
insurance policy or guarantee insurance, the establishment of one or more
reserve funds (as described under "Security and Sources of Payment for the
Notes--Reserve Fund" herein), or any combination of the foregoing. If so
provided in the related Prospectus Supplement, any form of credit enhancement
may provide credit enhancement for more than one Series of Notes or more than
one Class of Notes to the extent described therein.
Unless otherwise specified in the related Prospectus Supplement with
respect to a Series, the credit enhancement will not provide protection against
all risks of loss and will not guarantee payment to such Noteholders of all
amounts to which they are entitled under the related Indenture. If losses or
shortfalls occur that exceed the amount covered by the credit enhancement or
that are not covered by the credit enhancement, Noteholders will bear their
allocable share of deficiencies. Moreover, if a form of credit enhancement
covers more than one Series of Notes, holders of Notes of one Series will be
subject to the risk that such credit enhancement will be exhausted by the claims
of the holders of Notes of one or more other Series before the former receive
their intended share of such coverage.
If credit enhancement is provided with respect to one or more classes of
Notes of a Series, the related Prospectus Supplement will include a description
of (i) the nature and amount of coverage under such credit enhancement, (ii) any
conditions to payment thereunder not otherwise described herein, (iii) the
conditions (if any) under which the amount of coverage under such credit
enhancement may be reduced and under which such credit enhancement may be
terminated or replaced and (iv) the material provisions relating to such credit
enhancement. Additionally, the related Prospectus Supplement will set forth
certain information with respect to the obligor under any instrument of credit
enhancement, generally including (i) a brief description of its principal
business activities, (ii) its principal place of business, place of
incorporation and the jurisdiction under which it is chartered or licensed to do
business, (iii) if applicable, the identity of the regulatory agencies that
exercise primary jurisdiction over the conduct of its business and (iv) its
total assets, and its stockholders' equity or policyholders' surplus, if
applicable, as of a date that will be specified in the Prospectus Supplement.
SUBORDINATE NOTES
If so specified in the related Prospectus Supplement, one or more classes
of Notes of a Series may be Subordinate Notes or Junior-Subordinate Notes. To
the extent specified in the related Prospectus Supplement, the rights of the
holders of Subordinate Notes to receive distributions on any Distribution Date
will be subordinated to the corresponding rights of the holders of Senior Notes,
and the rights of the holders of Junior-Subordinate Notes to receive
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distributions on any Distribution Date will be subordinated to the corresponding
rights of the holders of the Subordinate Notes. If so provided in the related
Prospectus Supplement, the subordination of a Class may apply only in the event
of (or may be limited to) certain types of losses or shortfalls. The related
Prospectus Supplement will set forth information concerning the amount of
subordination provided by a Class or Classes of Subordinate Notes or
Junior-Subordinate Notes in a Series, the circumstances under which such
subordination will be available and the manner in which the amount of
subordination will be made available.
LETTER OF CREDIT
If so specified in the Prospectus Supplement with respect to a Series,
deficiencies in amounts otherwise payable on such Notes or certain Classes
thereof will be covered by one or more letters of credit, issued by a bank or
financial institution specified in such Prospectus Supplement (the "L/C Bank").
Under a letter of credit, the L/C Bank will be obligated to honor draws
thereunder in an aggregate fixed dollar amount, net of unreimbursed payments
thereunder, generally equal to a percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the Financed Eligible Loans on
the related Cut-off Date or of the initial aggregate principal balance of the
Notes of one or more Classes of Notes. If so specified in the related
Prospectus Supplement, the letter of credit may permit draws only in the event
of certain types of losses and shortfalls. The amount available under the
letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments thereunder and may otherwise be reduced as described in
the related Prospectus Supplement. The obligations of the L/C Bank under the
letter of credit for each Series of Notes will expire at the earlier of the date
specified in the related Prospectus Supplement or the termination of the Trust
Estate. A copy of any such letter of credit will accompany the Current Report
on Form 8-K to be filed with the Commission within 15 days of issuance of the
Notes of the related Series.
NOTE GUARANTEE INSURANCE AND SURETY BONDS
If so specified in the Prospectus Supplement with respect to a Series,
deficiencies in amounts otherwise payable on such Notes or certain Classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more Classes of Notes of the related Series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement. A copy of any such instrument
will accompany the Current Report on Form 8-K to be filed with the Commission
within 15 days of issuance of the Notes of the related Series.
RESERVE FUND
In addition to the Reserve Fund described herein, one or more reserve funds
may be established with respect to a Series, in which cash, a letter of credit,
eligible investments, a demand note or a combination thereof, in the amounts, if
any, so specified in the related
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Prospectus Supplement will be deposited. The reserve fund for a Series may
also be funded over time by depositing therein a specified amount of the
distributions received on the related Receivables as specified in the related
Prospectus Supplement.
Amounts on deposit in any reserve fund for a Series, together with the
reinvestment income thereon, will be applied by the Trustee for the purposes,
in the manner, and to the extent specified in the related Prospectus
Supplement. A reserve fund may be provided to increase the likelihood of
timely payments of principal of and interest on the Notes, if required as a
condition to the rating of such Series by each Rating Agency rating such
Series or any Classes relating thereto. If so specified in the related
Prospectus Supplement, a reserve fund may be established to provide limited
protection, in an amount satisfactory to each Rating Agency which assigns
rating to the Notes, against certain types of losses not covered by insurance
policies or other credit support. Following each Interest Payment Date,
amounts in such reserve fund in excess of any specified reserve fund
requirement may be released from the reserve fund under the conditions and to
the extent specified in the related Prospectus Supplement and will not be
available for further application by the Trustee.
Additional information concerning any reserve fund is to be set forth in
the related Prospectus Supplement, including the initial balance of such
reserve fund, the reserve fund balance to be maintained, the purposes for
which funds in the reserve fund may be applied to make distributions to
Noteholders and use of investment earnings from the reserve fund, if any.
THE ISSUER
The Issuer is a bankruptcy remote, limited purpose corporation organized
under the laws of the State of Nevada on February 28, 1996 to acquire student
loans and pledge such student loans and certain related collateral to a
trustee to secure the Notes.
The Issuer is a wholly-owned subsidiary of Union Financial Services,
Inc., a Nevada corporation ("UFS"), organized on January 26, 1996 for the
purpose of facilitating the financing of student loans and other financial
assets, and to engage in activities in connection therewith.
The Issuer has taken steps in structuring the transactions contemplated
hereby that are intended to make it unlikely that the voluntary or
involuntary application for relief by UFS or Union Bank under the United
States Bankruptcy Code or similar applicable federal or state laws,
respectively ("Insolvency Laws"), will result in consolidation of the assets
and liabilities of the Issuer with those of UFS or an affiliate including
Union Bank. These steps include the creation of the Issuer as a separate,
limited purpose entity pursuant to articles of incorporation containing
certain limitations (including restrictions on the nature of the Issuer's
business and a restriction on the Issuer's ability to commence a voluntary
case or proceeding under any Insolvency Laws without the prior unanimous
affirmative vote of all of its directors). The Issuer's Articles of
Incorporation includes a provision that requires the Issuer to have a
director who qualifies under the Articles of Incorporation as an "independent
director."
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The Issuer is governed by a Board of Directors, which is required by the
Issuer's Articles of Incorporation to include at least three directors. The
present directors and the addresses and principal occupations or affiliations
of the directors are as follows:
<TABLE>
<CAPTION>
Principal Occupation
Name Address or Affiliation
---- ------- --------------
<S> <C> <C>
Michael S. Dunlap 4732 Calvert Street Employee of Union Bank and
Lincoln, Nebraska 68506 Trust Company
Stephen F. Butterfield 6991 East Camelback Road, Suite B290 President of Union Financial
Scottsdale, Arizona 85251 Services, Inc.
Ross Wilcox 4732 Calvert Street Chief Executive Officer of
Lincoln, Nebraska 68506 Union Bank and Trust
Company
Ronald W. Page 3015 S. Parker Road Senior Vice President of
Aurora, CO 80014 Union Financial Services, Inc.
Dr. Paul Hoff Hernia Hill, Rural Route 1 Retired Physician
Seward, Nebraska 68434
</TABLE>
EXECUTIVE MANAGEMENT
The Board of Directors and management officials described below are
responsible for overall management of the Issuer. The Issuer's officers and
directors are shareholders, officers and directors of business entities that
have engaged in the business of purchasing, holding and selling student loans.
MR. MICHAEL S. DUNLAP, CHAIRMAN OF THE BOARD. As the Chairman of the
Board, Mr. Dunlap is responsible for the executive direction of the Issuer.
Mr. Dunlap is also Executive Vice President of Union Bank and Trust Company,
and President of Farmers & Merchants Investment Inc. He has been an employee
of Union Bank and Trust Company for approximately 14 years. Mr. Dunlap
received a Bachelor of Science degree in finance and accounting and a Juris
Doctor degree from the University of Nebraska.
MR. STEPHEN F. BUTTERFIELD, PRESIDENT. As the President, Mr. Butterfield
is responsible for the overall management and direction of the Issuer.
Included in his responsibilities are loan purchasing, marketing of corporate
services and coordination of its capital market activities. Mr. Butterfield
has been a member of the student loan industry since January 1989, first as
President of a for-profit student loan secondary marketing facility located
in Scottsdale, Arizona and currently as President of a non-profit student
loan secondary marketing facility in Scottsdale, Arizona. Prior to his work
in the student loan industry, Mr. Butterfield spent 15 years as an investment
banker specializing in municipal finance. Mr. Butterfield received a
Bachelor of Science Degree in Business from Arizona State University.
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RONALD W. PAGE, VICE PRESIDENT, TREASURER AND SECRETARY. As Vice
President, Treasurer and Secretary, Mr. Page is responsible for the financial
operations and record keeping of the Issuer. Included in his
responsibilities are financial planning and capital market operations. Mr.
Page spent 20 years as an investment banker specializing in tax-exempt and
taxable asset backed finance, with a specialty in the securitization of
student loans. Mr. Page received a Bachelor of Science Degree in Business
Administration from the University of Colorado, Boulder, Colorado, and a
Masters of Public Administration in Public Policy Analysis from the American
University, Washington DC.
UFS will provide certain administrative services to the Issuer in
connection with the operation of the Issuer's Student Loan Purchase Program.
UFS will receive compensation for such services but such payment will be made
as approved by each Rating Agency and when funds are available therefore in
the Operating Fund. Such approved compensation currently is one basis point
per month or such other amount as may be specified in the related Prospectus
Supplement.
THE ISSUER'S STUDENT LOAN PURCHASE PROGRAM
The Issuer established its Student Loan Purchase Program in order to
effectuate its general corporate purposes.
In order to participate in the Student Loan Purchase Program, each lender
must be an "eligible lender" under the Higher Education Act and be otherwise
approved by the Issuer. An "eligible lender" under the Higher Education Act
includes certain commercial banks, mutual savings banks, savings and loan
associations, credit unions, insurance companies, pension funds, certain
trust companies and educational institutions. Each eligible lender must also
have entered into an agreement with an eligible Guarantee Agency for the
guarantee of loans originated or acquired by such lender. In addition, each
eligible lender must enter into a Student Loan Purchase Agreement with the
Issuer, providing for the manner and terms of sale of Eligible Loans in the
standard form prescribed by the Issuer from time to time for all lenders and
providing for the manner and terms of repurchase of Student Loans by the
Eligible Lender from the Issuer upon the failure of any warranty with respect
to such Student Loan made by the Eligible Lender under such agreement. The
Student Loan Purchase Agreement may be terminated by the Issuer on the terms
and conditions stated therein.
THE ISSUER'S STUDENT LOAN PURCHASE AGREEMENT
As of July 1, 1996, with respect to the Private Notes, the Issuer had
purchased $235,500,000 aggregate principal amount of Eligible Loans from
Union Bank, as Seller. The Issuer has entered into Student Loan Purchase
Agreements with Union Bank with respect to such purchases. Eligible Loans
purchased from such Seller may be removed by the Issuer from the UNIPAC
servicing system. In addition, such Seller is required to repurchase, at the
request of the Issuer or the
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Trustee, any financed Eligible Loan purchased by the Issuer if, among other
items, the Secretary or a Guarantee Agency refuses to honor all or a part of
a claim filed with respect to a Financed Eligible Loan on account of any
circumstance or event that occurred prior to the sale of such Financed
Eligible Loan.
SERVICING OF FINANCED ELIGIBLE LOANS
The Issuer is required under the Act, the rules and regulations of the
Guarantee Agency and the Indenture to use due diligence in the servicing and
collection of Financed Eligible Loans and to use collection practices no less
extensive and forceful than those generally in use among financial
institutions with respect to other consumer debt.
THE TRUSTEE IS ACTING AS "ELIGIBLE LENDER" WITH RESPECT TO THE FINANCED
ELIGIBLE LOANS AS AN ACCOMMODATION TO THE ISSUER AND NOT FOR THE BENEFIT OF
ANY OTHER PARTY. NOTWITHSTANDING ANY RESPONSIBILITY THAT THE TRUSTEE MAY
HAVE TO THE SECRETARY OF EDUCATION OR ANY GUARANTEE AGENCY UNDER THE ACT, THE
TRUSTEE (UNTIL SUCH TIME AS THE TRUSTEE MAY BECOME THE OWNER OF THE FINANCED
ELIGIBLE LOANS FOLLOWING A DEFAULT UNDER THE INDENTURE AND THE EXERCISE OF
CERTAIN REMEDIES PROVIDED THEREIN) SHALL NOT HAVE ANY RESPONSIBILITY FOR ANY
ACTION OR INACTION OF THE TRUSTEE, THE ISSUER OR ANY OTHER PARTY IN
CONNECTION WITH THE FINANCED ELIGIBLE LOANS AND THE DOCUMENTS, AGREEMENTS,
UNDERSTANDINGS AND ARRANGEMENTS RELATING THERETO.
THE SERVICING AGREEMENTS
The Issuer has entered into an Amended and Restated Servicing Agreement
with Union Bank dated as of June 15, 1996 (the "Servicing Agreement") with
respect to the Private Notes which continues until the earlier of (i)
termination of the Indenture, (ii) early termination after material default
by Servicer as provided for in the Servicing Agreement, and (iii) the
Financed Eligible Loans serviced under the Servicing Agreement are paid in
full. As of the same date, Union Bank entered into an amendment to its
servicing agreement (the "Subservicing Agreement") with UNIPAC Service
Corporation, a Nebraska corporation ("UNIPAC"), under which UNIPAC, as
Subservicer, assumed all of the duties of the Servicer under the Servicing
Agreement for the term of the Servicing Agreement. UNIPAC will provide data
processing and other assistance necessary in connection with the servicing of
the Issuer's portfolio of Financed Eligible Loans acquired in connection with
its Student Loan Purchase Program. In accordance with the Subservicing
Agreement, UNIPAC will undertake to service the Issuer's Financed Eligible
Loans as required by the Higher Education Act and the Guarantee Agencies, and
the Issuer will cause the Trustee to pay, from the Trust Estate and only to
the extent moneys are available in the Revenue Fund established under the
Indenture, to Union Bank and UNIPAC servicing fees and subservicing fees,
respectively, and certain expenses for the services which Union Bank and
UNIPAC provide. In the event Union Bank no longer acts as the primary
servicer of the Financed Eligible Loan portfolio, UNIPAC has agreed to
service the Financed Eligible Loans under the terms of and pursuant to the
Servicing Agreement.
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Under the terms of the Servicing Agreement, the Servicer may be obligated
to pay the Issuer an amount equal to the outstanding principal balance plus
all accrued interest and other fees due to the date of purchase of a Financed
Eligible Loan if the Servicer causes such Financed Eligible Loan to be denied
the benefit of any applicable guarantee and is unable to cause the
reinstatement of such guarantee within twelve (12) months of denial by the
applicable Guarantee Agency. Upon such payment, such Financed Eligible Loan
shall be subrogated to the Servicer. In the event the Servicer cures any
Financed Eligible Loan which has been subrogated to the Servicer, the
Servicing Agreement provides that the Issuer shall pay an amount equal to the
then outstanding principal balance plus all accrued interest due on such
Financed Eligible Loan, less the amount subject to certain risk sharing
provisions in the Act, whereupon the subrogation rights of the Servicer shall
terminate.
As may be specified with respect to a Series in the related Prospectus
Supplement, another Servicer may be designated by the Issuer with respect to
certain Financed Eligible Loans financed from the proceeds of any such
Series. If so designated, the other Servicer and the servicing agreement with
respect thereto will be described in such Prospectus Supplement. Any
Servicer, other than Union Bank, shall be confirmed in writing by each Rating
Agency. In addition, any servicing agreement with Union Bank other than the
Servicing Agreement will be described in the related Prospectus Supplement.
UNIPAC
UNIPAC began its education loan servicing operations on January 1, 1978,
and provides education loan servicing, time sharing, administration and other
services to lenders, secondary market purchasers and guarantee agencies
throughout the United States. UNIPAC is a privately held corporation, owned
primarily by Union Bank and Trust Company, Lincoln, Nebraska, with a minority
ownership held by Packers Service Group, Inc., Lincoln, Nebraska. UNIPAC
offers student loan servicing to lending institutions and secondary markets.
UNIPAC's corporate headquarters is located in Aurora, Colorado, where UNIPAC
employs approximately 626 people. In December 1989, UNIPAC opened a second
servicing center in Lincoln, Nebraska, which currently employs approximately
298 people. As of March 30, 1996, UNIPAC's servicing volume in its Colorado
office was approximately $3.2 billion for its full-service and secondary
market clients, and approximately $2.2 billion for its remote lender clients
and, in its Nebraska office, was approximately $1.7 billion for its
full-service and secondary market clients.
UNIPAC's due diligence schedule is conducted through automated letter
generation. Telephone calls are made by an auto-dialer system. All
functions are monitored by an internal quality control system to ensure their
performance. Compliance training is provided on both centralized and unit
level basis. In addition, UNIPAC has distinct compliance and internal
auditing departments whose functions are to advise and coordinate compliance
issues. In order to provide these services, UNIPAC has developed and
maintains a computer mainframe and software system. See "Certain
Relationships Among Financing Participants."
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DESCRIPTION OF THE FEDERAL FAMILY EDUCATION LOAN PROGRAM
THE FEDERAL FAMILY EDUCATION LOAN PROGRAM
The Higher Education Act provides for a program of (a) direct federal
insurance of student loans ("FISLP") and (b) reinsurance of student loans
guaranteed or insured by a state agency or private non-profit corporation
(collectively, "Federal Family Education Loans" and the "Federal Family
Education Loan Program"). Several types of loans are currently authorized as
Federal Family Education Loans pursuant to the Federal Family Education Loan
Program. These include: (a) loans to students with respect to which the
federal government makes interest payments available to reduce student
interest cost during periods of enrollment ("Subsidized Federal Stafford
Loans"); (b) loans to students with respect to which the federal government
does not make such interest payments ("Unsubsidized Federal Stafford Loans"
and, collectively with Subsidized Federal Stafford Loans, "Federal Stafford
Loans"); (c) supplemental loans to parents of dependent students ("Federal
PLUS Loans"); and (d) loans to fund payment and consolidation of certain of
the borrower's obligations ("Federal Consolidation Loans"). Prior to July 1,
1994, the Federal Family Education Loan Program also included a separate type
of loan to graduate and professional students and independent undergraduate
students and, under certain circumstances, dependent undergraduate students,
to supplement their Stafford Loans ("Federal Supplemental Loans for Students"
or "Federal SLS Loans").
This summary of the Federal Family Education Loan Program as established
by the Higher Education Act does not purport to be comprehensive or
definitive and is qualified in its entirety by reference to the text of the
Higher Education Act and the regulations thereunder. Certain of the
provisions of the Federal Family Education Loan Program described below have
been subsequently modified by legislation signed by President Clinton on
August 10, 1993 and December 20, 1993. See "--1993 Amendments to the Federal
Family Education Loan Program" and "-Subsidized Federal Stafford
Loans--Principal and Interest" below.
SUBSIDIZED FEDERAL STAFFORD LOANS
The Higher Education Act provides for federal (a) insurance or
reinsurance of eligible Subsidized Federal Stafford Loans, (b) interest
subsidy payments to eligible lenders with respect to certain eligible
Subsidized Federal Stafford Loans, and (c) special allowance payments
representing an additional subsidy paid by the Secretary of Education to such
holders of eligible Subsidized Federal Stafford Loans.
Subsidized Federal Stafford Loans are eligible for reinsurance under the
Higher Education Act if the eligible student to whom the loan is made has
been accepted or is enrolled in good standing at an eligible institution of
higher education or vocational school and is carrying at least one-half the
normal full-time workload at that institution. In connection with eligible
Subsidized Federal Stafford Loans there are limits as to the maximum amount
which may be borrowed for an academic year and in the aggregate for both
undergraduate and graduate/professional study. Both aggregate limitations
exclude loans made under the Federal SLS and Federal PLUS
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Programs. The Secretary of Education has discretion to raise these limits to
accommodate students undertaking specialized training requiring exceptionally
high costs of education.
SUBJECT TO THESE LIMITS, SUBSIDIZED FEDERAL STAFFORD LOANS ARE AVAILABLE
TO BORROWERS IN AMOUNTS NOT EXCEEDING THEIR UNMET NEED FOR FINANCING AS
PROVIDED IN THE HIGHER EDUCATION ACT. PROVISIONS ADDRESSING THE
IMPLEMENTATION OF NEEDS ANALYSIS AND THE RELATIONSHIP BETWEEN UNMET NEED FOR
FINANCING AND THE AVAILABILITY OF SUBSIDIZED FEDERAL STAFFORD LOAN PROGRAM
FUNDING HAVE BEEN THE SUBJECT OF FREQUENT AND EXTENSIVE AMENDMENT IN RECENT
YEARS. THERE CAN BE NO ASSURANCE THAT FURTHER AMENDMENT TO SUCH PROVISIONS
WILL NOT MATERIALLY AFFECT THE AVAILABILITY OF SUBSIDIZED FEDERAL STAFFORD
LOAN FUNDING TO BORROWERS OR THE AVAILABILITY OF SUBSIDIZED FEDERAL STAFFORD
LOANS FOR SECONDARY MARKET ACQUISITION.
QUALIFIED STUDENT. Generally, a loan may be made only to a United States
citizen or national or otherwise eligible individual under federal
regulations who (a) has been accepted for enrollment or is enrolled and is
maintaining satisfactory progress at an eligible institution, (b) is carrying
at least one-half of the normal full-time academic workload for the course of
study the student is pursuing, as determined by such institution, (c) has
agreed to notify promptly the holder of the loan of any address change, and
(d) meets the applicable "needs" requirements. Eligible institutions include
higher educational institutions and vocational schools that comply with
certain federal regulations. Each loan is to be evidenced by an unsecured
note.
PRINCIPAL AND INTEREST. Subsidized Federal Stafford Loans may bear
interest at a rate not in excess of 7% per annum if made to a borrower to
cover costs of instruction for any period beginning prior to January 1, 1981
or, subsequent to such date, if made to a borrower who, upon entering into a
note for a loan, has outstanding student loans under the Federal Family
Education Loan Program for which the interest rates do not exceed 7%.
Subsidized Federal Stafford Loans made to new borrowers for periods of
instruction between January 1, 1981 and July 13, 1983 bear interest at a rate
of 9% per annum and for periods of instruction beginning on or after July 13,
1983 the rate for new borrowers is 8% per annum. Further, loans to
first-time borrowers for periods of enrollment beginning on or after July 1,
1988, made pursuant to Section 427A of the Higher Education Act ("427A
Loans"), 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 (the so-called "rebate") requiring annual discharge of principal
to the extent, in excess of $50, that the sum of quarterly calculations of
the amount by which interest calculated at the rate of 10% per annum exceeds
the amount which would result from application of a rate equivalent to the
annual average T-bill rate plus 3.25%. For new loans made to all existing
borrowers after July 23, 1992 and for loans made to all new borrowers after
July 23, 1992 but prior to October 1, 1992, the provision that requires
annual rebate is effective immediately, the rate with which the quarterly
calculation of interest is compared is equivalent to the annual average
91-day Treasury bill bond equivalent rate plus 3.10%, and any rebate with
respect to a loan for a period during which the Secretary of Education is
making interest subsidy payments must be credited to the Secretary of
Education.
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The Higher Education Technical Amendments of 1993, enacted December 20,
1993 (P.L. 103-208) (the "1993 Technical Amendments") changed the excess
interest rebate provisions of the Higher Education Act applicable to the
Federal Stafford Loans described in the preceding paragraph which were
previously subject to such rebate requirements. Holders of all such loans
previously subject to rebates were required to convert the fixed rates on
such loans to annual variable rates by January 1, 1995 in most cases (loans
with an initial rate of 8% which increase to 10% after four years of
repayment ("8/10% loans") must convert by January 1, 1995 or the date of
increase to 10%, whichever is later). The converted loans will not
thereafter be subject to the rebate requirements. At the time of conversion
the holder of the loan also must retroactively convert the fixed interest
rate for periods prior to the conversion to a quarterly variable rate. In
all cases the new variable rate cannot exceed the originally stated fixed
rate. The new annual variable rate for 8/10% loans made prior to July 23,
1992 and to new borrowers between July 23, 1992 and October 1, 1992 are the
bond equivalent rate of the 91-day Treasury bills auctioned at the final
auction prior to each June 1, plus 3.25%. The annual variable rate for 8/10%
loans and other fixed rate loans made to existing borrowers between July 23,
1992 and October 1, 1992 are the bond equivalent rate of the 91-day Treasury
bills auctioned at the final auction prior to each June 1, plus 3.10%. The
retroactive quarterly variable rates for periods prior to conversion is the
average of the bond equivalent rates of the 91-day Treasury bills auctioned
for the preceding three months plus 3.25% (in the case of 8/10% loans
described in the second preceding sentence) or 3.10% (in the case of loans
described in the preceding sentence).
Subsidized Federal Stafford Loans initially disbursed on or after October 1,
1992 to new borrowers as of that date, and subsequent loans to such borrowers,
bear a variable rate of interest, subject to annual reset. The effective
interest rate thereon would equal 3.10% over the average of the bond
equivalent rate of 91-day Treasury bills auctioned during a particular
fiscal year not to exceed 9%. The 1993 Amendments (as described below) made
certain changes to the interest rates on student loans to be originated in
the future. The interest rates on Subsidized Federal Stafford Loans made to
new borrowers as of July 1, 1994 will be the 91-day T-bill rate plus 3.1%,
not to exceed 8.25%. The interest rates on these programs for loans made on
or after July 1, 1995 prior to repayment and during any grace period will be
the 91-day T-bill plus 2.5%, not to exceed 8.25%. The interest rate on
Subsidized Federal Stafford Loans and Unsubsidized Federal Stafford Loans
made to new borrowers on or after July 1, 1998, will be the bond equivalent
rate of the U.S. Treasury security with a comparable maturity as established
by the Secretary of Education plus 1%, not to exceed 8.25%.
The Higher Education Act requires that loans in excess of $1,000 made to
cover enrollment periods longer than six months be disbursed by eligible
lenders in at least two separate disbursements. Prior to January 1, 1987,
the maximum amount of the loan for an academic year could not exceed $2,500
for undergraduate study and $5,000 for graduate or professional study,
subject to an aggregate limit of $12,500 for undergraduate study and up to
$25,000 for graduate and professional study, inclusive of loans for
undergraduate study. Since January 1, 1987, undergraduates have been able to
borrow up to $2,625 annually through the completion of the second year of
instruction and $4,000 annually through the remainder of
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undergraduate study. Subsidized Federal Stafford Loans are subject to an
aggregate limit of $17,250 for undergraduate study, while graduate or
professional students, who may borrow up to $7,500 annually, are subject to
an aggregate limit of $54,750, inclusive of loans for undergraduate study.
After July 1, 1993, the maximum amount of a Subsidized Federal Stafford Loan
for an academic year cannot exceed $2,625 for the first year of undergraduate
study, $3,500 for the second year of undergraduate study and $5,500 for the
remainder of undergraduate study. The aggregate limit for undergraduate
study is $23,000. The maximum amount of the loans for an academic year for
graduate students is $8,500. In either case, the Secretary of Education has
discretion to raise these limits by regulation to accommodate highly
specialized or exceptionally expensive courses of study.
REPAYMENT. Repayment of principal on a Subsidized Federal Stafford Loan
does not commence while a student remains a qualified student, but generally
begins upon expiration of the applicable Grace Period, as described below.
Such Grace Periods may be waived by borrowers. In general, each loan must be
scheduled for repayment over a period of not more than ten years after the
commencement of repayment. The Higher Education Act currently requires
minimum annual payments of $600, including principal and interest, unless the
borrower and the lender agree to lesser payments; in instances in which a
borrower and spouse both have such loans outstanding, the total combined
payments for such a couple may not be less than $600 per year.
GRACE PERIOD, DEFERMENT PERIODS, FORBEARANCE. Repayment of principal of
a Subsidized Federal Stafford Loan must generally commence following a period
of (a) not less than 9 months or 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 9%
per annum or 8% per annum and for loans to first time borrowers on or after
July 1, 1988) after the student borrower ceases to pursue at least a
half-time course of study (a "Grace Period"). However, during certain other
periods and subject to certain conditions, no principal repayments need be
made, including periods when the borrower has returned to an eligible
educational institution on a half-time basis or is pursuing studies pursuant
to an approved graduate fellowship program, is a member of the Armed Forces
or a volunteer under the Peace Corps Act or the Domestic Volunteer Service
Act of 1973, or is temporarily totally disabled or is unable to secure
employment by reason of the care required by a dependent who is so disabled
("Deferment Periods"). Other Deferment Periods include periods of
unemployment and qualified internships. The lender may also allow periods of
forbearance during which the borrower may defer principal payments because of
temporary financial hardship.
INTEREST SUBSIDY PAYMENTS. The Secretary of Education pays interest on
Subsidized Federal Stafford Loans while the student is a qualified student,
during a Grace Period or during certain Deferment Periods. The Secretary of
Education makes interest subsidy payments to the owner of Subsidized Federal
Stafford Loans in the amount of interest accruing on the unpaid balance
thereof prior to the commencement of repayment or during any Deferment
Period. The Higher Education Act provides that the owner of an eligible
Subsidized Federal Stafford Loan
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shall be deemed to have a contractual right against the United States to
receive interest subsidy payments in accordance with its provisions.
UNSUBSIDIZED FEDERAL STAFFORD LOANS
The 1992 Amendments (defined below) created the Unsubsidized Federal
Stafford Loan Program designed for students who do not qualify for Subsidized
Federal Stafford Loans due to parental and/or student income and assets in
excess of permitted amounts. In other respects, the general requirements for
Unsubsidized Federal Stafford Loans are essentially the same as those for
Subsidized Federal Stafford Loans. The interest rate, the annual loan limits
and the special allowance payment provisions of the Unsubsidized Federal
Stafford Loans are the same as the Subsidized Federal Stafford Loans.
However, the terms of the Unsubsidized Federal Stafford Loans differ
materially from Subsidized Federal Stafford Loans in that the federal
government will not make interest subsidy payments and the loan limitations
are determined without respect to the expected family contribution. The
borrower will be required to pay interest from the time such loan is
disbursed or capitalize the interest until repayment begins. The authority
for offering Unsubsidized Federal Stafford Loans became effective for periods
of enrollment beginning on or after October 1, 1992.
The 1993 Amendments made certain changes to the interest rates on student
loans to be originated in the future. The interest rates on Unsubsidized
Federal Stafford Loans made to new borrowers as of July 1, 1994 are the
91-day T-bill rate plus 3.10%, not to exceed 8.25%. The interest rates on
these programs for loans made on or after July 1, 1995 prior to repayment and
during any grace period are the 91-day T-bill rate plus 2.50%, not to exceed
8.25%. The interest rate on Unsubsidized Federal Stafford Loans made on or
after July 1, 1998 will be the bond equivalent rate of the security with a
comparable maturity as established by the Secretary of Education plus 1.0%,
not to exceed 8.25%.
SPECIAL ALLOWANCE PAYMENTS
The Higher Education Act provides for special allowance payments to be
made by the Secretary of Education to eligible lenders. The rates for
special allowance payments are based on formulas that differ according to the
type of loan (Federal Stafford or Federal PLUS and Federal SLS), the date the
loan was originally made or insured and the type of funds used to finance
such loan (tax-exempt or taxable). The effective formulas for special
allowance payment rates for Subsidized Federal Stafford Loans to borrowers
whose first loans were disbursed prior to July 23, 1992 and were acquired or
originated with the proceeds of tax-exempt obligations are set forth in the
following table. This formula has been changed by the 1993 Amendments, as
hereinafter described, for loans acquired or funded with proceeds of
tax-exempt obligations originally issued after September 30, 1993.
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Annualized SAP Rate/ Annualized SAP Rate/
Interest Pre-October 1980 Post-October 1980
Rate on Loan Loans(1) Tax-Exempt Loans(1)
- -------------- --------------------- --------------------------------
7% T-Bill - 3.5% (T-Bill-3.5%)/2: minimum 2.5%
8% T-Bill - 4.5% (T-Bill-4.5%)/2: minimum 1.5%
9% T-Bill - 5.5% (T-Bill-5.50%)/2: minimum 0.5%
________________
(1) "T-Bill," as used in this table, means the average
13-week Treasury bill rate calculated as a "bond equivalent rate" in the
manner applied by the Secretary of Education as referred to in Section 438 of
the Higher Education Act.
As noted in the foregoing table, there are minimum special allowance
payment rates for Subsidized Federal Stafford Loans acquired with proceeds of
tax-exempt obligations made on and after October 1, 1980, except for 427A
Loans (while bearing interest at 10%), which rates effectively ensure an
overall minimum return of 9.5% on such Subsidized Federal Stafford Loans.
However, loans acquired with the proceeds of tax-exempt obligations
originally issued after September 30, 1993 will no longer be assured of a
minimum special allowance payment. In addition, the formula will be the same
as for loans acquired with taxable proceeds (i.e., the full, rather than
half, special allowance payment rate). The formula for special allowance
payment rates for Federal PLUS and Federal SLS Loans is similar to that for
the Subsidized Federal Stafford Loans except that no such payments are made
until the rate on the Federal PLUS or Federal SLS Loan exceeds a certain rate
per annum according to the type of loan and based on when the loan was first
disbursed. In order to be eligible for special allowance payments, the rate
on PLUS Loans first disbursed on or after October 1, 1992 must exceed 10% and
for SLS Loans first disbursed on or after October 1, 1992 the rate must
exceed 11%. The rate of special allowance payments for Subsidized Federal
Stafford Loans first disbursed on or after October 1, 1992 is based on the
bond equivalent 91-day Treasury bill rate plus 3.1%. The special allowance
payment rates applicable to Federal Consolidation Loans are determined in the
same manner as Subsidized Federal Stafford Loans made on or after October 1,
1980.
FEDERAL PLUS AND FEDERAL SLS LOAN PROGRAMS
The Higher Education Act authorizes Federal PLUS Loans to be made to
parents of eligible dependent students and Federal SLS Loans to be made to
certain categories of students. Only parents who do not have an adverse
credit history are eligible for Federal PLUS Loans that have a first
disbursement date on or after July 1, 1993. The basic provisions applicable
to Federal PLUS and Federal SLS Loans are similar to those of Subsidized
Federal Stafford Loans with respect to the involvement of guarantee agencies
and the Secretary of Education in providing federal reinsurance on the loans.
However, Federal PLUS and Federal SLS Loans differ significantly from
Subsidized Federal Stafford Loans, particularly because federal interest
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subsidy payments are not available under the Federal PLUS and Federal SLS
Programs and special allowance payments are more restricted.
Federal SLS Loan limits for loans disbursed on or after July 1, 1993 are
dependent on the class year of the student and the length of the academic
year. The annual loan limit for Federal SLS Loans first disbursed on or after
July 1, 1993 ranges from $4,000 for first and second year undergraduate
borrowers to $10,000 for graduate borrowers, with a maximum aggregate amount
of $23,000 for undergraduate borrowers and $73,000 for graduate and
professional borrowers. The only limit on the annual and aggregate amounts of
Federal PLUS Loans first disbursed on or after July 1, 1993 is the student's
unmet financial need. Federal PLUS and Federal SLS Loans disbursed prior to
July 1, 1993 are limited to $4,000 per academic year with a maximum aggregate
amount of $20,000. Prior to October 17, 1986, the applicable loan limits
were $3,000 per academic year with a maximum aggregate amount of $15,000.
Federal PLUS and Federal SLS Loans are also limited, generally, to the cost
of attendance minus other financial aid for which the student is eligible.
The applicable interest rate depends upon the date of issuance of the
loan and the period of enrollment for which the loan is to apply. For
Federal PLUS Loans issued on or after October 1, 1981, but for periods of
educational enrollment beginning prior to July 1, 1987, the applicable rate
of interest is either 12% or 14% per annum. A variable interest rate applies
to Federal PLUS and Federal SLS Loans made and disbursed on or after July 1,
1987 but prior to October 1, 1992. The rate is determined on the basis of
any 12-month period beginning on July 1 and ending on the following June 30,
such that the rate shall be the bond equivalent rate of 52-week Treasury
bills auctioned at the final auction held prior to the June 1 preceding the
applicable 12-month period, plus 3.25%, with a maximum rate of 12% per annum.
Special allowance payments are available on variable rate Federal PLUS and
Federal SLS Loans disbursed on or after July 1, 1987 but prior to October 1,
1992 only if the rate determined by the formula above would exceed 12%. The
variable interest rate for Federal PLUS and Federal SLS Loans first disbursed
on or after October 1, 1992 is based on the same 12-month period as Federal
PLUS and Federal SLS Loans disbursed prior to October 1, 1992, except that
3.10% shall be added to the bond equivalent rate of 52-week Treasury bills
auctioned prior to the applicable period, with a maximum rate of 11% per
annum for Federal SLS Loans, and a maximum rate of 10% per annum for Federal
PLUS Loans. Special allowance payments are available on variable rate
Federal SLS and Federal PLUS Loans disbursed on or after October 1, 1992 only
if the rate determined by the formula in the preceding sentence exceeds 11%
per annum for Federal SLS Loans and 10% for Federal PLUS Loans.
The 1993 Amendments made certain changes to the interest rates on student
loans to be originated in the future. The interest rate on the Federal PLUS
Loans made on or after July 1, 1994 shall be the 52-week T-bill rate plus
3.10%, not to exceed 9%. Federal PLUS Loans made on or after July 1, 1998
shall have an interest rate of the bond equivalent rate of the security with
a comparable maturity as established by the Secretary of Education, plus
2.10%, not to exceed 9%.
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The 1992 Amendments provide Federal SLS Loan borrowers the option to
defer commencement of repayment of principal until the commencement of
repayment of Federal Stafford Loans. Otherwise, repayment of principal of
Federal PLUS and Federal SLS Loans is required to commence no later than 60
days after the date of disbursement of such loan, subject to certain deferral
provisions. The deferral provisions which apply are more limited than those
which apply to Stafford Loans. In addition, a parent borrower may defer
principal payments for periods during which the borrower has a dependent
student for whom the parent borrowed a Federal PLUS Loan, if such student is
engaged in a qualifying educational program, graduate fellowship program or
rehabilitation training program.
Repayment of interest, however, may be deferred only during certain
periods of educational enrollments specified under the Higher Education Act.
Further, whereas federal interest subsidy payments are not available for such
deferments, the Higher Education Act provides an opportunity for the
capitalization of interest during such periods upon agreement of the lender
and borrower. Amounts borrowed to capitalize interest do not count against
the $4,000 annual loan limit.
A borrower may refinance all outstanding Federal PLUS Loans under a
single repayment schedule for principal and interest. The interest rate of
such refinanced loan shall be the weighted average of the rates of all loans
being refinanced. A second type of refinancing enables an eligible lender to
reissue a Federal PLUS Loan which was initially originated at a fixed rate
prior to July 1, 1987 in order to permit the borrower to obtain the variable
interest rate available on Federal PLUS Loans on and after July 1, 1987. If
a lender is unwilling to refinance the original Federal PLUS Loan, the
borrower may obtain a loan from another lender for the purpose of discharging
the loan and obtaining a variable interest rate.
Commencing July 1, 1994, the Federal SLS Loan Program has been replaced
by the Unsubsidized Stafford Loan Program with annual loan limits in the
merged program equal to the combined limits of the two programs prior to the
merger.
THE FEDERAL CONSOLIDATION LOAN PROGRAM
The Higher Education Act authorizes a program under which certain
borrowers may consolidate their various student loans into a single loan
insured and reinsured on a basis similar to Subsidized Federal Stafford
Loans. Federal Consolidation Loans may be made in an amount sufficient to
pay outstanding principal, unpaid interest and late charges on certain
federally insured or reinsured student loans incurred under and pursuant to
the Federal Family Education Loan Program (other than Federal PLUS Loans made
to "parent borrowers") selected by the borrower, as well as loans made
pursuant to the Perkins (formally "National Direct Student Loan") and Health
Professional Student Loan Programs. These loans, for applications received
on or after January 1, 1993, are available only to borrowers who have
aggregate outstanding student loan balances of at least $7,500, and for
applications received before January 1, 1993, are available only to borrowers
who have aggregate outstanding student loan balances of at least $5,000. The
borrowers may be either in repayment status or in a grace period preceding
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repayment and, for applications received prior to January 1, 1993, the
borrower must not be delinquent by more than 90 days on any loan payment; for
applications received on or after January 1, 1993 delinquent or defaulted
borrowers are eligible to obtain Federal Consolidation Loans if they agree to
re-enter repayment through loan consolidation. For applications received on
or after January 1, 1993, borrowers may add additional loans to a Federal
Consolidation Loan during the 180-day period following origination of the
Federal Consolidation Loan. Further, a married couple whose application is
received on or after January 1, 1993 and who agree to be jointly and
severally liable will be treated as one borrower for purposes of loan
consolidation eligibility. A Federal Consolidation Loan will be federally
insured or reinsured only if such loan is made in compliance with
requirements of the Higher Education Act.
Federal Consolidation Loans made prior to July 1, 1994 bear interest at a
rate which equals the weighted average of interest rates on the unpaid
principal balance of outstanding loans, rounded to the nearest whole percent,
with a minimum rate of 9%. Interest on Federal Consolidation Loans accrues
and, for applications received prior to January 1, 1993, is to be paid
without deferral. Borrowers may defer periodic payments of principal under
certain circumstances that are more limited than those applicable to the
loans being refinanced. Deferral of principal repayments is authorized for
periods similar to those for Subsidized Federal Stafford Loans. Borrowers
may elect to accelerate principal payments without penalty. The rate for
special allowance payments for Federal Consolidation Loans financed with
tax-exempt funds is determined in the same manner as for Subsidized Federal
Stafford Loans made on or after October 1, 1980. See "--Special Allowance
Payments" above. Further, no insurance premium may be charged to a borrower
and no insurance premium may be charged by a lender in connection with a
Federal Consolidation Loan. However, a fee may be charged to a lender by the
guarantor to cover the costs of increased or extended liability with respect
to a Federal Consolidation Loan.
Repayment of Federal Consolidation Loans begins 60 days after discharge
of all prior loans which are consolidated. Federal interest subsidy payments
generally are not available with respect to Federal Consolidation Loans.
Repayment schedules include, for applications received on or after January 1,
1993, the establishment of graduated and income sensitive repayment plans,
subject to certain limits applicable to the sum of the Federal Consolidation
Loan and the amount of the borrower's other eligible student loans
outstanding. The lender may at its option include such graduated and income
sensitive repayment plans for applications received prior to that date.
Generally, the repayment shall be made over periods no shorter than ten but
not more than 25 years in length. For consolidation loans made after July 1,
1994, the maximum maturity schedule is thirty years for Federal Consolidation
Loans of $60,000 or more.
FEDERAL INSURANCE AND
REIMBURSEMENT OF GUARANTEE AGENCIES
A Federal Family Education Loan is considered to be in default for
purposes of the Higher Education Act when the borrower fails to make an
installment payment when due, or to comply with other terms of the loan, and
if the failure persists for 180 days in the case of a loan
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repayable in monthly installments or for 240 days in the case of a loan
repayable in less frequent installments.
If the loan in default is covered by federal loan insurance in accordance
with the provisions of the Higher Education Act, the Secretary of Education
is to pay the holder the amount of the loss sustained thereby, upon notice
and determination of such amount, within 90 days of such notification subject
to reduction as described in the following paragraphs.
The Higher Education Act provides that, subject to compliance with such
Act, the full faith and credit of the United States is pledged to the payment
of insurance claims and such Act guarantees reimbursements are not subject to
reduction. It further provides that guarantee agencies shall be deemed to
have a contractual right against the United States to receive reimbursement
in accordance with its provisions. In addition, the 1992 Amendments provide
that if a guarantor is unable to meet its insurance obligations, holders of
loans may submit insurance claims directly to the Secretary until such time
as the obligations are transferred to a new guarantor capable of meeting such
obligations or until a successor guarantor assumes such obligations. Federal
reimbursement and insurance payments for defaulted loans are paid from the
Student Loan Insurance Fund established under the Higher Education Act. The
Secretary of Education is authorized, to the extent provided in advance by
appropriations acts, to issue obligations to the Secretary of the Treasury to
provide funds to make such federal payments.
LOANS INITIALLY DISBURSED PRIOR TO OCTOBER 1, 1993. If the loan is
guaranteed by a guarantee agency, the eligible lender is reimbursed by the
guarantee agency for 100% of the unpaid principal balance of the loan plus
accrued unpaid interest on any loan defaulted so long as the eligible lender
has properly serviced such loan. Under the Higher Education Act, the
Secretary of Education enters into a guarantee agreement and an annually
renewable supplemental guarantee agreement with a guarantee agency which
provides for federal reimbursement for amounts paid to eligible lenders by
the guarantor with respect to defaulted loans.
Pursuant to such agreements, the Secretary of Education is to reimburse a
guarantee agency for 100% of the amounts expended in connection with a claim
resulting from the death, bankruptcy or total and permanent disability of a
borrower, the death of a student whose parent is the borrower of a Federal
PLUS Loan, or claims by borrowers who received loans on or after January 1,
1986 and who are unable to complete the programs in which they are enrolled
due to school closure or borrowers whose borrowing eligibility was falsely
certified by the eligible institution. Such claims are not included in
calculating a guarantor's claims rate experience for federal reimbursement
purposes. The Secretary of Education is also required to repay the unpaid
balance of any loan if collection is stayed under the Bankruptcy Code and is
authorized to acquire the loans of borrowers who are at high risk of default
and who request an alternative repayment option from the Secretary of
Education. Further, the Secretary of Education is to reimburse a guarantee
agency for any amounts paid to satisfy claims not resulting from death,
bankruptcy, or disability subject to reduction as described in the following
paragraphs.
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The amount of such insurance or reimbursement payment is subject to
reduction based upon the annual claim rate of the guarantee agency calculated
to equal the amount of federal reimbursement as a percentage of the original
principal amount of originated or guaranteed loans in repayment on the last
day of the prior fiscal year. The formula used for loans initially disbursed
prior to October 1, 1993 is summarized below:
Claims Rate Federal Payment
----------- ----------------
0% up to 5% 100%
5% up to 9% 100% of claims up to 5%;
90% of claims 5% and over
9% and over 100% of claims up to 5%;
90% of claims 5% and over, up to 9%;
80% of claims 9% and over
The claims experience is not accumulated from year to year, but is
determined solely on the basis of claims in any one federal fiscal year
compared with the original principal amount of loans in repayment at the
beginning of that year.
LOANS INITIALLY DISBURSED ON OR AFTER OCTOBER 1, 1993. The 1993
Amendments reduce the reimbursement amounts described above (effective for
loans initially disbursed on or after October 1, 1993) as follows: 100%
reimbursement is reduced to 98%, 90% reimbursement is reduced to 88%, and 80%
reimbursement is reduced to 78%, subject to certain limited exceptions.
REIMBURSEMENT
The original principal amount of loans guaranteed by a guarantee agency
which are in repayment for purposes of computing reimbursement payments to a
guarantee agency means the original principal amount of all loans guaranteed
by a guarantee agency less: (a) guarantee payments on such loans, (b) the
original principal amount of such loans that have been fully repaid, and (c)
the original amount of such loans for which the first principal installment
payment has not become due. Guarantee agencies with default rates below 5%
are required to pay the Secretary of Education annual fees equivalent to
0.51% of new loans guaranteed, while all other such agencies must pay a 0.5%
fee.
In addition, the Secretary of Education may withhold reimbursement
payments if a guarantee agency makes a material misrepresentation or fails to
comply with the terms of its agreements with the Secretary of Education or
applicable federal law. A supplemental guarantee agreement is subject to
annual renegotiation and to termination for cause by the Secretary of
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Education. The Issuer has no knowledge that any aforementioned supplemental
guarantee agreement will not be renegotiated on the same terms as are
currently in effect.
Under the guarantee agreements and the supplemental guarantee agreements,
if a payment on a Federal Family Education Loan guaranteed by a guarantee
agency is received after reimbursement by the Secretary of Education, the
guarantee agency is entitled to receive an equitable share of the payment.
Any originator of any student loan guaranteed by a guarantee agency is
required to discount from the proceeds of the loan at the time of
disbursement, and pay to the guarantee agency, an insurance premium which may
not exceed that permitted under the Higher Education Act.
The Issuer (or any other holder of a loan) is required to exercise due
care and diligence in the servicing of the loan and to utilize practices
which are at least as extensive and forceful as those utilized by financial
institutions in the collection of other consumer loans. If a guarantee
agency has probable cause to believe that the holder has made
misrepresentations or failed to comply with the terms of its agreement for
guarantee, the guarantee agency may take reasonable action including
withholding payments or requiring reimbursement of funds. The guarantee
agency may also terminate the agreement for cause upon notice and hearing.
THE GUARANTEE AGREEMENT
Pursuant to most typical agreements for guarantee between a guarantee
agency and the originator of the loan, any eligible holder of a loan insured
by such a guarantee agency is entitled to reimbursement from such guarantee
agency of any proven loss incurred by the holder of the loan resulting from
default, death, permanent and total disability or bankruptcy of the student
borrower at the rate of 100% of such loss (or, subject to certain
limitations, 98% for loans in default made on or after October 1, 1993).
Guarantee agencies generally deem default to mean a student borrower's
failure to make an installment payment when due or to comply with other terms
of a note or agreement under circumstances in which the holder of the loan
may reasonably conclude that the student borrower no longer intends to honor
the repayment obligation and for which the failure persists for 180 days in
the case of a loan payable in monthly installments or for 240 days in the
case of a loan payable in less frequent installments. When a loan becomes
from 60 to 90 days past due, the holder is required to request preclaims
assistance from the applicable guarantee agency in order to attempt to cure
the delinquency. When a loan becomes 150 days past due, the holder is
required to make a final demand for payment of the loan by the borrower and
to submit a claim for reimbursement to the applicable guarantee agency. The
holder is required to continue collection efforts until the loan is 180 days
past due. At the time of payment of insurance benefits, the holder must
assign to the applicable guarantee agency all rights accruing to the holder
under the note evidencing the loan. The Higher Education Act prohibits a
guarantee agency from filing a claim for reimbursement with respect to losses
prior to 270 days after the loan becomes delinquent with respect to any
installment thereon.
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If a student who has received any loan directly insured by the Secretary
of Education dies, becomes totally and permanently disabled or is discharged
in bankruptcy, the Secretary is required to discharge the borrower's
liability on the loan by repaying the amount owed.
HIGHER EDUCATION AMENDMENTS OF 1992
The 1992 Amendments reauthorized the Higher Education Act and made
certain amendments thereto. The following text describes some of the
amendments to the Higher Education Act contained in the 1992 Amendments, but
does not purport to be a complete description of those amendments, to which
reference is made for full and complete statements of their respective
provisions.
The 1992 Amendments adopted several provisions that affect loan terms,
which are described in part above. 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 receive
income-sensitive repayment schedules. In cases where the borrowers have
indicated a willingness to pay, but have demonstrated an inability to do so,
the 1992 Amendments entitle them to forbearance, on and after October 1,
1992. The 1992 Amendments also provide that in-school interest and special
allowance payments to lenders shall be made only with respect to loans that
have been consummated by the borrower.
In addition, the 1992 Amendments include provisions regarding the
relationship between the Secretary of Education and the various guarantee
agencies. These include, but are not limited to, a requirement that the
Secretary of Education promulgate regulations to standardize forms and
practices used by guarantee agencies; a requirement that the Secretary of
Education work with guarantee agencies to develop criteria regarding
assignment of loans to the Secretary of Education; a requirement for annual
submissions to, and evaluations by, the Secretary of Education of financial
information concerning each guarantee agency; a provision for the
establishment by the Secretary of standards pursuant to which certain
guarantee agencies would be required to submit management plans to the
Secretary of Education; a provision authorizing the Secretary of Education
to, among other things, revoke a guarantee agency's reinsurance contract if
it does not submit a satisfactory management plan or if the Secretary of
Education determines the guarantee agency to be financially nonviable; and a
provision that makes the Secretary of Education responsible for the payment
of obligations of insolvent guarantee agencies. The 1992 Amendments also
require that officers and employees of guarantee agencies and other
participants in the Higher Education Act's program (such as lenders,
secondary markets and servicers) report to the Secretary of Education
regarding financial interests they may have in other participants in the
Higher Education Act's program. The foregoing provisions of the 1992
Amendments were generally effective on the date of enactment, July 23, 1992,
subject to rulemaking procedures.
The 1992 Amendments also established a direct lending demonstration
program which would not have involved banks, secondary markets, or guarantee
agencies. This program was to cover the period of July 1, 1994 through June
30, 1998. The direct loan demonstration
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program was to include educational institutions which were representative of
the Higher Education Act's program participants and which were to be selected
by the Secretary of Education first, from among those institutions expressing
an interest in participating and second, from those institutions selected by
the Secretary of Education as necessary to complete the sample, with an
opportunity for such institutions to decline to participate. Selected
institutions may be required to participate either in the demonstration
program or the Act's program, but not both. Institutions comprising more
than 15% of the annual loan volume of any one guarantee agency will not be
selected. The 1993 Amendments, described below, made substantial revisions to
the direct lending program established by the 1992 Amendments. Certain of
the 1992 Amendments require promulgation of regulations by the Secretary of
Education.
1993 AMENDMENTS TO THE
FEDERAL FAMILY EDUCATION LOAN PROGRAM
On August 10, 1993, President Clinton signed into law the Omnibus Budget
Reconciliation Act of 1993, including Title IV of the Omnibus Budget
Reconciliation Act of 1993 and the Student Loan Reform Act of 1993 (the "1993
Amendments"). The summary of the 1993 Amendments contained herein does not
purport to be complete or comprehensive.
The 1993 Amendments provided for substantial changes to the current
student loan programs under the Federal Family Education Loan Program (the
"FFEL Program") and the Federal Direct Loan Demonstration program of the
Higher Education Act. Except as stated herein and in the 1993 Amendments,
these changes were effective on the date of enactment of the 1993 Amendments
into law.
TERMS AND CONDITIONS. Several terms and conditions of the current FFEL
Program were changed as follows:
With respect to loans initially disbursed on or after October 1, 1993, a
lender is entitled to receive from a guarantor 98% (reduced from 100%) of the
unpaid principal of defaulted loans (except with respect to loans made by a
lender-of-last-resort).
The effective floor rate of return of 9.5% available to holders of loans
made or purchased with funds obtained by the holder from the issuance of tax
exempt obligations, were eliminated for such obligations which were issued on
or after October 1, 1993. The special allowance payments payable with
respect to eligible loans acquired or funded with the proceeds of tax-exempt
obligations issued after September 30, 1993 are the full special allowance
payments paid to other lenders.
With respect to loans initially disbursed on or after October 1, 1993,
the Secretary of Education is required to reduce the interest subsidy and any
special allowance payment to any holder of a loan by a loan fee equal to
0.50% of the principal amount of the loan.
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Each holder of a Federal Consolidation Loan for which the first
disbursement is made on or after October 1, 1993, shall pay to the Secretary
of Education a monthly rebate fee calculated on an annual basis equal to
1.05% of the principal plus accrued unpaid interest on such loan.
Guarantee agency retention on collections was reduced to 27% from 30%. A
one-time lender-paid user fee of 0.5% on new loan volume has been imposed.
Guarantee agency reinsurance reimbursement will be reduced from 100% to 98%,
90% to 88% and 80% to 78% of the amount expended by it in the discharge of
its insurance obligation. Loans made under a lender-of-last-resort program
and under an agreement resulting from guarantee agency insolvency are exempt
from these reductions.
GENERAL. Under the Federal Direct Student Loan Program (the "FDSL
Program") established by the 1993 Amendments, a variety of student loans,
including loans for parents of students, may be obtained directly from the
student's institution of higher education ("IHE") or through an alternative
originator designated by the Secretary of Education, without application to
an outside lender. Loans made under the FDSL Program are funded and owned by
the Secretary of Education. The FDSL Program will provide for a variety of
repayment plans from which borrowers may choose, including repayment plans
based on income.
DIRECT LOANS. The 1993 Amendments provided that, unless otherwise
specified, loans made to borrowers under the FDSL Program have the same
terms, conditions, and are available in the same amounts as loans made to
borrowers for Subsidized Federal Stafford Loans, Federal PLUS Loans and
Unsubsidized Federal Stafford Loans. The FDSL Program loans are known
respectively as Federal Direct Stafford Loans, Federal Direct PLUS Loans and
Federal Direct Unsubsidized Stafford Loans.
GUARANTEE AGENCIES. The 1993 Amendments also provide that a guarantee
agency's assets are dedicated to the loan programs and may not be used for
unauthorized purposes. Thus, the 1993 Amendments add to the guarantee agency
reserve provisions in the Higher Education Act what the 1993 Amendments
describe as a "clarification" that, notwithstanding any other provision of
law, the reserve funds of the guarantee agencies, and any assets purchased
with these reserve funds, regardless of who holds or controls the reserves or
assets, are the property of the United States, to be used in the operation of
the FFEL Program or the FDSL Program. These reserves are required to be
maintained by each guarantee agency to pay program expenses and contingent
liabilities, as authorized by the Secretary of Education. The 1993
Amendments further provided that the Secretary of Education is prohibited
from requiring the return of all of a guarantee agency's reserve funds unless
the Secretary of Education determines that the return of these funds is in
the best interest of the operation of the FFEL Program, or to ensure the
proper maintenance of such agency's funds or assets or the orderly
termination of the guarantee agency's operations and the liquidation of its
assets. However, the Secretary of Education is also authorized to direct a
guarantee agency to: (a) return to the Secretary of Education all or a
portion of its reserve expenses and contingent liabilities; (b) return to the
Secretary of Education, or the guarantee agency any funds or assets held by,
or under the control of, any
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other entity, which the Secretary of Education determines are necessary to
pay the program expenses and contingent liabilities of the agency, or which
are required for the orderly termination of the agency's operation and
liquidation of its assets; and (c) cease any activities involving
expenditure, use or transfer of the guarantee agency's reserve funds or
assets which the Secretary of Education determines is a misapplication,
misuse or improper expenditure.
The 1993 Amendments gave the Secretary of Education increased flexibility
to terminate a guarantee agency's agreement by allowing the Secretary of
Education to terminate the agreement if the Secretary of Education determines
that termination is necessary, to protect the federal financial interest, to
ensure the continued availability of loans to student or parent borrowers, or
to ensure an orderly transition from the FFEL Program to the FDSL Program.
The 1993 Amendments also expanded the Secretary of Education's authorized
functions when a guarantee agency's agreement is terminated. The Secretary
of Education is authorized to provide the guarantee agency with additional
advance funds with such restrictions on the use of such funds as is
determined appropriate by the Secretary of Education, in order to meet the
immediate cash needs of the guarantee agency, ensure the uninterrupted
payment of claims, or ensure that the guarantee agency will make loans as the
lender-of-last-resort. Finally, the 1993 Amendments authorized the Secretary
of Education to take whatever other action is necessary, to ensure an orderly
transition from the FFEL Program to the FDSL Program.
The 1993 Amendments provided that if the Secretary of Education has
terminated or is seeking to terminate a guarantee agency's agreement, or has
assumed a guarantee agency's functions, notwithstanding any other provision
of law: (a) no state court may issue an order affecting the Secretary of
Education's actions with respect to that guarantee agency; (b) any contract
entered into by the guarantee agency with respect to the administration of
the agency's reserve funds or assets acquired with reserve funds shall
provide that the contract is terminable by the Secretary of Education upon 30
days notice to the contracting parties if the Secretary of Education
determines that such contract includes an impermissible transfer of funds or
assets or is inconsistent with the terms or purposes of this law; and (c) no
provision of state law shall apply to the actions of the Secretary of
Education in terminating the operations of the guarantee agency. Finally,
notwithstanding any other provision of law, the 1993 Amendments provided that
the Secretary of Education's liability for any outstanding liabilities of a
guarantee agency (other than outstanding student loan guarantees under Part D
of Title IV of the Higher Education Act), the functions of which the
Secretary of Education has assumed, shall not exceed the fair market value of
the reserves of the guarantee agency, minus any necessary liquidation or
other administrative costs.
AMENDMENTS TO TERMS OF FEDERAL FAMILY EDUCATION LOAN PROGRAM LOANS. The
1993 Amendments also amended the terms of loans under the FFEL Program. The
1993 Amendments require that following a borrower's default, the Secretary of
Education shall require at least 10% of borrowers who have defaulted on loans
made under the FFEL Program and whose loan is assigned to the Secretary of
Education to repay that loan under an income contingent repayment plan, the
terms and conditions of which would be established by the Secretary of
Education, and
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would be the same as or similar to the income contingent repayment plan
authorized under the FDSL Program. These provisions of the 1993 Amendments
are effective for loans for periods of instruction beginning on or after July
1, 1994 or, in the case of Federal PLUS Loans, for loans made on or after
July 1, 1994.
FEDERAL FAMILY EDUCATION LOAN PROGRAM LOAN CONSOLIDATION. The 1993
Amendments alter the provisions for the Federal Consolidation Loan Program in
order to facilitate the expansion of the FDSL Program. The 1993 Amendments
define "eligible borrower" for loan consolidation in the FFEL Program to mean
a borrower who, at the time of application for a consolidation loan, is in
repayment status, or in a grace period preceding repayment, or is a
delinquent or defaulted borrower who will reenter repayment through loan
consolidation.
In addition, the 1993 Amendments provided that any lender who wishes to
make consolidation loans must enter into an agreement with the Secretary of
Education that the lender shall offer an income-sensitive repayment schedule
to the borrower of any Federal Consolidation Loan made by the lender on or
after July 1, 1994. The Federal Consolidation Loan must also be evidenced by
a note or other written agreement which includes a provision stating that
interest during periods of authorized deferment shall accrue and be paid by
the Secretary of Education, in the case of consolidation of only Federal
Stafford Loans for which the borrower received an interest subsidy or by the
borrower or capitalized in the case of a Federal Consolidation Loan that
consolidated loans other than the Federal Stafford Loans. The interest rate
on Federal Consolidation Loans made before July 1, 1994, shall be the greater
of the weighted average of the interest rates on the consolidated loans,
rounded to the nearest whole percent or 9%. The interest rate of a Federal
Consolidation Loan made on or after July 1, 1994 shall be the weighted
average of the rates on the Federal Consolidation Loans, rounded upward to
the nearest whole percent.
The 1993 Amendments modified the terms of the Federal Consolidation Loan
Agreement to require a lender to offer income sensitive repayment terms for a
Federal Consolidation Loan made on or after July 1, 1994. In the event that
a borrower is unable to obtain a consolidation loan with income sensitive
repayment terms acceptable to the borrower from the holders of the borrower's
outstanding loans (that are selected for consolidation), or from any other
eligible lender, including Sallie Mae, the 1993 Amendments authorize the
Secretary of Education to offer the borrower a direct consolidation loan with
income contingent terms under the Federal Direct Student Loan Program. Such
direct Federal Consolidation Loans shall be repaid either pursuant to income
contingent repayment or any other repayment provision under this section. If
the Secretary of Education determines that the Department of Education does
not have the necessary origination and servicing arrangements in place for
such loans, the Secretary of Education shall not offer such loans.
The 1993 Amendments repealed the Federal Supplemental Loans for Students
program, but the loan limits for Unsubsidized Federal Stafford Loans were
increased to include the amounts formerly disbursed under the Federal
Supplemental Loans for Students program. Further, a section was added that
provides that the amount of periodic payment and the
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repayment schedule for any Unsubsidized Federal Stafford Loan shall be
established by assuming an interest rate equal to the applicable rate of
interest at the time the repayment of the loan principal commences. At the
option of the lender, the note or other written evidence of the loan may
require that the amount of the periodic payment will be adjusted annually or
the period of repayment of principal will be lengthened or shortened to
reflect adjustments in interest rates. Finally, the 10 year repayment period
of these loans shall commence at the time the first payment of principal is
due from the borrower.
INTEREST RATES. The interest rates on Federal Stafford Loans and
Unsubsidized Federal Stafford Loans made to new borrowers as of July 1, 1994
are the 91-day T-bill rate plus 3.1%, not to exceed 8.25%. The interest
rates for loans made on or after July 1, 1995 prior to repayment, during any
grace period or during deferment status, are the 91-day T-bill rate plus
2.5%, not to exceed 8.25%. The interest rate on Federal Stafford Loans and
Unsubsidized Federal Stafford Loans made on or after July 1, 1998 will be the
bond equivalent rate of the U.S. Treasury security with a comparable maturity
as established by the Secretary of Education plus 1.0%, not to exceed 8.25%.
The interest rates on the Federal PLUS Loans made on or after July 1, 1994
shall be the 52-week T-bill plus 3.1%, not to exceed 9%. Federal PLUS Loans
made after July 1, 1998 shall have an interest rate of the bond equivalent
rate of the security with a comparable maturity as established by the
Secretary of Education plus 2.1%, not to exceed 9%.
GUARANTEE AGENCIES
Information with respect to the Guarantee Agencies that have guaranteed
the Financed Eligible Loans pledged to the Trustee as well as the Eligible
Loans proposed to be acquired with respect to any Series will be included in
the related Prospectus Supplement. While the source of such information will
be described in such Prospectus Supplement, neither the Issuer nor any
placement agent or underwriter makes any representations as to its accuracy;
provided, that none of the Issuer, the placement agent or the underwriter
shall have any reason to believe that such information is incorrect in any
material respect. The Issuer, in connection with future financing of Eligible
Loans, may in its discretion engage the services of these entities or any
other Guarantee Agencies, as described below under the subheading "--Other
Guarantee Agencies."
GENERAL
Each Guarantee Agency has entered into certain agreements with the
Secretary of Education (the "Federal Reinsurance Agreements"), under which
the Secretary will reimburse them for 100%, or for student loans made
subsequent to October 1, 1993, 98%, of the amount expended by the Guarantee
Agency in discharging guarantee obligations as a result of the death,
disability or bankruptcy of a student and for at least 90% or 80% or, for
student loans made subsequent to October 1, 1993, 88% or 78%, of the amount
expended by the Guarantee Agency in discharging its guarantee obligations
resulting from defaults in the payment of principal or interest on
"guaranteed loans" by students, depending on the claims rate of the Guarantee
Agency. The reduced percentages for federal reimbursement do not apply if
the loan was
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transferred to the Guarantee Agency from an insolvent Guarantee Agency or if
the loan was made by the Guarantee Agency as a lender-of-last resort. The
following table summarizes the relationship between the claims rate and the
level of reimbursement by the Secretary with respect to claims resulting from
defaults:
Claims Rate of Reimbursement
------ ---------------------
0% to less than 5% 100% or 98%, as applicable
Equal to or greater than 5% 100% or 98%, as applicable, of claims
but less than 9% up to 5% and 90% or 88%, as applicable,
of claims equal to or greater than 5%
but less than 9%
Equal to or greater than 9% 100% or 98%, as applicable, of claims
up to 5%, 90% or 88% as applicable, of
claims equal to or greater than 5% but
less than 9%, and 80% or 78% as
applicable, of claims equal to or
greater than 9%
The claims rate for a Guarantee Agency with respect to defaults is
determined annually by dividing the amount of such claims by the Guarantee
Agency for reimbursement from the Secretary under the Federal Reinsurance
Agreements in any one federal fiscal year by the principal amount of loans
guaranteed by the Guarantee Agency which are in repayment at the end of the
preceding federal fiscal year. An increase in defaults on loans guaranteed
by a Guarantee Agency would increase a Guarantee Agency's claims rate. If
these defaults raise claims rates high enough to cause the reimbursement
determinant to exceed 5% in any given federal fiscal year, federal
reimbursements to a Guarantee Agency for the balance of that fiscal year
would decrease in accordance with the foregoing table. Regardless of the
claims rate, a Guarantee Agency is entitled to receive not less than 80% (or
78% for most loans made on or after October 1, 1993) reimbursement from the
Secretary for claims paid by a Guarantee Agency as long as the Guarantee
Agency complies with its Federal Reinsurance Agreements with the Secretary of
Education. Pursuant to the formula, any decrease in the amount of
reimbursement will be made only for the balance of the federal fiscal year in
which the reimbursement determinant exceeds 5%.
The Secretary may withhold reimbursement payments if the Guarantee Agency
makes a material misrepresentation or fails to comply with the terms of its
agreements with the Secretary or applicable federal law or if the Secretary
determines that the Guarantee Agency has not exercised reasonable prudence in
the administration of its program. The Federal Reinsurance Agreements are
subject to annual renegotiation and to termination for cause by the Secretary.
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Owners of guaranteed student loans are required to exercise due diligence
in servicing loans and to use practices which are at least as extensive and
forceful as those used by financial institutions in the collection of other
consumer loans. If the Guarantee Agency has probable cause to believe that
the holder has made misrepresentations or has failed to comply with the terms
of its contract with the Guarantee Agency, the Guarantee Agency may take
reasonable action, including withholding payments or requiring reimbursement
of funds. The Guarantee Agency may also terminate, limit or suspend
contracts of guaranty covering loans guaranteed by the Guarantee Agency for
cause upon notice and hearing.
OTHER GUARANTEE AGENCIES
Although the Issuer expects that most of the Eligible Loans it acquires
under the Indenture will be guaranteed by the Guarantee Agencies described in
the related Prospectus Supplement, the Issuer may acquire Eligible Loans
under the Indenture which are guaranteed by other Guarantee Agencies with the
approval of the Rating Agencies.
WEIGHTED AVERAGE LIFE OF THE NOTES
The weighted average life of the Notes of any Series will generally be
influenced by the rate at which the principal balances of the related
Financed Eligible Loans are paid, which payment may be in the form of
scheduled amortization or prepayments. (For this purpose, the term
"prepayments" includes prepayments in full or in part (including pursuant to
Federal consolidation loans), as a result of (i) borrower default, death,
disability or bankruptcy, (ii) a closing of or a false certification by the
borrower's school and (iii) subsequent liquidation or collection of guarantee
payments with respect thereto and as a result of Financed Eligible Loans
being repurchased by the respective Seller as a result of a breach of a
representation and warranty. All of the Financed Eligible Loans are
prepayable at any time without penalty to the borrower. The rate of
prepayment of Student Loans is influenced by a variety of economic, social
and other factors, including as 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 Student Loans. However, because many of
the Financed Eligible Loans bear interest that either actually or effectively
is floating, it is impossible to predict whether changes in prevailing
interest rates will be similar to or will vary from changes in the interest
rates on the Financed Eligible Loans. The addition of Financed Eligible
Loans to the Trust Estate during the recycling period could affect the
weighted average life of the Notes of the related Series.
On the other hand, scheduled payments with respect to, and maturities of,
the Financed Eligible Loans may be extended, including pursuant to applicable
grace, deferral and 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 Eligible Loans, by the severity of
those losses and by the timing of those losses, which may affect the ability
of the Guarantee Agencies to make guarantee payments with respect thereto.
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In light of the above consideration, there can be no assurance as to the
amount of principal payments to be made on the Notes of a given series on
each Interest Payment Date, since such amount will depend, in part, on the
amount of principal collected on the pool of Financed Eligible Loans. Any
reinvestment risks resulting from a faster or slower incidence of prepayment
of Financed Eligible Loans will be borne entirely by the Noteholders of a
given series. The related Prospectus Supplement may set forth certain
additional information with respect to the maturity and prepayment
considerations applicable to the Financed Eligible Loans and the related
Series of Notes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of all material federal income tax
consequences of the purchase, ownership and disposition of Notes for the
investors described below and is based on the advice of Kutak Rock, as tax
counsel to the Issuer. This summary is based upon laws, regulations, rulings
and decisions currently in effect, all of which are subject to change. The
discussion does not deal with all federal tax consequences applicable to all
categories of investors, some of which may be subject to special rules. In
addition, this summary is generally limited to investors who will hold the
Notes as "capital assets" (generally, property held for investment) within
the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended
(the "Code"). Investors should consult their own tax advisors to determine
the federal, state, local and other tax consequences of the purchase,
ownership and disposition of the Notes of any Series. Prospective investors
should note that no rulings have been or will be sought from the Internal
Revenue Service (the "Service") with respect to any of the federal income tax
consequences discussed below, and no assurance can be given that the Service
will not take contrary positions.
CHARACTERIZATION OF THE TRUST ESTATE
Based upon certain assumptions and certain representations of the
Issuer, Kutak Rock has rendered, with respect to the Private Notes, and
will render, with respect to the Additional Notes, its opinion to the Issuer
to the effect that the Notes, issued or to be issued, as the case may be,
will be treated as debt of the Issuer, rather than as an interest in the
Financed Eligible Loans for federal income tax purposes. In addition, Kutak
Rock has rendered its opinion to the effect that this discussion is a summary
of all material federal income tax consequences as to the purchase, ownership
and disposition of the Notes with respect to the investors described herein.
Such opinion is not binding on the courts or the Service. It is possible
that the Service could assert that, for purposes of the Code, the transaction
contemplated by this Memorandum constitutes a sale of the Financed Eligible
Loans (or an interest therein) to the Registered Owners or that the
relationship which will result from this transaction is that of a
partnership, or an association taxable as a corporation.
If, instead of treating the transaction as creating secured debt in the
form of the Series issued by the Issuer as a corporate entity, the transaction
were treated as creating a partnership among the Registered Owners, the Servicer
and the Issuer which has purchased the underlying
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Financed Eligible Loans, the resulting partnership would not be subject to
federal income tax. Rather, the Servicer, the Issuer and each Registered
Owner would be taxed individually on their respective distributive shares of
the partnership's income, gain, loss, deductions and credits. The amount and
timing of items of income and deduction of the Registered Owner could differ
if the Notes were held to constitute partnership interests, rather than
indebtedness.
If, alternatively, it were determined that this transaction created an
entity other than the Issuer which was classified as a corporation or a
publicly traded partnership taxable as a corporation and was treated as
having sold the Financed Eligible Loans, the Trust would be subject to
federal income tax at corporate income tax rates on the income it derives
from the Financed Eligible Loans, which would reduce the amounts available
for payment to the Registered Owners. Cash payments to the Registered Owners
generally would be treated as dividends for tax purposes to the extent of
such corporation's earnings and profits. A similar result would apply if the
Registered Owners were deemed to have acquired stock or other equity
interests in the Issuer. However, as noted above, the Issuer has been
advised that the Notes will be treated as debt of the Issuer for federal
income tax purposes.
CHARACTERIZATION OF THE NOTES AS INDEBTEDNESS
The Issuer and the Registered Owners express in the Indenture their
intent that, for applicable tax purposes, the Notes will be indebtedness of
the Issuer secured by the Financed Eligible Loans. The Issuer and the
Registered Owners, by accepting the Notes, have agreed to treat the Notes as
indebtedness of the Issuer for federal income tax purposes. The Issuer
intends to treat this transaction as a financing reflecting the Notes as its
indebtedness for tax and financial accounting purposes.
In general, the characterization of a transaction as a sale of property
or a secured loan, for federal income tax purposes, is a question of fact,
the resolution of which is based upon the economic substance of the
transaction, rather than its form or the manner in which it is characterized.
While the Service and the courts have set forth several factors to be taken
into account in determining whether the substance of a transaction is a sale
of property or a secured indebtedness, the primary factor in making this
determination is whether the transferee has assumed the risk of loss or other
economic burdens relating to the property and has obtained the benefits of
ownership thereof. Notwithstanding the foregoing, in some instances, courts
have held that a taxpayer is bound by the particular form it has chosen for a
transaction, even if the substance of the transaction does not accord with
its form.
The Issuer believes that it has retained the preponderance of the primary
benefits and burdens associated with the Financed Eligible Loans and should,
thus, be treated as the owner of the Financed Eligible Loans for federal
income tax purposes. If, however, the Service were to successfully assert
that this transaction should be treated as a sale of the Financed Eligible
Loans, the Service could further assert that the entity created pursuant to
the Indenture, as the owner of the Financed Eligible Loans for federal income
tax purposes, should be deemed engaged in a business and, therefore,
characterized as an association taxable as a corporation.
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TAXATION OF INTEREST
INCOME OF REGISTERED OWNERS
Payments of interest with regard to the Notes will be includible as
ordinary income when received or accrued by the Registered Owners in
accordance with their respective methods of tax accounting and applicable
provisions of the Code. In particular, Section 1272 of the Code requires the
current ratable inclusion in income of original issue discount using a
constant yield method. In general, original issue discount is calculated,
with regard to any accrual period, by applying the instrument's yield to its
adjusted issue price at the beginning of the accrual period, reduced by any
qualified stated interest allocable to the period. The aggregate original
issue discount allocable to an accrual period is allocated to each day
included in such period. The holder of a debt instrument must include in
income the sum of the daily portions of original issue discount attributable
to the number of days he owned the instrument.
Original issue discount is the stated redemption price at maturity of a
debt instrument over its issue price. The stated redemption price at
maturity includes all payments with respect to an instrument other than
interest unconditionally payable at a fixed rate or a qualified variable rate
at fixed intervals of one year or less. The Service recently promulgated
Regulations regarding the circumstances in which interest will be deemed
calculated at a fixed rate or a qualified variable rate for this purpose. The
Issuer expects that interest payable with respect to the Accrual Notes, if
any, will not be qualified stated interest and that such Accrual Notes will
be issued with original issuer discount as described in the related
Prospectus Supplement. Further, there can be no assurance that the Service
would not assert that the interest payable with respect to the Subordinate
Notes may not be qualified stated interest because such payments are not
unconditional and that the Subordinate Notes are issued with original issue
discount.
Payments of interest received with respect to the Notes may also
constitute "investment income" for purposes of certain limitations of the
Code concerning the deductibility of investment interest expense. Potential
Registered Owners or the Beneficial Owners should consult their own tax
advisors concerning the treatment of interest payments with regard to the
Notes.
A purchaser who buys a Note of any Series at a discount from its
principal amount or its adjusted issue price if issued with original issue
discount greater than a specified de minimis amount will be subject to the
market discount rules of the Code. In general, the market discount rules of
the Code treat principal payments and gain on disposition of a debt
instrument as ordinary income to the extent of accrued market discount.
Although the accrued market discount on debt instruments such as the Notes
which are subject to prepayment based on the prepayment of other debt
instruments is to be determined under regulations yet to be issued, the
legislative history of these provisions of the Code indicate that the same
prepayment assumption used to calculate original issue discount should be
utilized. Each potential investor should consult his tax advisor concerning
the application of the market discount rules to the Notes.
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The annual statement regularly furnished to Registered Owners for federal
income tax purposes will include information regarding the accrual of
payments of principal and interest with respect to the Notes. As noted
above, the Issuer believes, based on the advice of counsel, that it will
retain ownership of the Financed Eligible Loans for federal income tax
purposes. In the event the Indenture is deemed to create a pass-through
entity as the owner of the Financed Eligible Loans for federal income tax
purposes instead of the Issuer (assuming such entity is not, as a result,
taxed as an association), the owners of the Notes could be required to accrue
payments of interest more rapidly than otherwise would be required.
BACKUP WITHHOLDING
Certain purchasers may be subject to backup withholding at the rate of
31% with respect to interest paid with respect to the Notes if the
purchasers, upon issuance, fail to supply the Trustee or their brokers with
their taxpayer identification numbers, furnish incorrect taxpayer
identification numbers, fail to report interest, dividends or other
"reportable payments" (as defined in the Code) properly, or, under certain
circumstances, fail to provide the Trustee with a certified statement, under
penalty of perjury, that they are not subject to backup withholding.
Information returns will be sent annually to the Service and to each
purchaser setting forth the amount of interest paid with respect to the
Notes and the amount of tax withheld thereon.
The Issuer makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Notes under the tax laws of any
state, locality or foreign jurisdiction. Investors considering an investment
in the Notes should consult their own tax advisors regarding such tax
consequences.
LIMITATION ON THE DEDUCTIBILITY OF CERTAIN EXPENSES
Under Section 67 of the Code, an individual may deduct certain
miscellaneous itemized deductions only to the extent that the sum of such
deductions for the taxable year exceed 2% of his or her adjusted gross
income. If contrary to expectation, the entity created under the Indenture
were treated as the owner of the Financed Eligible Loans (and not as an
association taxable as a corporation), then the Issuer believes that a
substantial portion of the expenses to be generated by the Trust could be
subject to the foregoing limitations. As a result, each potential Registered
Owner should consult his or her personal tax advisor concerning the
application of these limitations to an investment in the Notes.
TAX-EXEMPT INVESTORS
In general, an entity which is exempt from federal income tax under the
provisions of Section 501 of the Code is subject to tax on its unrelated
business taxable income. An unrelated trade or business is any trade or
business which is not substantially related to the purpose which forms the
basis for such entity's exemption. However, under the provisions of Section
512 of the Code, interest may be excluded from the calculation of unrelated
business taxable income unless the obligation which gave rise to such
interest is subject to acquisition indebtedness. If,
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contrary to expectations, one or more of the Notes of any Series were
considered equity for tax purposes and if one or more other Notes were
considered debt for tax purposes, those Notes treated as equity likely would
be subject to acquisition indebtedness and likely would generate unrelated
business taxable income. However, as noted above, counsel has advised the
Issuer that the Notes will be characterized as debt for federal income tax
purposes. Therefore, except to the extent any Registered Owner incurs
acquisition indebtedness with respect to a Note, interest paid or accrued
with respect to such Note may be excluded by each tax-exempt Registered Owner
from the calculation of unrelated business taxable income. Each potential
tax-exempt Registered Owner is urged to consult its own tax advisor regarding
the application of these provisions.
SALE OR EXCHANGE OF NOTES
If a holder sells a Note, such person will recognize gain or loss equal
to the difference between the amount realized on such sale and the basis of
such Note. If a Note was acquired subsequent to its initial issuance at a
discount, a portion of such gain will be recharacterized as interest and
therefore ordinary income.
If the term of a Note was materially modified, in certain circumstances,
a new debt obligation would be deemed created and exchanged for the prior
obligation in a taxable transaction. Among the modifications which may be
treated as material are those which relate to the redemption provisions and,
in the case of a nonrecourse obligation, those which involve the substitution
of collateral. Each potential holder of a Note should consult its own tax
advisor concerning the circumstances in which the Notes would be deemed
reissued and the likely effects, if any, of such reissuance.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section
4975 of the Code imposes essentially the same prohibited transaction
restrictions on tax-qualified retirement plans described in Section 401(a) of
the Code ("Qualified Retirement Plans") and on Individual Retirement Accounts
("IRAs") described in Section 408(b) of the Code (collectively, "Tax-Favored
Plans"). Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA), and, if no election has been made under Section
410(d) of the Code, church plans (as defined in Section 3(33) of ERISA), are not
subject to ERISA requirements. Accordingly, assets of such plans may be
invested in Notes without regard to the ERISA considerations described below,
subject to the provisions of applicable federal and state law. Any such plan
which is a Qualified Retirement Plan and exempt from taxation under Sections
401(a) and 501(a) of the Code, however, is subject to the prohibited transaction
rules set forth in the Code.
In addition to the imposition of general fiduciary requirements including
those of investment prudence and diversification and the requirement that a
Plan's investment be made
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in accordance with the documents governing the Plan, Section 406 of ERISA and
Section 4975 of the Code prohibit a broad range of transactions involving
assets of ERISA Plans and Tax-Favored Plans and entities whose underlying
assets include plan assets by reason of ERISA Plans or Tax-Favored Plans
investing in such entities (collectively hereafter "Plan" or "Plans") and
persons ("Parties in Interest" or "Disqualified Persons") who have certain
specified relationships to the Plans, unless a statutory or administrative
exemption is available. Certain Parties in Interest (or Disqualified
Persons) that participate in a prohibited transaction may be subject to a
penalty (or an excise tax) imposed pursuant to Section 502(i) of ERISA or
Section 4975 of the Code unless a statutory or administrative exemption is
available.
The investment in a security by a Plan may, in certain circumstances, be
deemed to include an investment in the assets of the issuer of such security.
The U.S. Department of Labor (the "DOL") has promulgated regulations set
forth at 29 CFR Section 2510.3-101 (the "Regulations") concerning whether or
not an ERISA Plan's assets would be deemed to include an interest in the
underlying assets of an entity (such as a Trust Fund) for purposes of the
general fiduciary responsibility provisions of ERISA and for the prohibited
transaction provisions of ERISA and the Code, when a Plan acquires an "equity
interest" in such entity.
Under these provisions the acquisition by a Plan of a security which is
treated as debt under local law and which has no substantial equity features
will not be treated as the acquisition of an "equity interest" in the issuer.
In addition, under such Regulations the assets of an ERISA Plan will not
include an interest in the assets of an entity, the equity interests of which
are acquired by the ERISA Plan, if at no time do ERISA Plans in the aggregate
own 25% or more of the equity interests in such entity. Because the
availability of this exemption depends upon the identity of the Registered
Owners at any time, there can be no assurance that the Notes will qualify for
this exemption.
The Regulations also provide an exemption from "plan asset" treatment for
securities issued by an entity if such securities are debt securities under
applicable state law with no "substantial equity features." Except as
specified with respect to a Series in the related Prospectus Supplement, the
Notes are intended to represent debt of the Issuer for state law and federal
income tax purposes; however, there can be no assurance that the DOL will not
challenge such position. Assuming that a Class of Notes will be considered
debt with no substantial equity features for purposes of the Regulations, the
assets of the Trust will not be characterized as "plan assets" under the
Regulations whether any Class of Notes may be purchased by Plans will be set
forth in the related Prospectus Supplement.
Without regard to whether the Notes are treated as an "equity interest"
for such purposes, the acquisition or holding of Notes by or on behalf of a
Plan could be considered to give rise to a prohibited transaction if the
Issuer or any of their respective affiliates is or becomes a Party in
Interest or Disqualified Person with respect to such Plan, or in the event
that a Note is purchased in the secondary market by a Plan from a Party in
Interest or Disqualified Person with respect to such Plan. There can be no
assurance that the Issuer or any of their respective affiliates will not be
or become a party in interest or a disqualified person with respect to a Plan
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that acquires Notes. However, one or more of the following prohibited
transaction class exemptions may apply to the acquisition, holding and
transfer of the Notes: Prohibited Transaction Class Exemption ("PTCE") 84-14
(regarding investments by qualified professional asset managers), PTCE 90-1
(relating to investments by insurance company pooled separate accounts), PTCE
91-38 (regarding investments by bank collective investment funds), PTCE 95-60
(regarding investments by insurance company general accounts) and PTCE 96-23
(regarding investments by in-house asset managers). Any ERISA Plan fiduciary
considering whether to purchase Notes of any Series on behalf of an ERISA
Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment and the availability of any of the exemptions
referred to above. Persons responsible for investing the assets of
Tax-Favored Plans that are not ERISA Plans should seek similar counsel with
respect to the prohibited transaction provisions of the Code.
CERTAIN RELATIONSHIPS AMONG FINANCING PARTICIPANTS
The Issuer has acquired all Financed Eligible Loans currently pledged to
the Trustee from Union Bank pursuant to its respective Student Loan Purchase
Agreements and the Issuer may acquire additional Eligible Loans from Union
Bank in the future. Union Bank will, unless specified with respect to a
Series in the related Prospectus Supplement, also act as Servicer for all
other acquired Financed Eligible Loans pursuant to the Servicing Agreement.
However, UNIPAC, as Subservicer, will discharge the Servicer's duties with
respect to the Financed Eligible Loans pursuant to the Subservicing
Agreement. UNIPAC is a privately held corporation which is 80.5% owned by
Union Bank. UNIPAC will also act as Custodian for the Financed Eligible
Loans. See "Risk Factors--Reliance upon Sellers," "--Certain Legal Aspects"
and "--Perfection of Security Interest in Financed Eligible Loans" herein.
The Issuer is a wholly owned subsidiary of Union Financial Services, Inc.
("UFS"). UFS is a privately held corporation whose minority owners include
the parent of Union Bank, certain employees of Union Bank and certain
relatives of such employees.
PLAN OF DISTRIBUTION
The Issuer may sell the Offered Notes of each Series to or through
underwriters (the "Underwriters") or placement agents (the "Placement
Agents") by "best efforts" underwriting or a negotiated firm commitment
underwriting by the Underwriters or Placement Agents, and also may sell and
place the Offered Notes directly to other purchasers or through agents. If
so indicated in the Prospectus Supplement, the Issuer may sell such Notes,
directly or through agents, through a competitive bidding process described
in the applicable Prospectus Supplement. The Issuer intends that such Notes
will be offered through such various methods from time to time and that
offerings may be made concurrently through more than one of these methods or
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that an offering of a particular Series of such Notes may be made through a
combination of such methods.
The distribution of the Offered Notes may be effected from time to time
in one or more transactions at a fixed price or prices, which may be changed,
or at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices based, among other things,
upon existing interest rates, general economic conditions and investors'
judgments as to the price of the Offered Notes.
In connection with the sale of the Offered Notes, Underwriters or
Placement Agents or agents may receive compensation from the Issuer or from
the purchasers of such Notes for whom they may act as agents in the form of
discounts, concessions or commissions. Underwriters or Placement Agents may
sell the Notes of a Series to or through dealers and such dealers may receive
compensation in the form of discounts, concessions or commissions from the
Underwriters or Placement Agents and/or commissions from the purchasers for
whom they may act as agents. Underwriters or Placement Agents, dealers and
agents that participate in the distribution of the Notes of a Series may be
deemed to be underwriters and any discounts or commissions received by them
from the Issuer and any profit on the resale of the Notes by them may be
deemed to be underwriting discounts and commissions, under the 1933 Act. Any
such Underwriters or Placement Agents will be identified, and any such
compensation received from the Issuer will be described, in the applicable
Prospectus Supplement.
Under agreements which may be entered into by the Issuer, the
Underwriters or Placement Agents and agents who participate in the
distribution of the Offered Notes may be entitled to indemnification by the
Issuer against certain liabilities, including liabilities under the 1933 Act,
or to contribution with respect to payments which the Underwriters or
Placement Agents or agents may be required to make in respect thereto.
If so indicated in the Prospectus Supplement, the Issuer will authorize
Underwriters or Placement Agents or other persons acting as the Issuer's
agents to solicit offers by certain institutions to purchase the Offered
Notes from the Issuer pursuant to contracts providing for payment and
delivery on a future date. Institutions with which such contracts may be
made include commercial and savings banks, insurance companies, pension
funds, investment companies, educational and charitable institutions and
others, but in all cases such institutions must be approved by the Issuer.
The obligation of any purchaser under any such contract will be subject to
the condition that the purchaser of the Offered Notes shall not at the time
of delivery be prohibited under the laws of the jurisdiction to which such
purchaser is subject from purchasing such Notes. The Underwriters or the
Placement Agents and such other agents will not have responsibility in
respect of the validity or performance of such contracts.
The Underwriters or the Placement Agents may, from time to time, buy and
sell Notes, but there can be no assurance that an active secondary market
will develop and there is no assurance that any market, if established, will
continue.
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LEGAL MATTERS
Certain legal matters, including certain income tax matters, will be
passed upon for the Issuer by Kutak Rock, Denver, Colorado. Other counsel,
if any, passing upon legal matters for the Issuer or any placement agent or
underwriter will be identified in the related Prospectus Supplement.
FINANCIAL INFORMATION
The Issuer has determined that its financial statements are not material
to the offering made hereby. The Issuer will engage in no activities other
than as described herein. Accordingly, no financial statements with respect
to the Issuer are included in this Prospectus.
RATINGS
It is a condition to the issuance of the Offered Notes of any Series that
the Classes of Notes publicly offered be rated by at least one nationally
recognized statistical rating organization in one of its generic rating
categories which signifies investment grade (typically, in one of the four
highest rating categories). Such ratings will be described in the related
Prospectus Supplement.
A securities rating addresses the likelihood of the receipt by Registered
Owners of the Notes rated of payments of principal and interest with respect
to their Notes from assets in the Trust Estate. The rating takes into
consideration the characteristics of the Financed Eligible Loans, and the
structural, legal and tax aspects associated with the rated Notes.
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 organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
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INDEX TO AND GLOSSARY OF CERTAIN TERMS
There is provided below an index to and a glossary of certain definitions
used in this Prospectus. To the extent not contained herein, certain
definitions may be set forth in the Indenture included as an exhibit to this
Registration Statement of which this Prospectus is a part. In addition,
certain definitions related to Auction procedures are set forth herein under
"Certain Definitions and Provisions Related to Auction Rate Notes and Auction
Procedures--Auction--Related Definitions" and certain definitions related to
LIBOR Rate Notes are set forth herein under "Certain Definitions and
Provisions Related to LIBOR Rate Notes--LIBOR--Related Definitions."
INDEX TO DEFINED TERMS
There follows a reference to the definitions of capitalized terms used in
this Prospectus.
1933 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
1993 Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . 129
1993 Technical Amendments. . . . . . . . . . . . . . . . . . . . . . 118
427A Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
8/10% loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
ABI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Accrual Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Additional Notes . . . . . . . . . . . . . . . . . . . . . . . . . 1, ix
Aggregate Market Value . . . . . . . . . . . . . . . . . . . . . . . xxvi
Applicable Rate. . . . . . . . . . . . . . . . . . . . . . . . . . 15, 16
Auction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Auction Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Auction Agent Agreement. . . . . . . . . . . . . . . . . . . . . . . xii
Auction Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Auction Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Auction Period Adjustment. . . . . . . . . . . . . . . . . . . . . . . 64
Auction Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Auction Rate Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Available Auction Rate Notes . . . . . . . . . . . . . . . . . . . . . 55
Beneficial Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Buyer's Broker-Dealer. . . . . . . . . . . . . . . . . . . . . . . . . 67
Cash Flow Certificate. . . . . . . . . . . . . . . . . . . . . . . xviii
Cede . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxvii
Class. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, ix
Class A-1 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . x
Class A-2 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . x
Class A-3 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . x
Class A-4 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . x
Class B Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . ix, x
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Class B-2 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . xi
Class C Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .136
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Custodian. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x
Custodian Agreement. . . . . . . . . . . . . . . . . . . . . . . . . xii
Date of Issuance . . . . . . . . . . . . . . . . . . . . . . . . . 2, xx
Deferment Periods. . . . . . . . . . . . . . . . . . . . . . . . . . 119
Deferral Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . xiv
Department . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, xiii
Disqualified Persons . . . . . . . . . . . . . . . . . . . . . . . . 141
DOL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
DTC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxviii
Eligible Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . 1, x
Eligible Loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . xii
ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
ERISA Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
FDSL Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Federal Consolidation Loans. . . . . . . . . . . . . . . . . . . . . 116
Federal Family Education Loan Program. . . . . . . . . . . . . . . . 116
Federal Loans. . . . . . . . . . . . . . . . . . . . . . . . . . 3, xiii
Federal PLUS Loans . . . . . . . . . . . . . . . . . . . . . . . . . 116
Federal Reinsurance Agreements . . . . . . . . . . . . . . . . . . . 133
Federal SLS Loans. . . . . . . . . . . . . . . . . . . . . . . . . . 116
Federal Supplemental Loans for Students. . . . . . . . . . . . . . . 116
FFEL Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Financed Eligible Loans. . . . . . . . . . . . . . . . . . . . . . 1, xii
Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
FISLP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Forbearance Periods. . . . . . . . . . . . . . . . . . . . . . . . . . 10
Grace Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Grace Periods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Guarantee Agency . . . . . . . . . . . . . . . . . . . . . . . . 3, xiii
Guarantee Agreements . . . . . . . . . . . . . . . . . . . . . . . . xii
Guarantee Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Guarantors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Higher Education Act . . . . . . . . . . . . . . . . . . . . . . . . 3, 2
IHE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, x
Index Rate Notes . . . . . . . . . . . . . . . . . . . . . . . . . 2, xv
Index Rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Indirect Participants. . . . . . . . . . . . . . . . . . . . . . . ii, 77
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Insolvency Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Insolvency Proceeding. . . . . . . . . . . . . . . . . . . . . . . . . 11
Interest Payment Date. . . . . . . . . . . . . . . . . . . 2, xv, 13, 15
Interest Period. . . . . . . . . . . . . . . . . . . . . . . . . . 1, 15
IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Issuer Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxi
Junior-Subordinate Notes . . . . . . . . . . . . . . . . . . . . . xi, 13
L/C Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
LIBOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
LIBOR Rate Notes . . . . . . . . . . . . . . . . . . . . . . . . . 1, xv
Loan Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Maintenance and Operating Expenses . . . . . . . . . . . . . . . . . xxv
Maximum Auction Rate . . . . . . . . . . . . . . . . . . . . . . . . . 13
National Direct Student Loan . . . . . . . . . . . . . . . . . . . . 123
Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, ix
Offered Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . 1, ix
Outstanding Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . xi
Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, 76
Parties in Interest. . . . . . . . . . . . . . . . . . . . . . . . . 141
Placement Agents . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Prior Class A Notes. . . . . . . . . . . . . . . . . . . . . . . . . . xi
Prior Class B Notes. . . . . . . . . . . . . . . . . . . . . . . . . . xi
Private Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Prospectus Supplement. . . . . . . . . . . . . . . . . . . . . . . 1, ix
PTCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Qualified Retirement Plans . . . . . . . . . . . . . . . . . . . . . 140
Record Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . xv, 13
Registered Owners. . . . . . . . . . . . . . . . . . . . . . . . . . xii
Registered Owners Approval . . . . . . . . . . . . . . . . . . . . . . 87
Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Repayment Phase. . . . . . . . . . . . . . . . . . . . . . . . . . . xiv
Reserve Fund Requirement . . . . . . . . . . . . . . . . . . . . . xxvii
Scheduled Sale Date. . . . . . . . . . . . . . . . . . . . . . . . . 104
Secretary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxiii
Seller . . . . . . . . . . . . . . . . . . . . . . . . . . 1, ix, x, 103
Seller's Broker-Dealer . . . . . . . . . . . . . . . . . . . . . . . . 66
Sellers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x
Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . xi, 13
Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, ix
Series 1996A Notes . . . . . . . . . . . . . . . . . . . . . . . . . . x
Series 1996B Notes . . . . . . . . . . . . . . . . . . . . . . . . . . x
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Service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x
Servicing Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 114
Special Record Date. . . . . . . . . . . . . . . . . . . . . . . . . . 16
Stafford Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Stated Maturity. . . . . . . . . . . . . . . . . . . . . . . . . . 2, xvi
Student Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii
Student Loan Fund. . . . . . . . . . . . . . . . . . . . . . . . . . xii
Student Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . . xiv
Student Loan Purchase Agreement. . . . . . . . . . . . . . . . . . . . ix
Submitted Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Subordinate Notes. . . . . . . . . . . . . . . . . . . . . . . . . xi, 13
Subservicer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x
Subservicing Agreement . . . . . . . . . . . . . . . . . . . . . . . 114
Subsidized Federal Stafford Loans. . . . . . . . . . . . . . . . . . 116
Sufficient Bids. . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Supplemental Indenture . . . . . . . . . . . . . . . . . . . . . . . . x
Tax-Favored Plans. . . . . . . . . . . . . . . . . . . . . . . . . . 140
Transfer Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . xxvi
Transfer Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Treasury Rate Notes. . . . . . . . . . . . . . . . . . . . . . . . 2, xv
Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
UFS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111, 142
Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Union Bank . . . . . . . . . . . . . . . . . . . . . . . . . . 1, ix, 103
UNIPAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x, 114
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GLOSSARY OF TERMS
There follows definitions of certain capitalized terms used in this
Prospectus. Words importing the masculine gender include the feminine
gender. Words importing persons include firms, associations and corporations.
Words importing the singular number include the plural number and vice
versa. The Indenture contains the definition of certain terms not included
herein and reference is made thereto for such definitions. The following
definitions shall be applicable with respect to each Series unless otherwise
specified in the related Prospectus Supplement.
"ACCOUNT" shall mean any of the accounts created and established within
any Fund by the Indenture.
"ADDITIONAL NOTES" shall mean any notes, other than the Offered Notes,
the Prior Class A Notes and the Prior Class B Notes, issued pursuant to the
Indenture.
"AGGREGATE MARKET VALUE" shall mean on any calculation date the sum of
the Values of all assets of the Trust Estate, less moneys in any Fund or
Account which the Issuer is then entitled to receive for deposit into the
Operating Fund or the General Fund but which has not yet been removed from
the Trust Estate.
"AUTHORIZED DENOMINATIONS" shall mean with respect to any Class or
subclass of Notes, $100,000 or any integral multiple thereof.
"AUTHORIZED OFFICER" shall mean, when used with reference to the Issuer,
its President, its Vice President, its Secretary, or any other officer or
agent authorized in writing by the Board to act on behalf of the Issuer.
"BOARD" or "BOARD OF DIRECTORS" shall mean the Board of Directors of the
Issuer.
"BUSINESS DAY" shall mean any day on which banks located in the City of
New York, New York and banks located in the city in which the Principal
Office of the Trustee is located are not required or authorized by law to
remain closed and on which The New York Stock Exchange is not closed.
"CASH FLOW CERTIFICATE" shall mean a report or reports prepared by the
Issuer showing, with respect to the period covered by the Cash Flow
Certificate, which period shall extend from the date of the Cash Flow
Certificate to the latest maturity of the Notes then Outstanding, (a) all
Revenue expected to be received during such period from the Trust Estate, (b)
the application of all such Revenue in accordance with the Indenture and (c)
the resulting periodic balances on each Interest Payment Date, and showing
that anticipated Revenue will exceed, by a margin of $250,000 plus any
additional amount, if any, required by any Supplemental Indenture, the amount
necessary to pay the principal of and interest on the Notes when due and all
expenses payable under the Indenture when due and to maintain the Reserve
Fund Requirement at a level
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which will not cause the Rating Agencies to withdraw or reduce
their respective ratings on the Notes Outstanding, under all scenarios
included in the Cash Flows. Each Cash Flow Certificate shall be accompanied
by all supporting Cash Flows, shall be based solely upon assumptions
acceptable to each Rating Agency and shall be approved in writing by each
Rating Agency.
"CASH FLOWS" shall mean cash flow schedules prepared by the Issuer or its
designee including a listing of all assumptions used in the preparation of
such cash flow schedules. Such assumptions will include those contained in
Exhibits E-1 and E-2 to the Indenture or such other assumptions at the time
such Cash Flows are prepared as shall be reasonable in the judgment of the
Issuer and each Rating Agency.
"CERTIFICATE OF INSURANCE" shall mean a certificate of federal loan
insurance issued with respect to an Eligible Loan by the Secretary pursuant
to the provisions of the Act.
"CLASS A NOTES" shall mean the Issuer's Taxable Student Loan Asset-Backed
Notes issued pursuant to the Indenture and designated as Class A.
"CLASS A-1 NOTES" shall mean, with respect to the Series 1996A Notes, the
$48,300,000 of Class A Notes designated as Class A-1.
"CLASS A-2 NOTES" shall mean, with respect to the Series 1996A Notes, the
$48,300,000 of Class A Notes designated as Class A-2.
"CLASS A-3 NOTES" shall mean, with respect to the Series 1996B Notes, the
$73,700,000 of Class A Notes designated as Class A-3.
"CLASS A-4 NOTES" shall mean, with respect to the Series 1996B Notes, the
$54,300,000 of Class A Notes designated as Class A-4.
"CLASS B NOTES" shall mean the Issuer's Taxable Student Loan Asset-Backed
Notes issued pursuant to the Indenture and designated as Class B.
"CLASS B-2 NOTES" shall mean the Issuer's Taxable Student Loan
Asset-Backed Notes issued pursuant to the Indenture and designated as Class
B-2.
"CLOSING CASH FLOW PROJECTION" shall mean the Cash Flow Certificate
delivered on the Date of Issuance with respect to any Series as attached to
the Indenture as Exhibit F-2.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from time
to time. Each reference to a section of the Code herein shall be deemed to
include the United States Treasury Regulations, including temporary and
proposed regulations, relating to such section which are applicable to the
Notes of the use of the proceeds thereof. A reference to any specific
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section of the Code shall be deemed also to be a reference to the comparable
provisions of any enactment which supersedes or replaces the Code thereunder
from time to time.
"COMPLIANCE CERTIFICATE" shall mean a certificate substantially in the
form of Exhibit D attached to the Indenture signed by an Authorized Officer
and all documents, opinions and certificates required thereby.
"CONSOLIDATION LOAN" shall mean a Student Loan authorized under Section
428C of the Higher Education Act consolidating Eligible Loans.
"CONTRACT OF INSURANCE" shall mean the contract of insurance between the
Eligible Lender and the Secretary.
"COST OF ISSUANCE FUND" shall mean the Fund by that name created in the
Indenture and further described in the Indenture.
"CUSTODIAN AGREEMENT" shall mean, collectively, the Custodian Agreement
dated as of March 1, 1996, between the Trustee and the Custodian, and the
custodian agreements with any Servicer related to Financed Eligible Loans.
"CUTOFF DATE" shall mean, with respect to the Date of Issuance with
respect to any Series, the date specified in the related Prospectus
Supplement and with respect to each Scheduled Sale Date or other date of
acquisition thereafter, the close of business on the Business Day preceding
such Scheduled Sale Date or date of acquisition, as the case may be.
"DATE OF ISSUANCE" shall mean, with respect to any Offered Notes or
Additional Notes, the date of delivery of such Offered Notes or Additional
Notes to the placement agent or the underwriter.
"ELIGIBLE BORROWER" shall mean a borrower who is eligible under the
Higher Education Act to be the obligor of a loan for financing a program of
education at an Eligible Institution or for consolidating two or more such
loans, including without limitation a borrower who is eligible under the
Higher Education Act to be an obligor of a loan made pursuant to Section
428A, 428B or 428C of the Act.
"ELIGIBLE INSTITUTION" shall mean (a) an institution of higher education;
(b) a vocational school; or (c), with respect to students who are nationals
of the United States, an institution outside the United States which is
comparable to an institution of higher education or to a vocational school
and which has been approved by the Secretary.
"ELIGIBLE LENDER" shall mean any "ELIGIBLE LENDER," as defined in the Act,
permitted to participate as a seller of Student Loans to the Issuer under the
Program and which has received an eligible lender designation from the Secretary
with respect to Insured Student Loans or from the Guarantee Agency with respect
to Guaranteed Student Loans.
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"ELIGIBLE LOAN" shall mean a Student Loan which (a) has been or will be
made to an Eligible Borrower; (b) is Insured or is Guaranteed by a Guarantee
Agency which then has a Guarantee Agreement with the Trustee; (c) unless it
is an Unsubsidized Stafford Loan, a PLUS Loan or an SLS Loan or a
Consolidation Loan, is an "eligible loan" under the Higher Education Act for
purposes of receiving Interest Benefit Payments; (d) bears interest at not
less than the maximum applicable rate of interest permitted by the Higher
Education Act at the time originated; (e) is not delinquent more than 180
days and has not been tendered at any time to either the Secretary or any
guarantee agency, including without limitation, the Guarantee Agency, for
payment unless the situation giving rise to such tender has been cured; and
(f) is eligible for Special Allowance Payments as provided in Section 438 of
the Act.
"ESTIMATED AMOUNT" shall mean the amount which the Issuer estimates will
be required to pay Maintenance and Operating Expenses (including accrued but
unpaid Maintenance and Operating Expenses) for the period beginning on the
Date of Issuance of the Series 1996A Notes and ending on June 30, 1996, and
thereafter for the monthly period beginning on the first Business Day of each
month, commencing July 1, 1996. The Estimated Amount shall be paid pursuant
to the Indenture; provided, however, such Estimated Amount shall not exceed
(i) the amount shown therefor in the Closing Cash Flow Projection, (ii) 0.12%
annualized on the Outstanding Financial Eligible Loans or (iii) the amount
shown in the most recent subsequent Cash Flow Certificate.
"EVENT OF BANKRUPTCY" shall mean (a) the Issuer shall have commenced a
voluntary case or other proceeding seeking liquidation, reorganization, or
other relief with respect to itself or its debts under any bankruptcy,
insolvency, or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian, or other similar
official of it or any substantial part of its property, or shall have made a
general assignment for the benefit of creditors, or shall have declared a
moratorium with respect to its debts or shall have failed generally to pay
its debts as they become due, or shall have taken any action to authorize any
of the foregoing; or (b) an involuntary case or other proceeding shall have
been commenced against the Issuer seeking liquidation, reorganization, or
other relief with respect to it or its debts under any bankruptcy, insolvency
or other similar law now or hereafter in effect or seeking the appointment of
a trustee, receiver, liquidator, custodian, or other similar official of it
or any substantial part of its property provided such action or proceeding is
not dismissed within 60 days.
"EVENT OF DEFAULT" shall have the meaning specified in the Indenture.
"EXCHANGE DATE" shall mean the date that the Notes are exchanged for
Exchange Notes pursuant to the Indenture.
"EXCHANGE NOTES" shall mean the Notes exchanged for the Series 1996A
Notes and the Series 1996B Notes pursuant to the Indenture.
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"FEDERAL REIMBURSEMENT CONTRACTS" shall mean the agreements between the
Guarantee Agency and the Secretary providing for the payment by the Secretary
of amounts authorized to be paid pursuant to the Act, including (but not
necessarily limited to) reimbursement of amounts paid or payable upon
defaulted Financed Eligible Loans and other Student Loans Guaranteed or
Insured by the Guarantee Agency and Interest Benefit Payments and Special
Allowance Payments to holders of qualifying Student Loans Guaranteed or
Insured by the Guarantee Agency.
"FINANCED" or "FINANCING," when used with respect to Eligible Loans or
Student Loans, shall mean or refer to Eligible Loans or Student Loans, as the
case may be, (i) acquired by the Issuer with balances in the Student Loan
Fund and (ii) Eligible Loans substituted or exchanged for Financed Eligible
Loans or Financed Eligible Loans, but does not include Student Loans or
Eligible Loans released from the lien of the Indenture and sold or
transferred, to the extent permitted by the Indenture.
"FISCAL YEAR" shall mean the fiscal year of the Issuer as established
from time to time.
"FISL PROGRAM" shall mean the federal loan insurance program created
under the Act, whereby the Secretary directly insures the repayment of 100%
of the principal of and accrued interest on student loans under the Act.
"FITCH" shall mean Fitch Investors Service, L.P., and its successors and
assigns, and, for the purposes of the Auction Procedures, if such corporation
shall be dissolved or liquidated or shall no longer perform the functions of
a securities rating agency, "Fitch" shall be deemed to relate to any other
nationally recognized securities rating agency designated by the Issuer by
notice to the Trustee, the Auction Agent and the Broker-Dealers; provided,
however, that such notice shall not be effective unless accompanied by a
consent of a majority of the Broker-Dealers.
"FUNDS" shall mean the following funds created under Section 5.01 of the
Indenture and held by the Trustee: (a) the Student Loan Fund, including
therein the Series 1996 Loan Account, the Series 1996 Note Account, the
Series 1996 Recycling Account and any other Loan Account and Recycling
Account designated with respect to a Series, (b) the Revenue Fund, (c) the
Reserve Fund, (d) the Interest Fund, including therein the Senior Interest
Account, the Subordinate Interest Account and the Junior-Subordinate Interest
Account, if any, (e) the Note Redemption Fund, including therein the Senior
Note Redemption Account, the Subordinate Note Redemption Account and the
Junior-Subordinate Note Redemption Account, if any, (f) the Student Loan
Holding Fund and (g) the Cost of Issuance Fund.
"GENERAL FUND" shall mean the fund by that name described in the
Indenture.
"GUARANTEE" or "GUARANTEED" shall mean with respect to a Student Loan,
the insurance or guarantee by the Guarantee Agency pursuant to such Guarantee
Agency's Guarantee Agreement of not less than 98% of the principal of and
accrued interest on such Student Loan and the coverage of such Student Loan
by the Federal Reimbursement Contracts, providing,
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among other things, for reimbursement to the Guarantee Agency for payments
made by it on defaulted Student Loans insured or guaranteed by the Guarantee
Agency of at least the minimum reimbursement allowed by the Federal
Reinsurance Contracts and the Higher Education Act with respect to a
particular Student Loan.
"GUARANTEE AGENCY" shall mean (a) United Student Aid Funds, Inc., (b)
Iowa College Student Aid Commission, (c) Oklahoma State Guaranty Agency, (d)
Nebraska Student Loan Program, Inc. (e) Kentucky Higher Education Assistance
Authority, (f) Colorado Student Loan Program, (g) Northstar Guarantee, Inc.
and (h) and any other guarantee agency so long as the Issuer shall have
received written confirmation from each Rating Agency that the designation of
such entity as a "Guarantee Agency" hereunder will not, at the time of such
designation, adversely affect its Ratings then applicable to any of the
Notes, and their respective successors and assigns.
"GUARANTEE AGREEMENTS" shall mean (a) the Guarantee Agreement, dated as
of March 7, 1996, between United Student Aid Funds, Inc. and Norwest Bank
Minnesota, National Association as trustee, (b) the Guarantee Agreement,
dated as of February 23, 1996, between Iowa College Student Aid Commission
and Norwest Bank Minnesota, National Association, as trustee, (c) the
Guarantee Agreement, dated as of March 7, 1996, between Oklahoma State
Guaranty Agency and Norwest Bank Minnesota, National Association, as trustee,
(d) the Guarantee Agreement, dated as of May 1, 1996, between Nebraska
Student Loan Program, Inc. and Norwest Bank Minnesota, National Association,
as trustee, (e) the Guarantee Agreement, dated as of June 12, 1996, between
Kentucky Higher Education Assistance Authority and Norwest Bank Minnesota,
National Association, as trustee, (f) the Lender Program Participation
Agreement dated as of September 24, 1996, between Colorado Student Loan
Program and Norwest Bank Minnesota, National Association, as trustee, (g) the
Lender Agreement dated as of September 26, 1996, between Northstar Guarantee
Inc. and Norwest Bank Minnesota, National Association, as trustee, (h) any
similar guarantee or lender agreement with any other Guarantee Agency, and
(i) any amendments to the foregoing.
"GUARANTEED STUDENT LOAN" shall mean a Student Loan which is Guaranteed
or Insured.
"GUARANTEED STUDENT LOAN PROGRAM" shall mean the program known as the
Federal Family Education Loan Program which makes low interest loans under
the Higher Education Act available to pay the costs of a student attending
post-secondary schools, whether under the Guarantee Agency program or the
FISL Program.
"HIGHER EDUCATION ACT" shall mean the Higher Education Act of 1965, as
amended or supplemented from time to time, or any successor federal act and
all regulations, directives, bulletins, and guidelines proposed or
promulgated from time to time thereunder.
"HOLD ORDER" shall have the meaning set forth in the Indenture.
"IMMEDIATE NOTICE" shall mean notice by telephone, telex or telecopier to
such address as the addressee shall have directed in writing, promptly
followed by written notice by first class mail, postage prepaid; provided,
however, that if any person required to give Immediate Notice shall not have
been provided with the necessary information as to the telephone, telex or
telecopier number of an addressee, Immediate Notice shall mean written notice
by first class mail, postage prepaid.
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"INDENTURE" shall mean the Second Amended and Restated Indenture of Trust
dated as of November 1, 1996, including all supplements and amendments
thereto.
"INSURANCE," "INSURED" or "INSURING" shall mean, with respect to a
Student Loan, insurance by the Secretary under the Higher Education Act (as
evidenced by a Contract of Insurance issued or entered into under the
provisions of the Act) of the maximum percentage of the principal of such
Student Loan allowed by the Act, and, during such time as such Student Loan
is not entitled to Interest Benefit Payments, the interest on such Student
Loan.
"INTEREST BENEFIT PAYMENT" shall mean an interest payment on Student
Loans received pursuant to the Interest Benefits Agreement.
"INTEREST BENEFITS AGREEMENT" shall mean the agreement between the
Guarantee Agency and the Secretary whereby the Secretary agrees to pay to
holders of Student Loans Guaranteed by the Guarantee Agency the portion of
the interest charges on such loans which students are entitled to have paid
on their behalf pursuant to Sections 428(a)(1) and 428(a)(2) of the Act.
"INTEREST FUND" shall mean the Fund by that name created in the Indenture
and further described in the Indenture, including the Senior Interest
Account, the Subordinate Interest Account and the Junior-Subordinate Interest
Account, if any, created therein.
"INVESTMENT AGREEMENT" shall mean, collectively, the Investment Agreement
dated as of June 19, 1996 by and among the Trustee, the Issuer and Lehman
Brothers, Inc., the Promissory Note dated as of June 19, 1996 between the
Issuer and Lehman Brothers Holdings Inc.
"INVESTMENT SECURITIES" shall mean
(a) Direct obligations of (including obligations issued or held in
book entry form on the books of) the Department of Treasury of the United
States of America with remaining maturities not exceeding the first
Business Day preceding the next Transfer Date. If not rated by Standard &
Poor's, the obligations must have a predetermined fixed dollar principal
due at maturity that cannot vary or change. If the obligation is rated, it
should not have an "r" highlighter affixed to its rating;
(b) Obligations of any of the following federal agencies which
obligations represent full faith and credit of the United States of America
with remaining maturities not exceeding the first Business Day preceding
the next Transfer Date, (i) Export -Import Bank; (ii) Farmers Home
Administration; (iii) General Services Administration; (iv) Government
National Mortgage Association (GNMA); (v) U.S. Department of Housing &
Urban Development (PHA's); (vi) Federal Housing Administration. If not
rated by S&P, the obligations must have a predetermined fixed dollar
principal due at maturity that cannot vary or change. If the obligation is
rated, it should not have an "r" highlighter affixed to its rating;
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(c) Notes, bonds or other evidences of indebtedness rated "AAA" by
Fitch and S&P issued by the Federal National Mortgage Association or the
Federal Home Loan Mortgage Corporation with remaining maturities not
exceeding the first Business Day preceding the next Transfer Date. If not
rated by S&P, the obligations must have a predetermined fixed dollar
principal due at maturity that cannot vary or change. If the obligation is
rated, it should not have an "r" highlighter affixed to its rating;
(d) U.S. dollar denominated deposit accounts, federal funds and
banker's acceptances with domestic commercial banks which have a rating on
their short-term debt obligations of "A-1+" by S&P and "F-1+" by Fitch and
maturities not exceeding the first Business Day preceding the next Transfer
Date. In addition, the instruments should not have an "r" highlighter
affixed to the rating and its terms should have a predetermined amount of
principal due at maturity that cannot vary or change (Ratings on holding
companies are not considered as the rating of the bank);
(e) Commercial paper which is rated "F-1+" by Fitch and "A-1+" by S&P
and maturities not exceeding the first Business Day preceding the next
Transfer Date. In addition, the instruments should not have an "r"
highlighter affixed to the rating and its terms should have a predetermined
amount of principal due at maturity that cannot vary or change;
(f) Investments in money market funds (i) rated within the two
highest rating categories of Fitch and (ii) "AAAm" or "AAAm-G" by S&P;
(g) With the prior written consent of Fitch and S&P, repurchase
agreements with respect to securities of the type described in (a), (b) or
(c) above, with (i) a registered broker/dealer rated by Fitch and S&P or
approved in writing by Fitch and S&P and subject to the Securities
Investors' Protection Issuer Liquidation Act in the event of insolvency to
the full extent of such repurchase agreement, (ii) a primary dealer rated
by Fitch and S&P reporting to and trading with the Federal Reserve Bank of
New York, or (iii) any commercial bank, and in the case of clauses (i),
(ii) and (iii), (x) whose unsecured long-term indebtedness is rated by
Fitch and S&P and whose long-term or short-term indebtedness is rated
"F-1+" or "AAA" by Fitch and "A-1+" or "AAA" by S&P (dependent upon whether
the repurchase agreement is long-term or short-term, respectively) or
better by Fitch, or (y) which in the case of clause (iii) is the lead bank
of a parent bank holding company whose unsecured long-term indebtedness is
rated "AAA" or better by Fitch and S&P, and in the case of either (x) or
(y), having a combined capital, surplus and undivided profits of not less
than $100 million and which repurchase agreement shall provide that:
(A) the repurchase obligation is collateralized by the
securities themselves which shall be held by the Trustee (unless the
Trustee is the purchaser under the repurchase agreement) or a third
party which is a Federal Reserve Bank or a commercial bank with
capital, surplus and undivided profits of not less
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than $50 million, and the Trustee shall have received written
confirmation from such third party that it holds such securities;
(B) a perfected security interest in favor of the Trustee in the
securities has been created under the Uniform Commercial Code or
pursuant to the book entry procedures described in 31 C.F.R. 306.1 et
seq. or 31 C.F.R. 350.0 et seq., as amended, and any successor
regulations thereto; and
(C) the securities on the date of execution of the repurchase
agreement and upon weekly evaluation by the Trustee thereafter have a
fair market value of at least 102% of the amount of the repurchase
obligation, including both principal and interest;
(h) With the prior written consent of Fitch and S&P, any investment
agreement that has as a counterparty, an institution rated "F-1+" or "AAA"
by Fitch and "A-1+" or "AAA" by S&P; and
(i) The Investment Agreement and any other investment approved in
advance in writing by each Rating Agency.
"ISSUER" shall mean Union Financial Services-1, Inc., a corporation
organized and existing under the corporation laws of the State, and any
successor to its functions.
"ISSUER ORDER" shall mean a written order signed in the name of the Issuer
by an Authorized Officer.
"JUNIOR-SUBORDINATE INTEREST ACCOUNT" shall mean the Account by that name
created within the Interest Fund by Section 5.01 of the Indenture and further
described in the Indenture.
"JUNIOR-SUBORDINATE NOTE REDEMPTION ACCOUNT" shall mean the Account by that
name created within the Note Redemption Fund by the Indenture and further
described in the Indenture.
"JUNIOR-SUBORDINATE NOTES" shall mean Offered Notes or Additional Notes, if
any, subordinate to the Subordinate Notes, the principal of and interest on
which is paid from the Junior-Subordinate Redemption Account of the Note
Redemption Fund and the Junior-Subordinate Interest Account of the Interest
Fund, respectively; provided, however, that any series of the Junior-Subordinate
Notes need not necessarily be payable on a parity with all other series of the
Junior-Subordinate Notes. Any Junior-Subordinate Notes shall be designated by
Class "C," "D," "E" or lower alphabetic designation, the higher alphabetic
designation ("C" being higher than "D") indicating the more senior series of the
Junior-Subordinate Notes.
"LETTER OF REPRESENTATIONS" means the Letters of Representations among the
Securities Depository, the Issuer and the Trustee.
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"LOAN ACCOUNT" shall mean the Account by that name created within the
Student Loan Fund by the Indenture designated with respect to each Series and
further described in the Indenture.
"MAINTENANCE AND OPERATING EXPENSES" shall mean the expenses of the
Issuer incurred in direct connection with the Program under the Indenture,
including attorneys' fees, auditing fees, marketing fees, travel expenses of
directors and officers, insurance, taxes, and such other reasonable and
necessary expenses which may be incurred directly or indirectly in connection
with the operation of the Program under the Indenture and in an annual amount
not to exceed the estimated Maintenance and Operating Expenses described in
Exhibit E-2 to the Indenture until January 1, 1999, unless otherwise approved
by each Rating Agency, and on and after January 1, 1999, an annual amount not
to exceed the estimated Maintenance and Operating Expenses described in a
Cash Flow Certificate to be approved by each Rating Agency for a specified
period approved by each Rating Agency, but such term shall not include
servicing fees and expenses incurred under the Servicing Agreement or the
Subservicing Agreement, as the case may be, the Trustee fees and expenses and
the Calculation Agent fees and expenses incurred under the Indenture or the
Custodian Agreement, the Auction Agent's fees and expenses incurred under the
Auction Agent Agreement, any Broker-Dealer Fees and expenses incurred under a
Broker-Dealer Agreement or the Rating Agency Fees and expenses incurred under
the Indenture.
"MATURITY" shall mean, when used with respect to any Note, the date on
which the principal thereof becomes due and payable as provided herein in the
Indenture, whether at its Stated Maturity, by earlier redemption, by
declaration of acceleration, or otherwise.
"NET LOSSES" shall mean the aggregate principal amount of all Financed
Eligible Loans which are over 540 days delinquent, less any recoveries of
principal received with respect to such Financed Eligible Loans.
"NOTE COUNSEL" shall mean Kutak Rock, or any other counsel of nationally
recognized standing in the field of law relating to notes, selected by the
Issuer and reasonably acceptable to the Trustee.
"NOTE REDEMPTION FUND" shall mean the Fund by that name created in the
Indenture and further described in the Indenture, including the Senior Note
Redemption Account, the Subordinate Note Redemption Account and the
Junior-Subordinate Note Redemption Account created therein.
"NOTES" shall mean the Private Notes, the Offered Notes and any other
Additional Notes.
"NOTICE OF MANDATORY EXCHANGE" shall mean the notice regarding the
exchange of the Notes to be delivered by the Trustee pursuant to the
Indenture.
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"NOTIFICATION OF LOAN APPROVAL" shall mean the written notification by
the Guarantee Agency with respect to an Eligible Loan evidencing the
Guarantee thereof by the Guarantee Agency.
"OFFERED NOTES" shall mean, with respect to any Series, the Taxable
Student Loan Asset-Backed Notes being offered with respect thereto as
specified in the related Prospectus Supplement.
"OPERATING FUND" shall mean the fund by that name continued by and
described in the Indenture and under "Security and Sources of Payment for the
Notes."
"OUTSTANDING" shall mean, when used in connection with any Note, a Note
which has been executed and delivered pursuant to the Indenture which at such
time remains unpaid as to principal or interest, unless provision has been
made for such payment pursuant to the Indenture, excluding Notes which have
been replaced pursuant to the Indenture.
"OWNERSHIP INTEREST" means, with respect to any Note, any ownership
interest in such Note, including any interest in such Note as the Registered
Owner thereof and any other interest therein, whether direct or indirect,
legal or beneficial.
"PARTICIPANT" means a member of, or participant in, the Depository.
"PERSON" shall mean an individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated
organization, or government or agency or political subdivision thereof.
"PLUS LOAN" or "FEDERAL PLUS LOAN" shall mean a Student Loan authorized
under Section 428B of the Act.
"PRESIDENT" shall mean the President of the Issuer.
"PRINCIPAL OFFICE" shall mean the principal corporate trust office of the
Trustee.
"PRIOR CLASS A NOTES" shall mean (i) the Issuer's Taxable Student Loan
Asset-Backed Notes, Series 1996A Senior Auction Rate issued pursuant to the
Indenture in the aggregate principal amount of $96,600,000 and consisting of
$48,300,000 of Class 1996 A-1 Notes (Auction Rate Securities-SM- (ARS-SM-))
and $48,300,000 of Class 1996 A-2 Notes (Auction Rate Securities-SM-
(ARS-SM-)) and (ii) the Issuer's Taxable Student Loan Asset-Backed Notes,
Series 1996B, Class 1996B Senior Auction Rate issued pursuant to the
Indenture in the aggregate principal amount of $128,000,000 and consisting of
$73,700,000 of Class A-3 Notes (Auction Rate Securities-SM- (ARS-SM-)) and
$54,300,000 of Class A-4 Notes (Auction Rate Securities-SM- (ARS-SM-)).
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"PRIOR CLASS B NOTES" shall mean (i) the Issuer's Taxable Student Loan
Asset-Backed Notes, Series 1996A, Class B Subordinate LIBOR Rate, issued
pursuant to the Indenture in the aggregate principal amount of $11,100,000
and (ii) the Issuer's Taxable Student Loan Asset-Backed Notes, Series 1996B,
Class B-2 Subordinate LIBOR Rate, issued pursuant to the Indenture in the
aggregate principal amount of $14,200,000.
"PRIVATE NOTES" shall mean the Series 1996A Notes and the Series 1996B
Notes.
"PROGRAM" or "PURCHASE PROGRAM" shall mean the Issuer's Program for the
purchase of Eligible Loans from Eligible Lenders in order to increase the
supply of money available for new Student Loans, thereby assisting students
in obtaining an education at an Eligible Institution.
"PURCHASE PRICE" shall mean the purchase price for the Financed Eligible
Loans described in the respective Student Loan Purchase Agreement.
"RATING" shall mean one of the rating categories of Fitch, S&P or any
other Rating Agency, provided Fitch, S&P or any other Rating Agency, as the
case may be, is currently rating the Notes.
"RATING AGENCY" shall mean, collectively, (a) Fitch and its successors
and assigns, (b) S&P and its successors and assigns or (c) or any other
Rating Agency requested by the Issuer to maintain a Rating on any of the
Notes, but only to the extent such entity is at the time maintaining a Rating
on the Notes.
"RECYCLING ACCOUNT" shall mean the Account by that name created within
the Student Loan Fund by the Indenture designated with respect to each Series
and further described in the Indenture.
"REGISTERED OWNER" shall mean the Person in whose name a Note is
registered on the Note registration books maintained by the Trustee or, if a
Note is registered in the name of a Securities Depository, any other Person
with an Ownership Interest.
"REGULATIONS" shall mean the Regulations promulgated from time to time by
the Secretary or the Guarantee Agency.
"RESERVE FUND" shall mean the Fund by that name created in the Indenture
and further described in the Indenture and under "Security and Sources of
Payment for the Notes."
"RESERVE FUND REQUIREMENT" shall mean at any time (a) the greater of an
amount equal to 2% of the aggregate principal amount of the Notes then
Outstanding or $750,000 plus (b) an amount, if any, required to be on deposit
in the Reserve Fund with respect to any Additional Notes pursuant to the
Supplemental Indenture authorizing the issuance of such Additional Notes.
"RESOLUTION" shall mean a resolution duly adopted by the Board.
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"REVENUE" shall mean all principal and interest payments, proceeds,
charges and other income received by the Trustee or the Issuer from or on
account of any Financed Eligible Loan (including, but not limited to,
scheduled, delinquent and advance payments of and any insurance proceeds with
respect to, interest, including Interest Benefit Payments, on Financed
Eligible Loans and any Special Allowance Payments received by the Issuer or
the Trustee with respect to any Financed Eligible Loan) and investment income
from all Funds and Accounts, and any proceeds from the sale or other
disposition of such Financed Eligible Loans.
"REVENUE FUND" shall mean the Fund by that name created in the Indenture
and further described in the Indenture and under "Security and Sources of
Payment for the Notes."
"S&P" shall mean Standard & Poor's Ratings Services, a Division of The
McGraw-Hill Companies, Inc., its successors and assigns, and, for the
purposes of the Auction Procedures, if such corporation shall be dissolved or
liquidated or shall no longer perform the functions of a securities rating
agency, "S&P" shall be deemed to relate to any other nationally recognized
securities rating agency designated by the Issuer by notice to the Trustee,
the Auction Agent and the Broker-Dealers; provided, however, that such notice
shall not be effective unless accompanied by a consent of a majority of the
Broker-Dealers.
"SECRETARY" shall mean the Secretary of the United States Department of
Education or any successor to the pertinent functions thereof, under the
Higher Education Act or when the context so requires, the former Commissioner
of Education of the United States Department of Health, Education and Welfare.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES DEPOSITORY" shall mean The Depository Trust Company and its
successors and assigns or if, (i) the then Securities Depository resigns from
its functions as depository of the Notes or (ii) the Issuer discontinues use
of the Securities Depository pursuant to Section 2.01(d) of the Indenture,
any other securities depository which agrees to follow the procedures
required to be followed by a securities depository in connection with the
Notes and which is selected by the Issuer with the consent of the Trustee.
"SECURITIES EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended.
"SELLER" shall mean an Eligible Lender from which the Issuer is
purchasing or has purchased or agreed to purchase Eligible Loans pursuant to
a Student Loan Purchase Agreement between the Issuer and such Eligible
Lender; provided, however, that any Seller, other than Union Bank and Trust
Company, shall be approved in writing by each Rating Agency.
"SENIOR NOTE REDEMPTION ACCOUNT" shall mean the Account by that name
created within the Note Redemption Fund by Section 5.01 of the Indenture and
further described in the Indenture.
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"SENIOR NOTES" shall mean the Prior Class A Notes and any Offered Notes
or Additional Notes secured on a parity with the Prior Class A Notes, the
principal of and interest on which is paid from the Senior Note Redemption
Account of the Note Redemption Fund and the Senior Interest Account of the
Interest Fund, respectively.
"SENIOR INTEREST ACCOUNT" shall mean the Account by that name created
within the Interest Fund by the Indenture and further described in the
Indenture and under "Security and Sources of Payment for the Notes."
"SERIES 1996 NOTE ACCOUNT" shall mean the Account by that name created
within the Student Loan Fund by the Indenture and further described in the
Indenture and under "Security and Sources of Payment for the Notes."
"SERIES 1996A NOTES" shall mean the Union Financial Services-1, Inc.,
Taxable Student Loan Asset-Backed Notes, Series 1996A issued pursuant to the
Indenture in the aggregate principal amount of $107,700,000, consisting of
the Class A-1 Notes, the Class A-2 Notes and the Class B Notes.
"SERIES 1996B NOTES" shall mean the Union Financial Services-1, Inc.,
Taxable Student Loan Asset-Backed Notes, Series 1996B issued pursuant to the
Indenture in the aggregate principal amount of $142,200,000, consisting of
the Class A Notes and the Class B-2 Notes with respect thereto.
"SERVICER" shall mean Union Bank and Trust Company, and any other
servicer so long as the Issuer shall have received written confirmation from
each Rating Agency that the designation of such entity as a "Servicer" under
the Indenture will not, at the time of such designation, cause such Rating
Agency to reduce or withdraw its Ratings then applicable to any of the Notes,
and their respective successors and assigns.
"SERVICING AGREEMENT" shall mean the Amended and Restated Servicing
Agreement, dated as of June 19, 1996, as amended, between the Issuer and
Union Bank and Trust Company and any other servicing agreement with any other
Servicer relating to Financed Eligible Loans.
"SLS LOAN" or "FEDERAL SLS LOAN" shall mean a Student Loan authorized
under Section 428A of the Act.
"SPECIAL ALLOWANCE PAYMENTS" shall mean the special allowance payments
authorized to be made by the Secretary by Section 438 of the Act, or similar
allowances authorized from time to time by federal law or regulation.
"SPECIAL RECORD DATE" shall mean the date set forth in the Indenture on
which any defaulted interest shall be paid to Noteholders.
"STATE" shall mean the State of Nevada.
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"STATED MATURITY" shall mean the date specified in the Notes as the fixed
date on which principal of such Notes is due and payable.
"STUDENT LOAN" shall mean a loan under the Higher Education Act to an
Eligible Borrower for education at an Eligible Institution (or a loan to
consolidate the same) authorized to be made or acquired by the Issuer
pursuant to its articles of incorporation and the Loan Purchase Regulations
and described in Section 144(b)(1)(A) of the Code.
"STUDENT LOAN FUND" shall mean the Fund by that name created in the
Indenture and further described in the Indenture, including the Series 1996
Loan Account, the Series 1996 Note Account and the Series 1996 Recycling
Account created therein and each Loan Account and Recycling Account
designated with respect to Additional Notes.
"STUDENT LOAN HOLDING FUND" shall mean the Fund by that name created in
the Indenture and further described in the Indenture and under "Security and
Sources of Payment for the Notes."
"STUDENT LOAN PURCHASE AGREEMENT" shall mean, collectively, (a) that
certain Loan Sale and Commitment Agreement dated as of March 1, 1996 between
the Issuer and Union Bank and Trust Company, (b) that certain Loan Sale and
Commitment Agreement dated as of June 19, 1996, between the Issuer and Union
Bank and Trust Company and (c) any other loan purchase agreement, entered
into between the Issuer and any Eligible Lender for the purchase of Eligible
Loans in substantially the same form as said Loan Sale and Commitment
Agreement, as determined by the Issuer and with an opinion of Note Counsel.
"SUBORDINATE INTEREST ACCOUNT" shall mean the Account by that name
created within the Interest Fund by the Indenture and further described in
the Indenture and under "Security and Sources of Payment for the Notes."
"SUBORDINATE NOTE REDEMPTION ACCOUNT" shall mean the Account by that name
created within the Note Redemption Fund by the Indenture and further
described in the Indenture and under "Security and Sources of Payment for the
Notes."
"SUBORDINATE NOTES" shall mean the Prior Class B Notes and any Offered
Notes or Additional Notes secured on a parity with the Prior Class B Notes,
the principal of and interest on which is paid from the Subordinate Note
Redemption Account of the Note Redemption Fund and the Subordinate Interest
Account of the Interest Fund, respectively.
"SUBSERVICER" shall mean UNIPAC Service Corporation, a Nebraska
corporation, and any other subservicer so long as the Issuer shall have
received written confirmation from each Rating Agency that the designation of
such entity as a "Subservicer" hereunder will not, at the time of such
designation, cause such Rating Agency to reduce or withdraw its Ratings then
applicable to any of the Notes, and their respective successors and assigns.
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"SUBSERVICING AGREEMENT" shall mean the Servicing Agreement, dated as of
January 1, 1995, as amended by the First Amendment to Servicing Agreement
dated as of March 1, 1996 and the Second Amendment to Servicing Agreement
dated as of June 19, 1996, each between the Servicer and the Subservicer and
any other subservicing agreement with any other Subservicer relating to
Financed Eligible Loans.
"SUPPLEMENTAL INDENTURE" shall mean an agreement supplemental to the
Indenture executed pursuant to the Indenture.
"TRANSFER DATE" shall mean each January 1 and July 1, commencing July 1,
1996.
"TRUSTEE" shall mean Norwest Bank Minnesota, National Association, acting
in its capacity as Trustee under the Indenture, or any successor trustee
designated pursuant to the Indenture.
"UNSUBSIDIZED LOAN" or "UNSUBSIDIZED STAFFORD LOAN" shall mean a Student
Loan authorized under Section 428H of the Act.
"VALUE" on any calculation date when required under the Indenture shall
mean the value of the Trust Estate calculated by the Trustee as follows:
(a) with respect to any Eligible Loan, the unpaid principal amount
thereof plus any unamortized premiums, any accrued but unpaid interest,
Interest Benefit Payments and Special Allowance Payments as set forth on
the most recent Servicer's report or from the Issuer;
(b) with respect to any funds on deposit in any commercial bank or as
to any banker's acceptance or repurchase agreement or investment contract,
the amount thereof plus accrued but unpaid interest;
(c) with respect to any Investment Securities of an investment
company, the net asset value price of the shares as reported by the
investment company;
(d) as to investments the bid and asked prices of which are published
on a regular basis in THE WALL STREET JOURNAL (or, if not there, then in
THE NEW YORK TIMES): (i) the average of the bid and asked prices for such
investments so published on or most recently prior to such time of
determination, but not in excess of the par amount of such investment plus
accrued interest thereon or (ii) the bid price published by a nationally
recognized pricing service; and
(e) as to investments the bid and asked prices of which are not
published on a regular basis in THE WALL STREET JOURNAL or THE NEW YORK
TIMES: (i) the lower of the bid prices at such time of determination for
such investments by any two nationally recognized government securities
dealers (selected by the Issuer in its absolute discretion)
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at the time making a market in such investments or (ii) the bid price
published by a nationally recognized pricing service.
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APPENDIX I
FORM OF MASTER PURCHASER'S LETTER
TO BE SUBMITTED TO YOUR BROKER-DEALER
Relating to Securities Involving Rate Settings
Through Auctions or Remarketings
To: The Company
Remarketing Agent
The Trust Company
A Broker-Dealer
An Agent Member
Other Persons
Dear Sirs:
1. This letter is designed to apply to publicly or privately offered
debt or equity securities ("Securities") of any issuer (the "Company") which
are described in any final prospectus, private placement memorandum, offering
circular or other offering materials relating to such Securities as the same
may be amended or supplemented (collectively, with respect to the particular
Securities concerned, the "Prospectus") and which involve periodic rate
auctions ("Auctions") or remarketing procedures ("Remarketing"). This letter
shall be for the benefit of the Company and of any trust company, auction
agent, paying agent (collectively, "trust company"), remarketing agent,
broker-dealer, agent member, securities depository or other interested person
in connection with any Securities and related Auctions or Remarketings (it
being understood that such persons may be required to execute specified
agreements and nothing herein shall alter such requirements). The
terminology used herein is intended to be general in its application and not
to exclude any Securities in respect of which (in the Prospectus or
otherwise) alternative terminology is used.
2. We may from time to time offer to purchase, purchase, offer to sell
and/or sell Securities of the Company as described in the Prospectus relating
thereto. We agree that this letter shall apply to all such purchases, sales
and offers and to Securities owned by us. We understand that the
dividend/interest rate on Securities may be based from time to time on the
results of Auctions or Remarketings as set forth in the Prospectus.
3. We agree that any bid or sell order placed by us in an Auction or a
Remarketing shall constitute an irrevocable offer (except as otherwise described
in the Prospectus) by us to purchase or sell the Securities subject to such bid
or sell order, or such lesser amount of Securities as we shall be required to
sell or purchase as a result of such Auction or Remarketing, at the applicable
price, all as set forth in the Prospectus, and that if we fail to place a bid or
sell order with respect to Securities owned by us with a broker-dealer on any
Auction or
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Remarketing date, or a broker-dealer to which we communicate a bid or sell
order fails to submit such bid or sell order to the trust company or
remarketing agent concerned, we shall be deemed to have placed a hold order
with respect to such Securities as described in the Prospectus. We authorize
any broker-dealer that submits a bid or sell order as our agent in Auctions
or Remarketings to execute contracts for the sale of Securities covered by
such bid or sell order. We recognize that the payment by such broker-dealer
with respect to Securities purchased on our behalf shall not relieve us of
any liability to such broker-dealer for payment for such Securities.
4. We understand that in a Remarketing, the dividend or interest rate
or rates on the Securities and the allocation of Securities tendered for sale
between dividend or interest periods of different lengths will be based from
time to time on the determinations of one or more remarketing agent(s), and
we agree to be conclusively bound by such determinations. We further agree
to the payment of different dividend or interest rates to different holders
of Securities depending on the length of the dividend or interest period
elected by such holders. We agree that any notice given by us to a
remarketing agent (or to a broker-dealer for transmission to a remarketing
agent) of our desire to tender Securities in a Remarketing shall constitute
an irrevocable (except to the limited extent set forth in the Prospectus)
offer by us to sell the Securities specified in such notice, or such lesser
number of Securities as we shall be required to sell as a result of such
Remarketing, in accordance with the terms set forth in the Prospectus, and we
authorize the remarketing agent to sell, transfer or otherwise dispose of
such Securities as set forth in the Prospectus.
5. We agree that, during the applicable period as described in the
Prospectus, dispositions of Securities can be made only in the denominations
set forth in the Prospectus and we will sell, transfer or otherwise dispose
of any Securities held by us from time to time only pursuant to a bid or sell
order placed in an Auction, in a Remarketing, to or through a broker-dealer
or, when permitted in the Prospectus, to a person that has signed and
delivered to the applicable trust company or remarketing agent a letter
substantially in the form of this letter (or other applicable purchaser's
letter), provided that in the case of all transfers, other than pursuant to
Auctions, the form of this letter (or other applicable purchaser's letter),
provided that in the case of all transfers other than pursuant to Auctions or
Remarketings we or our broker-dealer or our agent member shall advise such
trust company or remarketing agent of such transfer. We understand that a
restrictive legend will be placed on certificates representing the Securities
and stop-transfer instructions will be issued to the transfer agent and/or
registrar, all as set forth in the Prospectus.
6. We agree that, during the applicable period as described in the
Prospectus, ownership of Securities shall be represented by one or more global
certificates registered in the name of the applicable securities depository or
its nominee, that we will not be entitled to receive any certificate
representing the Securities and that our ownership of any Securities will be
maintained in book-entry form by the securities depository for the account of
our agent member, which in turn will maintain records of our beneficial
ownership. We authorize and instruct our agent member to disclose to the
applicable trust company or remarketing agent such
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information concerning our beneficial ownership of Securities as such trust
company shall request.
7. We acknowledge that partial deliveries of Securities purchased in
Auctions or Remarketings may be made to us and such deliveries shall
constitute good delivery as set forth in the Prospectus.
8. This letter is not a commitment by us to purchase any Securities.
9. This letter supersedes any prior-dated version of this master
purchaser's letter, and supplements any prior or postdated purchaser's letter
specific to any particular Securities, and this letter may only be revoked by
a signed writing delivered to the original recipients hereof.
10. The descriptions of Auction or Remarketing Procedures set forth in
each applicable Prospectus are incorporated by reference herein and in case
of any conflict between this letter, any purchaser's letter specific to
particular Securities and any such description, such description shall
control.
11. Any xerographic or other copy of this letter shall be deemed of
equal effect as a signed original.
12. In the case of each offer to purchase, purchase, offer to sell or
sale by us of Securities not registered under the Securities Act of 1933, as
amended (the "Securities Act"), we represent and agree as follows:
(a) We understand and expressly acknowledge that the Securities have
not been and will not be registered under the Securities Act and,
accordingly, that the Securities may not be reoffered, resold or otherwise
pledged, hypothecated or transferred unless an applicable exemption from
the registration requirements of the Securities Act is available.
(b) We hereby confirm that any purchase of Securities made by us will
be for our own account, or for the account of one or more parties for which
we are acting as trustee or agent with complete investment discretion and
with authority to bind such parties, and not with a view to any public
resale or distribution thereof. We and each other party for which we are
acting which will acquire Securities will be "accredited investors" within
the meaning of Regulation D under the Securities Act with respect to the
Securities to be purchased by us or such party, as the case may be, will
have previously invested in similar types of instruments and will be able
and prepared to bear the economic risk of investing in and holding such
Securities.
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(c) We acknowledge that prior to purchasing any Securities we have
had access to such financial and other information as we deem necessary in
connection with our decision to purchase Securities.
(d) We recognize that the Company and broker-dealers or remarketing
agents will rely upon the truth and accuracy of the foregoing investment
representations and agreements, and we agree that each of our purchases of
Securities now or in the future shall be deemed to constitute our
concurrence in, and affirmation of, all of the foregoing, which shall be
binding on us and each party for which we are acting as set forth in
subparagraph (b) above.
Date:
------------------------------ -------------------------------------
(Name of Institution, if applicable)
By
-----------------------------------
Print Name:
-----------------------------------
Title:
-----------------------------------
[Placement Agent] [Underwriter]
Account Number
-------------------------------------
-------------------------------------
-------------------------------------
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- -------------------------------------------
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- -------------------------------------------
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO 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 THE NOTES IN ANY STATE OR JURISDICTION
IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY
OF THIS PROSPECTUS SUPPLEMENT OR ANY PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE;
HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Terms of the Offering.......................... S-2
Previously Issued Notes........................ S-9
Credit Enhancement............................. S-10
Characteristics of the Financed Eligible
Loans........................................ S-11
Certain Information Relating to the Guarantee
Agencies..................................... S-17
Plan of Distribution........................... S-20
Legal Matters.................................. S-21
PROSPECTUS
PROSPECTUS SUPPLEMENT.......................... i
AVAILABLE INFORMATION.......................... i
REPORTS TO NOTEHOLDERS......................... i
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE.................................... iii
SUMMARY OF THE OFFERING........................ ix
RISK FACTORS................................... 1
DESCRIPTION OF THE NOTES....................... 13
SECURITY AND SOURCES OF PAYMENT FOR THE
NOTES........................................ 21
CERTAIN DEFINITIONS AND PROVISIONS RELATED TO
AUCTION RATE NOTES AND AUCTION PROCEDURES.... 37
AUCTION RATE NOTE SETTLEMENT PROCEDURES........ 65
CERTAIN DEFINITIONS AND PROVISIONS RELATED TO
LIBOR RATE NOTES............................. 68
BOOK ENTRY REGISTRATION........................ 75
ADDITIONAL NOTES............................... 77
SUMMARY OF CERTAIN PROVISIONS OF THE
INDENTURE.................................... 78
SELLER REPRESENTATIONS AND WARRANTIES.......... 101
DESCRIPTION OF CREDIT ENHANCEMENT.............. 106
THE ISSUER..................................... 108
THE ISSUER'S STUDENT LOAN PURCHASE PROGRAM..... 110
DESCRIPTION OF THE FEDERAL FAMILY EDUCATION
LOAN PROGRAM................................. 113
GUARANTEE AGENCIES............................. 130
WEIGHTED AVERAGE LIFE OF THE NOTES............. 132
CERTAIN FEDERAL INCOME TAX CONSEQUENCES........ 133
ERISA CONSIDERATIONS........................... 137
CERTAIN RELATIONSHIPS AMONG FINANCING
PARTICIPANTS................................. 139
PLAN OF DISTRIBUTION........................... 139
LEGAL MATTERS.................................. 140
FINANCIAL INFORMATION.......................... 140
RATINGS........................................ 140
INDEX TO AND GLOSSARY OF CERTAIN TERMS......... 142
APPENDIX I--FORM OF MASTER PURCHASER'S
LETTER....................................... I-1
</TABLE>
$30,800,000
Union Financial Services-1, Inc.
Issuer
TAXABLE STUDENT LOAN
ASSET-BACKED NOTES
SERIES 1997A
$30,800,000 SUBORDINATE CLASS 1997B-4
LIBOR RATE NOTES
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PROSPECTUS SUPPLEMENT
MARCH 19, 1997
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SMITH BARNEY INC.
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