As filed with the Securities and Exchange Commission on June 5, 1997
Registration No. 333-____
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
UNION FINANCIAL SERVICES-1, INC.
(Exact name of registrant as specified in its charter)
Nevada 86-0817755
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6991 East Camelback Road, Suite B290, Scottsdale, Arizona 85251,
(602)947-7703
(Address, including ZIP code, and telephone number,
including area code, of registrant's principal executive offices)
--------------------
Stephen F. Butterfield, President
Union Financial Services-1, Inc.
6991 East Camelback Road, Suite B290, Scottsdale, Arizona 85251,
(602) 947-7703
(Name, address, including ZIP code, and telephone number,
including area code, of agent for service)
--------------------
COPIES TO:
Gerald J. Guarcini, Esq.
Thomas H. Duncan, Esq.
Thomas O. McGimpsey, Esq.
Ballard Spahr Andrews & Ingersoll
1225 Seventeenth Street, Suite 2300
Denver, Colorado 80202
(303) 292-2400
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, check the following box. |_|
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=================================================================================================================
<S> <C> <C> <C> <C>
AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PER UNIT(1) AGGREGATE OFFERING PRICE(1) FEE(2)
- -----------------------------------------------------------------------------------------------------------------
Notes $1,000,000 100% $1,000,000 $304
=================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Registration fee is calculated on the basis of 1/33 of 1% of the Proposed
maximum aggregate offering price.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the Registration Statement becomes effective. This Prospectus Supplement and
Prospectus shall not constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any state in which
such offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any state.
SUBJECT TO COMPLETION Dated __________ __, 199_
PROSPECTUS SUPPLEMENT
(To Prospectus dated __________ __, 199_)
$-----------
UNION FINANCIAL SERVICES-1, INC.
TAXABLE STUDENT LOAN ASSET-BACKED NOTES
SERIES 199_-_
[NOTE CLASSES]
Union Financial Services-1, Inc. (the "Issuer") is offering $___________
aggregate principal amount of its Taxable Student Loan Asset-Backed Notes,
Series 199_-_. The Series 199_-_ Notes are to be issued in _____ Classes
designated as Senior [Auction] [Index] Rate Class A-_ Notes (the "Class A-_
Notes"), Senior [Auction] [Index] Rate Class A-__ Notes (the "Class A-_ Notes")
and Subordinate [Auction] [Index] Rate Class B-__ Notes (the "Class B-_ Notes")
[and Junior-Subordinate [Auction] [Index] Rate Class C-__ Notes (the"Class C-_
Notes")] (collectively, the "Series 199_-_ Notes"). The Class A-_ Notes and the
Class A-_ Notes are each senior [Auction] [Index] Rate Notes. The Class A-_
Notes and the Class A-_ Notes are sometimes referred to herein as the "[Auction]
[Index] Rate Notes" or the "Class A Notes." [The Class B-_ Notes are sometimes
referred to herein as the "[Auction] [Index] Rate Notes" or the "Class B Notes"]
[and the Class C-_ Notes are sometimes referred to herein as the [Auction]
[Index] Rate Notes" or the "Class C Notes."] [The Class C Notes are not being
offered hereby.] See "Terms of the Offering" herein.
PROSPECTIVE INVESTORS IN THE SERIES 199_-_ NOTES SHOULD CONSIDER THE
DISCUSSION OF CERTAIN MATERIAL FACTORS SET FORTH UNDER "RISK FACTORS" ON PAGE __
OF THE PROSPECTUS.
[The Class A-_ Notes, the Class A-_ Notes and the Class B-_ Notes [and
the Class C Notes] will be issued in the initial principal amounts of
$__________, $__________ and $__________ [and $__________], respectively.] The
Series 199_-_ Notes will be collaterized 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 [(ii)] [(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 Issuer expects to use proceeds of the Series 199_-_ Notes to
acquire Financed Eligible Loans from ____________________ (the "Seller")
pursuant to a Student Loan Purchase Agreement. The Issuer has contracted with
____________________ to act as Servicer and ____________________ to act as
Subservicer of the Financed Eligible Loans to be funded from the proceeds of the
offering of the Series 199_-_ Notes. THE SERIES 199_-_ NOTES ARE SUBJECT TO
OPTIONAL, MANDATORY AND EXTRAORDINARY OPTIONAL REDEMPTION AS MORE FULLY
DESCRIBED HEREIN. SEE "TERMS OF THE OFFERING" HEREIN.
[Interest on the Class _ Auction Rate Notes will accrue at the initial rate
of _____% per annum through __________ __, ____. Interest on the Class _ Auction
Rate Notes will accrue at the initial rate of _____% per annum through
__________, ____. Thereafter, interest on the Auction Rate Notes of any Class
will accrue at the Auction Rate determined from time to time pursuant to the
Auction Procedure described herein. Interest on the Auction Rate Notes will be
paid on the first Business Day following the expiration of each respective
Auction Period (each, an "Interest Payment Date"). The Stated Maturity for the
Class A-_ Auction Rate Notes is __________ __, ____. [Auction Rate Notes]].
[Interest on the Class _ [LIBOR] [Treasury] Rate Notes [and the Class _
[LIBOR] [Treasury] Rate Notes] is payable monthly on the _____ day of each
month, or if any such day is not a Business Day, on the first Business Day
thereafter, commencing __________, 199_, until maturity or earlier redemption or
payment at the Applicable Rate with respect thereto. The Applicable Rate (as
defined herein) with respect to the Class _ [LIBOR] [Treasury] Rate Notes [and
the Class _ [LIBOR] [Treasury] Rate Notes] will be determined from time to time
as described herein by reference to the rate of interest described as the
[LIBOR] [Treasury] Rate. The Stated Maturity for the Class _ [LIBOR] [Treasury]
Rate Notes is _____________ __, ____. [The Stated Maturity for the Class _
[LIBOR] [Treasury] Rate Notes is _____________ __, ____. [Index Rate Notes]]
[The Accrual Notes will be issued at a _____% discount from their
scheduled principal balance at Stated Maturity. That discount [together with
interest being paid currently beginning __________, 19__] results in a yield to
stated Maturity of _____% per annum, computed on a [designate accrual frequency]
compounding basis from the Date of Issuance. [Interest on the Accrual notes
[will] [may] be paid prior to Stated Maturity beginning __________, 19__] [upon
the occurrence of events described under "Terms of the Offering--Accrual Notes"
herein]].]
The Issuer has previously issued $_______ of its Taxable Student Loan
Asset-Backed Notes, $________ of which remain Outstanding on the Date of
Issuance of the Series 199_-_ Notes (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") [and certain
were designated as Class C (the "Prior Class C Notes)]. The Stated Maturity for
[each Class] [designate Class] of Series 199_-_ Notes is __________ 1, 20__. 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 Class A
Notes and the Prior Class A Notes, and may be senior to, on a parity with or
subordinate to, the Class B-_ Notes and the Prior Class B Notes. The Class A
Notes, the Prior Class A Notes, the Class B-_ Notes, the Prior Class B Notes [,
the Class C Notes][, the Prior Class C Notes] and any Additional Notes are
collectively referred to herein as the "Notes."
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 199_-_ NOTES REPRESENT OBLIGATIONS SOLELY OF THE ISSUER, AND
ARE NOT INSURED OR GUARANTEED BY ANY GOVERNMENT AGENCY OR INSTRUMENTALITY, [OR]
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 199_-_ NOTES OTHER THAN THOSE PLEDGED AS COLLATERAL FOR THE NOTES UNDER
THE INDENTURE.
- ------------------------------------------------------------------------------
Underwriting Proceeds
Price to Public Discount(1) to Issuer(2)
Class A-_ Notes ___% ___% ___%
Class A-_ Notes ___% ___% ___%
Class B-_ Notes ___% ___% ___%
[Class C Notes] [___%] [___%] [___%]
Total $___________ $__________ $__________
- ------------------------------------------------------------------------------
(1) The Issuer has agreed to indemnify the [Underwriter] [Placement Agent]
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended.
(2) Before deducting expenses payable by the Issuer, estimated to be $_________.
The Series 199_-_ Notes are offered by ____________________ (the
"[Underwriter][Placement Agent]") subject to prior sale, where, as and if
[issued to] [offered by] the [Underwriter] [Placement Agent], subject to
approval of certain legal matters by counsel for the [Underwriter] [Placement
Agent]. The [Underwriter] [Placement Agent] 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 199_-_ Notes [other than [designate
Classes] will be made in book-entry-only form through the Same Day Funds
Settlement System of The Depository Trust Company [and the [designate Classes]
Notes will be delivered at the offices of ____________________, in each case] on
or about ____________________, 199_.
[NAME OF [UNDERWRITER] PLACEMENT AGENT]]
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS __________, 199_.
<PAGE>
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS EFFECTING TRANSACTIONS
IN THE SERIES 199__-__ 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 199_-_
NOTES. SALES OF THE SERIES 199_-_ 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 199_-_
NOTES, INCLUDING PURCHASES OF THE SERIES 199_-_ NOTES TO STABILIZE THEIR MARKET
PRICE AND PURCHASES OF THE SERIES 199_-_ NOTES TO COVER SOME OR ALL OF A SHORT
POSITION IN THE SERIES 199_-_ 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 199__-__ 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." This Prospectus contains
forward-looking statements that involve risks and uncertainties. See "Special
Note Regarding Forward Looking Information."
SECURITIES OFFERED The Taxable Student Loan Asset-Backed Notes, Series
199__-__ consist of __________ Classes, designated as Senior
[Auction] [Index] Rate Class A-_ Notes (the "Class A-__
Notes"), Senior [Auction] [Index] Rate Class A-__ Notes (the
"Class A-__ Notes") [and][,] Subordinate [Auction] [Index]
Rate Class B-__ Notes (the "Class B-__ Notes") [and Junior
Subordinate [Auction] [Index] Rate Class C-__ Notes (the
"Class C Notes")]] with an initial aggregate stated
principal balance of $__________. The [Class A-__ Notes, the
Class A-__ Notes [and][,] the Class B-__ Notes] [and the
Class C Notes] are referred to collectively as the "Series
199__-__ Notes," and the [Class A-__ Notes and the Class
A-__ Notes] are sometimes referred to collectively as the
"[Auction] [Index] Rate Notes" or the "Class A Notes." [The
Class B-__ Notes are sometimes referred to herein as the
"[Auction] [Index] Rate Notes" or the Class B Notes" [and
the Class C Notes are sometimes referred to herein as the
"[Auction] [Index] Rate Notes]." [The Class C Notes are not
being offered pursuant to this Prospectus Supplement.] The
original stated principal amount of the Class A-__ Notes and
the Class A-__ Notes shall be $__________ and $__________,
respectively, and the original stated principal amount of
the Class B-__ Notes [and the Class C Notes] shall be
$__________ [and $__________, respectively]. The Class B-__
Notes and the Prior Class B Notes are subordinated in
certain respects to the Class A Notes and the Prior Class A
Notes[, and the Class C-__ Notes are subordinated in certain
respects to the Class B-__ Notes, the Prior Class B Notes,
the Class A Notes and the Prior Class A Notes], as more
fully described herein and in the Prospectus. The Series
199__-__ Notes will be issued pursuant to the Indenture as
hereinafter described.
[AUCTION NOTE RATES][The Class __ Auction Rate Notes will bear interest
at an initial rate of ____% per annum through
__________ __, ____, the first Auction Date for such Class
[and the Class __ Auction Rate Notes will bear interest at
an initial rate of ____% per annum through __________ __,
____, the first Auction 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.
After the Initial Period for the Auction Rate Notes, each
Interest Period, with respect to the Class __ Auction Rate
Notes [and the Class __ Auction Rate Notes] will initially
S-2
<PAGE>
consist of [Specify Auction Period] days, subject to
adjustment as set forth under "Certain Definitions and
Provisions Related to Auction Rate Notes and Auction
Procedure--Auction Procedures" in the Prospectus. The
interest rates for the Class __ Auction Rate Notes [and the
Class __ Auction Rate Notes] will be reset at the Auction
Rate with respect to each such Class pursuant to the Auction
Procedures described under "Certain Definitions and
Provisions Related to Auction Rate Notes and Auction
Procedure--Auction Procedures" in the Prospectus (but in no
event exceeding the Maximum Auction Rate (as defined in the
Prospectus)). 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.]
[The following definitions with respect to the Class A-_
Auction Rate Notes should be read in conjunction with the
information under "Certain Definitions and Provisions
Related to Auction Rate Notes and Auction Procedures" in the
Prospectus.
CLASS A-_ AUCTION RATE NOTES
"Auction Period" means _____________________________.
"Initial Auction Date" means _________________.
"Initial Period" means ___________________________________
___________________________________________________________.
"Initial Rate" means _____%.
"Initial Rate Adjustment Date" means _________________.]
[PROCEDURES]
[DESCRIBE ANY ADDITIONAL AUCTION PROCEDURES AND THE NUMBER
OF ADDITIONAL BROKER-DEALERS.]
[LIBOR NOTE RATES] [The Class __ LIBOR Rate Notes will bear interest at an
initial rate of ____% per annum through __________ __, ____
and will be paid [monthly] [quarterly] beginning __________
__, ____ [and on each __________ 1, __________ 1, __________
1, and thereafter] (or, if any such date is not a Business
Day, on the next succeeding Business Day (each, an "Interest
Payment Date")), until maturity or earlier redemption or
payment to the holders of record of the LIBOR Rate Notes on
the Business Day immediately preceding the Interest Payment
Date. The Applicable Rate (as defined herein) with respect
to the Class __ LIBOR Rate Notes will be determined from
time to time as described herein by reference to the rate of
interest described as the Based Rate.
After the initial Interest Period for the Class __ LIBOR
Rate Notes, the Applicable Rate for the Class __ LIBOR Rate
Notes will be reset to equal [describe index], but in no
event exceeding [describe applicable cap]. See "Description
of Notes - LIBOR Rate Notes" and "Certain Definitions and
S-3
<PAGE>
Provisions Related to LIBOR Rate Notes" and
"____________________" in the Prospectus with respect to the
determination of and certain procedures with respect to
LIBOR-Based Notes and certain definitions relating thereto.
The following definitions [and procedures] with respect to
the Class B-_ LIBOR Rate Notes should be read in conjunction
with the information under "____________________" in the
Prospectus.]
CLASS B-_ LIBOR RATE NOTES
"Applicable Rate" means _________________________________
_________________________________________________________.
"Initial Interest Payment Date" means ________________.
"Initial Interest Period" means ____________________________
_________________________________________________________.
"LIBOR-Based Rate" means __________________________.]
[PROCEDURES]
[DESCRIBE ANY ADDITIONAL LIBOR PROCEDURES.]
[TREASURY NOTE RATES]
[The Class_ Treasury Rate Notes will bear interest at an
initial rate of ___% per annum through _______, ____ and
will be paid [monthly] [quarterly] beginning ______ 1, ____
and on each ____ 1, ______ 1, ______ 1, and _______ 1,
thereafter (or, if any such date is not a Business day, on
the next succeeding Business Day (each, an "Interest Payment
Date")), until maturity or earlier redemption or payment to
the holders of record of the Treasury Rate Notes on the
Business Day immediately preceding the Interest Payment
Date. The Applicable Rate (as defined herein) with respect
to the Class ____ Treasury Rate Notes will be determined
from time to time as described herein by reference to the
rate of interest described as the Treasury-Based Rate.
After the initial Interest Period for the Class __ Treasury
Rate Notes, the Applicable Rate for the Class __ Treasury
Rate Notes will be reset to equal [describe index], but in
no event exceeding [describe applicable cap]. See
"Description of the Notes Treasury Rate Notes" in the
Prospectus with respect to the determination of and certain
procedures with respect to Treasury Based Notes.]
[Describe determination of interest rate and procedures
relating thereto for Treasury Rate Notes.]]
[ACCRUAL NOTES] [The Accrual Notes will be issued at a ____% discount from
their scheduled principal balance at Stated Maturity. That
S-4
<PAGE>
discount [together with interest being paid currently as
described below] results in a yield to Stated Maturity of
____% per annum computed on a [designate accrual frequency]
compounding basis from the Date of Issuance. The Accrual
Notes will accrue interest [designate interest accrual date]
(with respect to such Notes, an "Interest Payment Date")
which will be capitalized and added to the principal balance
thereof on each such date. [Beginning __________ __, 199_]
[upon the occurrence of [describe event]], the Accrual Notes
will be entitled to receive payments of interest on each
Interest Payment Date.] The Accrual Notes shall be
designated as [Senior] [Subordinate] [Junior-Subordinate]
Notes under the Indenture.
STATED MATURITY DATE
The Stated Maturity for the Series 199__-__ Notes are as
follows:
Class Stated Maturity
------ ----------------
Class A-_ Notes _________ __, 20__
Class A-_ Notes _________ __, 20__
Class B-_ Notes _________ __, 20__
[Other Notes] _________ __, 20__
DATE OF ISSUANCE
OF SERIES
199__-__ NOTES __________ __, 199_.
DENOMINATIONS The Class __ [Auction] [Index] Rate Notes will be issued in
minimum denominations of [$__________] [or any integral
multiple thereof] [ and in $__________ increments above such
amount] [and the Class __ [Auction] [Index] Rate Notes will
be issued in minimum denominations of [$__________] [or any
integral multiple thereof] [and in $__________ increments
above such amount].
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 Series 199__-__ Notes
and pledged to the Trustee (with such changes as noted
therein) on or about _______ __, 19__ is included herein
under "Characteristic 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.
CUTOFF DATE With respect to the portfolio of Eligible Loans to be
acquired with the proceeds of the Series 199_-_ Notes, the
close of business on __________ __, 199_, and with respect
S-5
<PAGE>
to Financed Eligible Loans acquired during the recycling
period and pledged to the Trustee thereafter, their
respective dates of acquisition.
USE OF PROCEEDS The Issuer estimates that the net proceeds from the sale of
the Series 199__-__ Notes will be applied as follows:
Deposit to Series 199_-_ Loan Account of $
Student Loan Fund
Deposit to Reserve Fund
Deposit to Revenue Fund
Deposit to Operating Fund
Deposit to Cost of Issuance Fund $
Total $__________
[__________ of the proceeds deposited to the Series 199_-_
Loan Account of the Student Loan Fund are expected to be
used on the Date of Issuance to acquire a portfolio of
Eligible Loans from the Seller. The remaining proceeds
deposited to the Series 199_-_ Loan Account of the Student
Loan Fund are expected to be used to purchase a portfolio of
Eligible Loans from the Seller on or before ______ __, ____.
If such proceeds are not used to purchase Eligible Loans on
or before _________ __, ____, such proceeds will be
transferred to the Note Redemption Fund and used to redeem
Notes. See "Mandatory Redemption" herein.] [The Issuer
expects to pay __________ from the amounts deposited in the
Operating Fund to its parent corporation, Union Financial
Services, Inc., for services rendered in connection with
issuance of the Series 199_-_ Notes and the related
acquisition of Eligible Loans.]
[SERVICER AND
SUBSERVICER [____________________ shall act as Servicer (in such
capacity, the "Servicer") and ____________________, shall
act as Subservicer [and Custodian] of the Financed Eligible
Loans. See "Certain Relationships Among Financing
Participants" in the Prospectus.]
[THE SELLER] [____________________ (the "Seller") has entered into a
Student Loan Purchase Agreement with the Issuer requiring
the Seller to [make Eligible Loans available to be acquired
by the Issuer] [sell Eligible Loans to the Issuer]. See
"Seller Representations and Warranties--The Sellers" in the
Prospectus.]
INDENTURE The Series 199__-__ 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 199__-__ 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.
S-6
<PAGE>
The Class A Notes and the Prior Class A Notes constitute
"Senior Notes" under the Indenture, secured on a basis which
is on a parity with the Prior Class A Notes, are senior to
the Class B-__ Notes and the Prior Class B Notes and to any
Additional Notes secured on a parity with or subordinate to
the Class B-__ Notes and the Prior Class B Notes. The Class
B-__ Notes and the Prior Class B Notes constitute
"Subordinate Notes" under the Indenture, secured on a basis
which is subordinate to the Class A Notes and the Prior
Class A Notes. [The Class C-__ Notes [and the Prior Class C
Notes] constitute "Junior-Subordinate Notes" under the
Indenture, secured on a basis which is subordinate to the
Class B Notes, the Prior Class B Notes, the Class A Notes
and the Prior Class A Notes.]
Additional Notes secured on a parity with or on a basis
subordinate to the Class A Notes and the Prior Class A Notes
may be issued under the Indenture. Such Additional Notes may
be secured on a basis which is senior to, on a parity with
or on a basis which is subordinate to the Class B-__ Notes
and the Prior Class B Notes. If subordinate to the Class
B-__ Notes and the Prior Class B Notes, such Additional
Notes would constitute "Junior-Subordinate Notes" under the
Indenture.
[MANDATORY REDEMPTION]
[The Class A-_ Notes and Class A-_ Notes are subject to
mandatory redemption, in whole or in part, on any Interest
Payment Date, at a redemption price equal to the principal
amount thereof to be redeemed plus accrued and unpaid
interest to the date of redemption: (i) subsequent to
_______ __, ____, 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 Senior Note Redemption Account;
and (ii) on the Interest Payment Date next succeeding
_______ __, ____ from moneys not previously used to purchase
Eligible Loans that remain in the Series 199_-_ Loan Account
of the Student Loan Fund unless the Issuer provides to the
Trustee a Cash Flow Certificate and an opinion of Note
Counsel as described in "Description of the Notes -
Mandatory Redemption" in the Prospectus.]
[The Class B-_ Notes are subject to mandatory redemption, in
whole or in part, on any Interest Payment Date on or after
______ __, ____ at a redemption price equal to the principal
amount thereof to be redeemed plus accrued and unpaid
interest to the date of redemption: (i) subsequent to
_________ __, ____, from moneys representing principal
payments received with respect to the Financed Eligible Loan
acquired with respect to such Series and other excess
revenues transferred to the Subordinate Note Redemption
Account; and (ii) from moneys not previously used to
purchase Eligible Loans that remain in the Series 199_-_
Loan Account of the Student Loan Fund unless the Issuer
provides to the Trustee a Cash Flow Certificate and an
S-7
<PAGE>
opinion of Note Counsel as described in "Description of the
Notes-Mandatory Redemption" in the Prospectus.]
[The Class C-__ Notes are subject to mandatory redemption,
in whole or in part, on any Interest Payment Date, on or
after __________ 1, ____ at a redemption price equal to the
principal amount thereof to be redeemed plus accrued and
unpaid interest to the date of redemption: (i) subsequent to
______ __, ____, 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 Junior Subordinate Note
Redemption Account; and (ii) from moneys not previously used
to purchase Eligible Loans that remain in the Series 199_-_
Loan Account of the Student Loan Fund unless the Issuer
provides to the Trustee a Cash Flow Certificate and an
opinion of the Note Counsel as described in "Description of
the Notes--Mandatory Redemption" in the Prospectus.]
[OPTIONAL REDEMPTION]
[The Class A-__ Notes are subject to optional redemption, in
whole or in part, on any Interest Payment Date, on or after
__________ __, ____, at a redemption price equal to the
principal amount thereof to be redeemed, plus interest
accrued, if any, to the date of redemption.]
[The Class A-__ Notes are subject to optional redemption, in
whole or in part, on any Interest Payment Date, on or after
__________ __, ____, at a redemption price equal to the
principal amount thereof to be redeemed, plus interest
accrued, if any, to the date of redemption.]
[The Class B-__ Notes are subject to optional redemption, in
whole or in part, on any Interest Payment Date, on or after
__________, ____ at a redemption price equal to the
principal amount thereof to be redeemed, plus interest
accrued, if any, to the date of redemption.]
[The Class C-__ Notes are subject to optional redemption, in
whole or in part, on any Interest Payment Date on or after
__________, ____ 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
REDEMPTION] [The Series 199__-__ Notes shall also be subject to
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 199__-__ 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 of
return on Financed Eligible Loans has materially decreased,
or that the costs of administering the Trust Estate have
S-8
<PAGE>
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.
STUDENT LOAN FUND The sum of $__________ will be deposited in the Series
199__-__ Loan Account of the Student Loan Fund on the Date
of Issuance of the Series 199__-__ Notes [and $__________ of
such amount will be used to acquire a portfolio of Eligible
Loans [on the Date of Issuance] [on or prior to __________
__, ____] [or such later date as may be agreed to by the
Rating Agencies], which, [together with the Financed
Eligible Loans currently held by the Trustee,] is described
herein. [See " Estimated Characteristics of the Financed
Eligible Loans" herein.] The remaining proceeds deposited in
the Series 199_-_ Loan Account of the Student Loan Fund on
the Date of Issuance of the Series 199_-_ Notes are expected
to be used to acquire a portfolio of Eligible Loans from the
Seller on or before __________ __, ____. Proceeds deposited
in the Series 199_-_ Loan Account of the Student Loan Fund
and not used to purchase Eligible Loans on or before
__________ __, ____ will be transferred to the Note
Redemption Fund. In addition, except upon the occurrence of
an Event of Default, there shall be deposited into the
Series 199_-_ Recycling Account of the Student Loan Fund
principal payments received with respect to the Financed
Eligible Loans up to __________ __, ____ [or such later date
as may be agreed to by the Rating Agencies]. Funds on
deposit in the Series 199_-_ Recycling Account shall be used
prior to __________ __, ____ [or such later date as may be
agreed to by the Rating Agencies] solely to acquire
additional Eligible Loans. [If on any Transfer Date, moneys
have remained in the Series 199_-_ Recycling Account for
more than [specify period], said moneys shall be transferred
on such date to the Note Redemption Fund unless (a) the
Aggregate Market Value of the Trust Estate 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 Note Counsel, in which case said moneys shall remain in
the Series 199_-_ Recycling Account for a period of up to
one additional year, but in no event later than __________
__, ____ or such other date as may be approved by the Rating
Agencies.]
[If moneys in the Revenue Fund are insufficient to make
certain payments or distributions therefrom (relating
generally to interest payments, redemption amounts and
certain losses), the remaining insufficiency may be funded
from transfers from the Student Loan Fund after application
of amounts available to be transferred thereto from the Note
Redemption Fund, the Student Loan Holding Fund and the
Reserve Fund. On __________ __, ____, or such later date as
may be approved by the Rating Agencies, all moneys remaining
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<PAGE>
in the Series 199_-_ Recycling Account of the Student Loan
Fund shall be transferred to the Note Redemption Fund.]
[RESERVE FUND] [The sum of $__________ will be deposited into the Reserve
Fund on the Date of Issuance of the Series 199_-_ 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 199_-_ Notes and all Series then
Outstanding shall be the greater of an amount equal to
[_____% of the aggregate principal amount of all Series then
Outstanding or $__________].]
[LETTER OF CREDIT] [On the Date of Issuance of the Series 199_-_ Notes, there
will be issued an irrevocable [standby] [direct pay] letter
of credit (the "Letter of Credit") issued by [Name of Bank]
in favor of the Trustee, on behalf of the holders of the
[designate Classes of Notes]. The initial Letter of Credit
will expire no earlier than ______. The initial Letter of
Credit is designed to help protect such Noteholders against
losses on the Financed Eligible Loans to the maximum of the
stated amount of the Letter of Credit.
The drawing to be made on the Letter of Credit with respect
to any Interest Payment Date will be the lesser of (a) the
excess, if any, of the amount required to make distributions
to the holders of the [designate Classes of Notes] [and to
pay [describe fees] on such Interest Payment Date, over the
amount on deposit in the [Revenue Fund] and (b) the stated
amount of the Letter of Credit with respect to such Interest
Payment Date. On the _________ Business Day preceding each
Interest Payment Date, the Trustee will draw on the Letter
of Credit with respect to deficiencies in the amount of
interest received on the Financed Eligible Loans as compared
to the amount of interest required to be paid to the
[designate Class of Noteholders] on the related Interest
Payment Date and any shortfall in the amounts required to
pay the fees of the [Servicer [describe other [persons]].
The stated amount of the Letter of Credit on the first
Interest Payment Date will be __% of the aggregate initial
principal amount of the [Class A Notes] [Financed Eligible
Loans] [$__________]. The amount available under the Letter
of Credit on any subsequent Interest Payment Date will be
reduced by the prior cumulative draws under the Letter of
Credit. See "Credit Enhancement--The Letter of Credit"
herein and "Description of Credit Enhancement--Letter of
Credit" in the Prospectus.
[NOTE GUARANTEE
INSURANCE] [On the Date of Issuance of the Series 199_-_ Notes, there
will be issued Note Guarantee Insurance issued by [Name of
Insurer] in favor of the Trustee, on behalf of [designate
Class of Noteholders]. The Note Guarantee Insurance will be
in force so long as the [designate Class of Noteholders] are
outstanding.
S-10
<PAGE>
Drawings will be made by the Trustee on the Note Guarantee
Insurance with respect to any Interest Payment Date in an
amount equal to the lesser of (a) __________ and (b)
__________ for the purpose of [described insurance use
terms].
The Note Guarantee Insurance will be in an amount equal to
____% of the aggregate initial principal amount of the
[[Class A] Notes] [Financial Eligible Loans] [$__________].
[The amount available under the Note Guarantee Insurance
will be reduced by the prior cumulative draws under the
policy.] See "Credit Enhancement--Note Guarantee Insurance"
herein and "Description of Credit Enhancement--Note
Guarantee Insurance and Surety Bonds" in the Prospectus.]
SUBORDINATED NOTES The rights of the Class B Noteholders [and Class C
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. The rights of the Class C Noteholders to
receive payments with respect to Financed Eligible Loans
will be subordinated to such rights of the Class B and Class
A Noteholders to the extent described below. This
subordination is intended to enhance the likelihood of
regular receipt by the Class B and Class A Noteholders of
the full amount of scheduled monthly payments of principal
and interest due them and to protect the Class B and Class A
Noteholders against losses.
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 [and Class C
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 [and Class C Notes]. [The protection afforded the
Class B Noteholders by the subordination feature will be
effected by the preferential right of the Class B
Noteholders to receive, before any distributions to the
Class C Noteholders, current distributions from the Trust
Estate and, if necessary, by the right of such holders to
receive distributions that would otherwise have been payable
to the Holders of Class C Notes.] The Class B Notes [Class C
Notes] are then entitled to the available amounts, if any,
remaining in the Trust Estate and allocated to such Holders
after distributions due to the Holders of the Class A Notes
[and Class B Notes.] See "Description of Credit
Enhancement-Subordinates Notes" in the Prospectus.
S-11
<PAGE>
[DEFINITIVE NOTES] [The [designate Classes] Notes will be evidenced by
definitive Notes registered in the name or names of the
holders thereof or their nominee.]
[PRINCIPAL BALANCE
OF NOTES EXCEEDS
AGGREGATE PRINCIPAL
BALANCE OF FINANCED
ELIGIBLE LOANS] [On the Date of Issuance, the aggregate principal amount of
the Offered Notes and all Notes then Outstanding will be
approximately ___.__% of 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. Each Eligible Loan acquired from proceeds
deposited in the Series 199_-_ Loan Account of the Student
Loan Fund will be purchased by the Issuer for an amount not
to exceed ___.__% of the principal balance thereof
(including any accrued interest thereon expected to be
capitalized upon repayment) as of the related Cutoff Date.
In addition, Eligible Loans acquired during the recycling
period may be purchased by the Issuer for an amount
exceeding the principal balance thereof. 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
TAX CONSEQUENCES The [Series 199_-_ Notes] [designate Classes of Notes] will
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 the [Series 199_-_ Notes]
[designate Classes of Notes] will be required to include in
income interest on such [Series 199_-_ Notes] [designate
Classes of 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.
ERISA CONSIDERATIONS
Assuming that the [Series 199_-_ Notes] [designate Classes
of Notes] should be treated as indebtedness without
substantial equity features under the plan asset regulations
(as set forth in 29 C.F.R. ss. 2510.3-101) issued by the
Department of Labor, the Series 199_-_ Notes are eligible
for purchase by or on behalf of employee benefit plans,
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<PAGE>
retirement arrangements, individual retirement accounts and
Keogh Plans, subject to certain consideration discussed
under "ERISA Considerations" in the Prospectus.
RATINGS It is a condition to the issuance of the Series 199_-_ Notes
that the [Class A-_ Notes and Class A-_ Notes] each be rated
no less than "_____" and "_____" by [rating agency] and
[rating agency], respectively, and that the Class B-_ Notes
be rated no less than "_____" by [rating agency] [and that
the Class C-_ Notes be rated no less than "_____" by [rating
agency]]. [rating agency] and [rating agency] are
collectively referred to herein as the "Rating Agency." See
"Rating" in the Prospectus.
S-13
<PAGE>
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Prospectus, including those concerning the Issuer's
expectations as to its ability to purchase eligible student loans, to structure
and to issue competitive securities, and certain of the information presented in
this Prospectus, constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. As such, actual results may
vary materially from such expectations. For a discussion of the factors which
could cause actual results to differ from expectations, please see the caption
entitled "Risk Factors".
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, as well as the Series 199_-_ Notes being offered by means of
this Prospectus Supplement and the attached Prospectus.
Original Outstanding
Principal Principal Amount Maturity
Series Class Date Issued Amount (As of ________, 199_) Date
- -------------------
(*) Defeased and no longer Outstanding.
[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 __________
__, ____, the Financed Eligible Loans in repayment by principal balance pledged
to the Trustee as collateral for the outstanding Notes had delinquencies as
follows: $__________ was 30 to 59 days delinquent; $__________ was 60 to 89 days
delinquent; $__________ was 90 to 119 days delinquent; and $__________ was 120
to 179 days delinquent. As of __________ __, ____, there were $__________ of
Financed Eligible Loans in claim status with a Guarantee Agency. As of
__________ __, ____, the cumulative amount of Net Losses by principal balance of
the Financed Eligible Loans was $__________.]
<TABLE>
<CAPTION>
[The following fees are payable (per annum) with respect to the Prior
Notes previously issued:
Trustee Servicing Auction Broker Dealer Calculation Agent Maintenance and
Series Fee Fee Agent Fees Fees Fees Operating Expenses
------ --- --- ---------- ---- ---- ------------------
<S> <C> <C> <C> <C> <C> <C>
199__ % (1) $_______(2) .__%(2) $_____ per annum(3) .18%
199__ % (1) $_______(2) .__%(2) $_____ per annum(3) .18%
- ---------------
(1) __.__% per annum for Financed Eligible Loans in school, grace, deferment and
forbearance and __.__% for Financed Eligible Loans in repayment.
(2) On Auction Rate Notes only.
(3) On Treasury Rate Notes only.
</TABLE>
S-14
<PAGE>
As of the date hereof, all fees and expenses due and payable on each
Series specified above [have been] paid in full.]
[CREDIT ENHANCEMENT]
[NOTE GUARANTEE INSURANCE]
[Subject to the limitations described under "Description of Credit
Enhancement--Notes Guarantee Insurance and Surety Bonds" in the Prospectus, the
[Issuer] will obtain Note Guarantee Insurance for the [Class A] Notes which will
guarantee timely payments of interest and payments of principal. Principal
payments will be guaranteed by the Guarantee Insurance Provider on the following
basis:
[Describe terms of guarantee]
The amount of the Note Guarantee Insurance on the Date of Issuance will
be [____]% of the aggregate initial principal amount of the [Class __ Notes]
[Financed Eligible Loans]. The amount available under the Note Guarantee
Insurance policy on any subsequent Interest Payment Date will be [the initial
amount minus the sum of the prior cumulative claims under the policy] [[____]%
of the then existing principal amount of the [Class __] [Notes] [Financed
Eligible Loans]].
The Guarantee Insurance Provider is [Name of Guarantee Insurance
Provider] [which is a member of [Name of insurance group]. The claims paying
ability of the [Name of Guarantee Insurance Provider] [Name of insurance group]
is rated "____" by the [Name of rating agency]].
The address of the Guarantee Insurance Provider is [address].]
[RESERVE FUND]
[The Reserve Fund is currently funded in an amount equal to __% 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 __%
of the principal balance of the Series 199_-_ Notes. 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 Note Redemption Fund or the Student Loan
Holding Fund are not sufficient to pay amounts due and payable to the Class A
Noteholders and the Class B Noteholders and the Class C Noteholders. After the
Cutoff Date, the Reserve Fund shall be maintained at the greater of $__________
or __% of the aggregate principal amount of all Series then Outstanding.]
[LETTER OF CREDIT]
[The Letter of Credit will initially be an irrevocable [standby] [direct
pay] letter of credit issued by [Name of Bank] (the "Issuing Bank"). The initial
Letter of Credit will expire no earlier than __________. The Letter of Credit
will protect [Class __] Noteholders against losses on Financed Eligible Loans to
the maximum of the stated amount of the Letter of Credit.
The amount of the Letter of Credit on the Date of Issuance will be
[__]% of the aggregate initial principal amount of the [Class __ Notes]
[Financed Eligible Loans]. The amount available under the Letter of Credit on
any subsequent Interest Payment Date will be equal to this initial amount minus
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<PAGE>
the sum of the prior cumulative draws under the Letter of Credit to cover any
shortfall between in the amounts payable to the [Class __] Noteholders [and the
Class __ Noteholders].
The Issuer will be required to renew or replace the Letter of Credit
before its expiration until the [designate Class] Series 199_ Notes are no
longer outstanding. If the Issuer does not renew or replace a letter of credit,
the [Trustee], before the expiration of the then existing Letter of Credit, will
draw under such Letter of Credit an amount equal to the full amount available
thereunder on such date and will transfer such funds to a separate trust fund.
Thereafter, the [Trustee] will be entitled to withdraw such funds on each
Interest Payment Date if and to the extent draws would have been required under
the Letter of Credit.
[The long-term debt of the Issuing Bank is rated "____" by [Name of
Rating Agency] [and "____" by [Name of Rating Agency]]. For the year ended [end
of fiscal year], the Issuing Bank reported total assets of $__________, total
deposits of $__________ and total capital and reserves of $__________. Upon
request therefore, a copy of the Annual Report of [Name of Issuing Bank] may be
obtained [without charge] from [Name of Issuing Bank] at [address].]
S-16
<PAGE>
CHARACTERISTICS OF THE
FINANCED ELIGIBLE LOANS*
COMPOSITION OF THE FINANCED ELIGIBLE LOANS AS OF THE CUTOFF DATE
Aggregate Outstanding Principal Balance............................ $
Number of Borrowers................................................
Average Outstanding Principal Balance Per Borrower................. $
Number of Loans....................................................
Average Outstanding Principal Balance Per Loan..................... $
Approximate Weighted Average Remaining Term (months)
(does not include school, grace, deferment or forbearance).......
Weighted Average Borrowed Interest Rate............................ %
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY LOAN TYPE
Outstanding Percent of Loans
Number of Principal by Outstanding
Loan Types Loans Balance Balance
--------------- ----------- ------------ -----------------
$ %
--------- ------- -------
Total $ %
========== ======== ========
- --------
* Includes all Financed Eligible Loans pledged to the Trustee on the
Cutoff Date as well as estimated information concerning the additional
Financed Eligible Loans expected to be pledged to the Trustee on the
Date of Issuance of the Series 199_-_ Notes.
S-17
<PAGE>
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY INTEREST RATE
Outstanding Percent of Loans
Number of Principal by Outstanding
Interest Rate Loans Balance Balance
------------- ----- ------- -------
$ %
--------- ---------- -------
Total $ %
========= =========== =======
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY SCHOOL TYPE
Outstanding Percent of Loans
SCHOOL Number of Principal by Outstanding
TYPE Loans Balance Balance
---- ----- ------- -------
$ %
2-Year
4-Year
Proprietary
Consolidation
[Others]
--------- ------- -------
Total $ %
========= ======= =======
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY BORROWER PAYMENT STATUS
Outstanding Percent of Loans
Borrower Number of Principal by Outstanding
Payment Status Loans Balance Balance
Claim Deferment $ %
Grace
School
Repayment
First Year Repayment
Second Year Repayment
Third Year Repayment
More than 3 years -------- -------- -------
Total $ %
======== ======== =======
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<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS
Outstanding Percent of Loans
Number of Principal by Outstanding
Location(1) Loans Balance Balance
Alabama $ %
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Foreign Country
Georgia
Guam
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Military (Atlantic)
Military (Europe)
Military (Pacific)
Minnesota
Mississippi
Missouri
Montana
North Carolina
North Dakota
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
Ohio
Oklahoma
Oregon
Pennsylvania
Puerto Rico
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Virginia
Virgin Islands
Vermont
Washington
West Virginia
Wisconsin
Wyoming
Other ----------- ----------- ------------
Total $
=========== =========== ============
- ---------------
(1) Based on the permanent billing addresses of the borrowers of the Financed
Eligible Loans shown on the Servicer's records.
S-19
<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 $ %
Post 10/01/93 ----------- ----------- ------------
Total $ %
=========== =========== ============
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY GUARANTEE AGENCY
Percent
Outstanding of Loans by
Guarantee Number of Principal Outstanding
Agencies(1) Loans Balance Balance
[specify guarantors] $ %
----------- --------- ---------
Total $ %
=========== ========= =========
(1) As defined herein under "Certain Information Relating to the Guarantee
Agencies."
S-20
<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 %
$1,000-$1,999
$2,000-$2,999
$3,000-$3,999
$4,000-$4,999
$5,000-$5,999
$6,000-$6,999
$7,000-$7,999
$8,000-$8,999
$9,000-$9,999
$10,000-$10,999
$11,000-$11,999
$12,000-$12,999
$13,000-$13,999
$14,000-$14,999
$15,000 or greater ---------- --------- ---------
Total $ %
=========== =========== =========
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<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 _______ _, 199_ (each,
a "Guarantee Agency" and collectively, the "Guarantee Agencies"). Except as
otherwise indicated below, the information regarding each 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, _____, _____,
_____, ____, _________, _____ and ____ ranked __, __, __, __, _, __ and _,
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
Federal All
Fiscal [specify Guarantee
Year Guarantors] Agencies
---- ----------- ----- ---- ----- ----- ---- ----- ----- --------
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 "original principal amount of
outstanding loans" consists of the original principal amount of
- --------
* The information set forth in the table above has been obtained from the
Federal Fiscal Year 1993 DOE Data Book (with respect to fiscal years
1992 and 1993).
S-22
<PAGE>
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:*
[Guarantor] [Guarantor [Guarantor]
National
Federal Cumulative Cumulative Cumulative Average
Fiscal Cash Reserve Cash Reserve Cash Reserve Reserve
Year Reserves** Ratio Reserves** Ratio Reserves** Ratio Ratio
---- ---------- ----- ---------- ----- ---------- ----- -----
- --------------------
* The information set forth in the table above has been obtained from the
Federal Fiscal year 1993 DOE Data Books (with respect to fiscal years
1992 and 1993). The cash reserves and the reserve ratio increased
substantially between Federal Fiscal Years 1992 and 1993. As described
in the Federal Fiscal Year 1993 DOE Data Book, this difference was
caused, in part, because default costs were decreasing, while insurance
premiums, administrative costs allowances and investment income were
increasing. According to the Department, available cash reserves may not
always be an accurate barometer of a guarantor's financial health.
** Dollars in millions
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:*
- --------
* The information set forth in the table above has been obtained from the
Department.
S-23
<PAGE>
RECOVERY RATE
Federal
Fiscal [specify National
Year Guarantors] Average
---- ----------- ----- ----- ----- ----- ----- ------ -------
- ---------------
*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).
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 19__
through 199_, _____, _____, _____ and _____ 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 Agency were not fully reimbursed by
the Department. No assurance can be made that any of the Guarantee Agency 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 19__ through
199_:*
S-24
<PAGE>
CLAIMS RATE
Federal
Fiscal [specify National
Year Guarantor] Average
---- ---------- ----- ----- ----- ----- ------ ------- -------
- --------------------
* 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
[With respect to federal fiscal year 199_, 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 _____, to [address[; if to _____, to [address]; if to _____, to
[address].
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges
for the Issuer for each of the following periods.
The ratio of earnings to fixed charges has been computed by dividing
earnings by fixed charges. Earnings consist of income from operations before
income taxes plus fixed charges. Fixed charges consist of interest on all
indebtedness plus amortization of debt issuance costs.
Quarter Ended Period from inception
March 31, 1997 (February 28, 1996 to
December 31, 1996
------------------ ------------------
Earnings............................. $8,794,387 $11,424,421
Fixed Charges........................ 8,184,324 12,238,247
Ratio................................ 1.0745 *
* For the period from inception (February 28, 1996) to December 31, 1996,
earnings were inadequate to cover fixed charges by a deficiency of $813,826.
S-25
<PAGE>
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the [Underwriting]
[Placement] Agreement for the sale of the [Series 199_-_ Notes] [designate
Classes of Notes], dated __________, 199_, [and a related Terms Agreement dated
__________, 199_ (collectively, the "Underwriting Agreement")] [the "Placement
Agreement")], the Issuer has agreed to sell and the [Underwriter] [Placement
Agent] has agreed to [purchase] [offer] all the [Series 199_-_ Notes] [designate
Classes of Notes]. [The [Series 199_-_ Notes] [designate Classes of Notes]
initially will be offered by the Underwriter to the public [at the respective
public offering prices set forth on the cover 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 199_-_
Notes] [designate Classes of Notes] may be deemed to be underwriters and any
commissions received by them and any profit on the resale of the [Series 199_-_
Notes] [Class _ Notes] may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended.] [The Placement Agent
has agreed to offer the [Series _-_ Notes] [designate Classes of Notes] on a
"best-efforts-all or none" basis].
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 199_-_
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 199_-_ 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 199_-_ Notes in connection with the offering
than it is committed to purchase, and in such case may purchase Series 199_-_
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 199_-_ 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] [Placement Agent]
against certain liabilities including liabilities under the Securities Act of
1933, as amended [, and the Issuer has agreed to reimburse the [Underwriter]
[Placement Agent] for the fees and expenses of __________ to the [Underwriter]
[Placement Agent].
LEGAL MATTERS
[Certain legal matters will be passed upon for the Issuer by Ballard
Spahr Andrews & Ingersoll, Denver, Colorado. Certain legal and income tax
matters will be passed upon for the Issuer by Kutak Rock, Denver, Colorado.
Certain legal matters will be passed upon for the [Underwriter] [Placement
Agent] by ____________________.
S-26
<PAGE>
[OTHER INFORMATION]
[Describe any applicable update to the description in the Prospectus of
the Higher Education Act, the programs under which the Financed Eligible Loans
are originated and the Issuer.]
S-27
<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 Offered Notes will
be and the Prior Notes (as defined below) are 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 previously issued its Taxable Student Loan
Asset-Backed Notes in transactions exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Private Notes") and pursuant to its
registration statement on Form S-3 filed with the Securities and Exchange
Commission (the "Prior Registered Notes," and together with the Private Notes,
the "Prior Notes"). Notes to be issued by the Issuer in the future under the
Indenture of Trust (the "Indenture"), other than the Offered Notes, are referred
to herein as "Additional Notes." The Offered Notes, the Additional Notes and the
Prior Notes are hereinafter referred to collectively as the "Notes." Each Series
of Notes, including the Offered Notes, will be collateralized by the Trust
Estate pledged to the Trustee. The Prior 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 Offered Notes 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 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.
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 __________, 1997.
<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 (herein, together with all
amendments and exhibits thereto, the "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
Issuer is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports and other information with the Commission. The Registration Statement
and amendments thereof and the exhibits thereto, as well as reports and other
information concerning the Issuer, 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).
The Issuer has filed the Registration Statement relating to the Offered
Notes on Form S-3 under the 1933 Act. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement and the
exhibits filed as a part thereof. Statements contained herein concerning any
document filed as an exhibit to the Registration Statement are qualified in
their entirety by such reference.
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
i
<PAGE>
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 monthly reports concerning the Notes and the Issuer will be
provided to the Noteholders as required by the Indenture. Such periodic monthly
reports concerning the Notes will not be reviewed by a certified public
accounting firm. 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 "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 filing of such documents.
Further, all documents and exhibits filed by or on behalf of the Issuer in
connection with the Issuer's Registration Statement on Form S-3 (File No.
333-08929), filed with the Commission in October 1996, and subsequently amended
and supplemented, shall be deemed to be incorporated by reference in this
Prospectus and to be a part of this Prospectus from the date of filing of such
documents and exhibits. The Issuer has filed with the Commission (i) its Current
Report on Form 8-K dated January 7, 1997 (ii) its Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and (iii) its Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1997. 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..................................................... ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................iii
SUMMARY OF THE OFFERING.................................................... x
Securities Offered................................................. x
Issuer ............................................................ x
Sellers............................................................ x
Servicer and Subservicer........................................... xi
Trustee............................................................ xi
Indenture.......................................................... xi
Trust Estate......................................................xiii
The Financed Eligible Loans.......................................xiii
The Higher Education Act...........................................xvi
Determination of Interest Rates...................................xvii
Principal Payments.................................................xix
Stated Maturity Date...............................................xix
Auction Procedures.................................................xix
Pool Characteristics............................................... xx
Cutoff Date........................................................ xx
Redemption Provisions.............................................. xx
Subordinated Notes................................................xxiv
Additional Parity Notes...........................................xxiv
Sales and Repurchases of Certain Eligible Loans....................xxv
Funds and Accounts.................................................xxv
Credit Enhancement................................................xxix
Registration of Notes.............................................xxix
Certain Federal Income Tax Consequences...........................xxix
ERISA Considerations...............................................xxx
Ratings............................................................xxx
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
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Perfection of Security Interest in Financed Eligible Loans......... 3
Certain Insolvency Concerns........................................ 4
Changing Assets of the Trust Estate................................ 5
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
Reauthorization; Appropriation..................................... 8
Changes in Legislation............................................. 8
The Financed Eligible Loans and the Student Loan Fund.............. 9
Issuance of Additional Notes....................................... 10
Maturity and Prepayment Assumptions................................ 10
Basis Risk......................................................... 11
Certain Legal Aspects.............................................. 11
Book-Entry Registration............................................ 13
Repurchase of Financed Eligible Loans.............................. 13
Ratings of the Notes............................................... 13
DESCRIPTION OF THE NOTES................................................... 14
General............................................................ 14
Auction Rate Notes................................................. 14
LIBOR Rate Notes................................................... 15
Treasury Rate Notes................................................ 16
Accrual Notes...................................................... 17
Principal Payments of the Notes.................................... 18
Mandatory Redemption............................................... 18
Optional Redemption................................................ 19
Extraordinary Optional Redemption.................................. 20
Optional Purchase.................................................. 20
Notice and Partial Redemption of Notes............................. 20
Accelerated Maturity of Notes...................................... 21
SECURITY AND SOURCES OF PAYMENT FOR THE NOTES.............................. 22
General............................................................ 22
Funds and Accounts and Flow of Revenues............................ 22
Student Loan Fund.................................................. 26
Revenue Fund....................................................... 27
Reserve Fund....................................................... 30
Interest Fund...................................................... 32
Note Redemption Fund............................................... 33
Student Loan Holding Fund.......................................... 36
Cost of Issuance Fund.............................................. 36
v
<PAGE>
Operating Fund..................................................... 36
General Fund....................................................... 37
Investment of Funds Held by Trustee................................ 38
Release............................................................ 39
CERTAIN DEFINITIONS AND PROVISIONS RELATED TO AUCTION RATE
NOTES AND AUCTION PROCEDURES....................................... 39
Auction-Related Definitions........................................ 39
Summary of Auction Procedures...................................... 46
Auction Procedures................................................. 48
Auction Note Interest Rate......................................... 52
AUCTION RATE NOTE SETTLEMENT PROCEDURES.................................... 68
CERTAIN DEFINITIONS AND PROVISIONS RELATED TO LIBOR RATE
NOTES.............................................................. 71
LIBOR-Related Definitions.......................................... 71
Interest on LIBOR Rate Notes....................................... 74
Payments........................................................... 75
Notice of Payment Defaults and Cures............................... 75
Calculation of Rates; Termination of Book-Entry System............. 75
Computation of Interest............................................ 76
Notification of Rates, Amounts and Payment Dates................... 76
Calculation Agent.................................................. 77
Credit Ratings..................................................... 77
Notice ............................................................ 78
Notice of Payment Default.......................................... 78
BOOK-ENTRY REGISTRATION.................................................... 78
ADDITIONAL NOTES........................................................... 80
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE............................. 81
Parity of Lien..................................................... 81
Other Obligations of the Issuer.................................... 82
Pledge for Payment................................................. 82
Representations and Warranties of the Issuer....................... 82
Covenants as to Additional Conveyances............................. 83
Further Covenants of the Issuer.................................... 83
Servicing Agreement................................................ 85
Procedures for Transfer of Funds................................... 85
Additional Covenants with Respect to the Higher Education Act...... 85
Student Loans; Collections Thereof; Assignment Thereof............. 86
Appointment of Agents.............................................. 86
vi
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Capacity to Sue.................................................... 86
Certain Matters Relating to Bankruptcy............................. 86
Events of Default.................................................. 87
Remedies on Default................................................ 88
The Trustee........................................................ 93
Supplemental Indentures............................................100
Satisfaction of Indenture..........................................102
SELLER REPRESENTATIONS AND WARRANTIES......................................104
The Sellers........................................................104
Representations and Warranties-Portfolio Characteristics...........105
Representations and Warranties-Eligible Loans......................105
Repurchase Obligation of Seller....................................108
DESCRIPTION OF CREDIT ENHANCEMENT..........................................109
General............................................................109
Subordinate Notes..................................................110
Letter of Credit...................................................110
Note Guarantee Insurance and Surety Bonds..........................111
Reserve Fund.......................................................111
THE ISSUER.................................................................112
THE ISSUER'S STUDENT LOAN PURCHASE PROGRAM.................................115
The Issuer's Student Loan Purchase Agreement.......................115
Servicing of Financed Eligible Loans...............................115
The Servicing Agreements...........................................116
UNIPAC ............................................................117
DESCRIPTION OF THE FEDERAL FAMILY EDUCATION LOAN PROGRAM...................117
The Federal Family Education Loan Program..........................117
Subsidized Federal Stafford Loans..................................118
Unsubsidized Federal Stafford Loans................................121
Special Allowance Payments.........................................122
Federal PLUS and Federal SLS Loan Programs.........................123
The Federal Consolidation Loan Program.............................125
Federal Insurance and Reimbursement of Guarantee Agencies..........126
Reimbursement......................................................128
The Guarantee Agreement............................................128
Higher Education Amendments of 1992................................129
1993 Amendments to the Federal Family Education Loan Program.......130
Updates............................................................134
vii
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GUARANTEE AGENCIES.........................................................135
General............................................................135
Other Guarantee Agencies...........................................136
WEIGHTED AVERAGE LIFE OF THE NOTES.........................................136
CERTAIN FEDERAL INCOME TAX CONSEQUENCES....................................137
Characterization of the Trust Estate...............................138
Characterization of the Notes as Indebtedness......................138
Taxation of Interest Income of Registered Owners...................139
Backup Withholding.................................................140
Limitation on the Deductibility of Certain Expenses................141
Tax-Exempt Investors...............................................141
Sale or Exchange of Notes..........................................141
ERISA CONSIDERATIONS.......................................................142
CERTAIN RELATIONSHIPS AMONG FINANCING PARTICIPANTS.........................143
PLAN OF DISTRIBUTION.......................................................144
LEGAL MATTERS..............................................................145
FINANCIAL INFORMATION......................................................145
RATINGS ...................................................................145
INDEX TO AND GLOSSARY OF CERTAIN TERMS.....................................147
Index to Defined Terms.............................................147
Glossary of Terms..................................................148
APPENDIX I-FORM OF MASTER PURCHASER'S LETTER...............................I-1
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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 and the Prior Notes that are designated as
Class B Notes (the "Class B Notes") are subordinated in
certain respects to the Offered Notes and the Prior Notes
that are 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 (other than the Offered Notes) are referred to
herein as "Additional Notes." The Offered Notes, the
Additional Notes and the Prior 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 Prior 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 pursuant
to which the Seller has sold Financed Eligible Loans to the
Issuer. The Issuer will only acquire Financed Eligible Loans
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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 Prior Notes have been and the Offered Notes will be
issued pursuant to an Indenture of Trust, an Amended and
Restated Indenture of Trust and a Second 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"), consisting of $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"), consisting of $73,700,000 of its Senior
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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 LIBOR
Rate Class B-2 Notes (the "Class B-2 Notes"). The Class B
Notes and the Class B-2 Notes were defeased on March 20,
1997, and are no longer Outstanding under the Indenture. The
Issuer has previously issued the Notes designated as its (i)
Taxable Student Loan Asset-Backed Notes, Series 1996C (the
"Series 1996C Notes"), consisting of $225,000,000 of its
Senior Treasury Rate Class A-5 Notes (the "Class A-5
Notes"), $75,500,000 of its Senior Auction Rate Class A-6
Notes (the "Class A-6 Notes") and $15,600,000 of its
Subordinate LIBOR Rate Class B-3 Notes (the "Class B-3
Notes"), and (ii) Taxable Student Loan Asset-Backed Notes,
Series 1997A (the "Series 1997A Notes"), consisting of
$30,800,000 of its Subordinate Class 1997 B-4 LIBOR Rate
Notes (the "Class B-4 Notes"). The Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5 and Class A-6 Notes,
together with any Notes issued with respect to a Series of
Offered Notes before the date of a Prospectus Supplement
which are designated as Class A Notes are collectively
referred to herein as the "Prior Class A Notes," and the
Class B-3 and Class B-4 Notes, together with any Notes
issued with respect to a Series of Offered Notes before the
date of a Prospectus Supplement 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 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
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otherwise specified with respect to a Series, will be
designated as Class C Notes.
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.
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 the Reserve Fund and
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, the Series 1996A Notes, the Series 1996B
Notes and the Series 1996C Notes, and the date specified in
the related Prospectus Supplement with respect to the
Offered Notes (the "Student Loan 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
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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 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 pool of
Eligible Loans acquired by the Issuer from proceeds of
Offered Notes with respect to each Series, no more than 15%
of each such pool of Eligible Loans shall be 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
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<PAGE>
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 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.
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<PAGE>
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
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
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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
occur if a Guarantee Agency fails to meet its obligations.
In addition, failure to properly originate or service an
Eligible Loan can cause an Eligible Loan to lose it
guarantee. 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
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<PAGE>
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 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
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<PAGE>
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
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."
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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
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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 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"). See "Description of the
Notes-Notice and Partial Redemption of Notes" herein.
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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 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.
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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.
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
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Student Loan Fund with respect to such Series until April 1,
1999 with respect to the Series 1996A Notes, the Series
1996B Notes and the Series 1996C Notes, and with respect to
the Offered Notes, until the date specified in the related
Prospectus Supplement. 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 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
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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 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
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(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.
If moneys in the Revenue Fund are insufficient to make
certain distributions therefrom (relating generally to
interest payments, redemption amounts and certain losses),
the remaining insufficiency may be funded from transfers
from the Student Loan Fund, but only after application of
amounts available to be transferred 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.
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
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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.
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
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<PAGE>
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 ss. 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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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 (except to the extent that
credit enhancement is provided for a Series or Class of Notes as described in a
Prospectus Supplement). 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 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
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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 Junior Subordinate Notes 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
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PAY PRINCIPAL AND INTEREST ON THE NOTES. SEE "DESCRIPTION OF THE FEDERAL FAMILY
EDUCATION LOAN PROGRAM" HEREIN.
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 will agree 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. Each Student Loan Purchase Agreement further
provides that the related Seller shall be obligated to repurchase Financed
Eligible Loans under certain circumstances. No assurance can be given that the
Issuer will be able to acquire Eligible Loans in the amount desired, with
similar characteristics or at comparable prices from sources other than the
Sellers, in the event that the Sellers are 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.
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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 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
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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."
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
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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.
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.
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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 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 Offered 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. 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 the Cutoff Date. In addition, Eligible Loans
acquired during the recycling period may be purchased by the Issuer for an
amount exceeding the principal balance thereof. 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
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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
processing standards no more stringent than those of the Guarantee Agency. See
"Description of the Federal Family Education Loan Program" herein.
REAUTHORIZATION; APPROPRIATION
The Department's authority to provide interest subsidies and Federal
insurance for loans originated under the Higher Education Act terminates on a
date specified in the Higher Education Act. The Higher Education Act Amendments
of 1992 extended the principal provisions of the Federal Family Education Loan
Program (the "FFEL Program") to loans made on or before September 30, 1998
(except that loans may continue to be made through September 30, 2002 to enable
a student who has obtained a prior loan to continue his or her education
program). While Congress has consistently extended the effective date of the
Higher Education Act and the FFEL Program, there can be no assurance that the
Department's ability to provide interest subsidies and Federal insurance for
loans will be reauthorized for the period beginning October 1, 1998. Such a
failure of reauthorization would reduce the number of Eligible Loans available
for purchase by the Issuer under its student loan purchase program.
The availability of interest subsidies and various other Federal
payments under the FFEL Program is subject to Federal budgetary appropriation.
In recent years, Federal budget legislation has contained provisions that
restricted federal payments made under the FFEL Program to achieve reductions in
federal spending. There can be no assurance that future federal budget
legislation will not adversely affect expenditures by the Department or the
Secretary, or the financial condition of the Guarantee Agencies.
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.
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
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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 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 condition, among others, that each
such additional Eligible Loan satisfy the eligibility criteria specified in the
applicable Student Loan Purchase Agreement. 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, will
have certain pool characteristics described in the Prospectus Supplement. See
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"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
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 or Servicing 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
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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 of such funds (such as certain
administrative expenses), causing payment of 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
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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 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
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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.
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.
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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. Prior to the authentication and delivery of any Series
of Notes, the Issuer must deliver a resolution to the Trustee which has been
certified by the Secretary or other Authorized Officer of the Issuer, deliver a
written order to the Trustee, execute any necessary supplements to the Indenture
and deliver any other documents, instruments and certificates required by the
Indenture. The Indenture has been filed as an exhibit to the Issuer's
Registration Statement.
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 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
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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 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
15
<PAGE>
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
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,
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<PAGE>
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 the T-Bill Rate. The T-Bill Rate will generally be adjusted weekly on
the calendar day following each auction of direct obligations of the United
States with a maturity of 13 weeks ("91-day Treasury Bills") and will 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 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
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<PAGE>
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 (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
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<PAGE>
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 prior 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.
Certain Classes of the Prior Notes are not subject to optional redemption prior
to dates specified in the Indenture. Any limitations on optional redemptions of
the Offered Notes of any Series will be described in the Prospectus Supplement
related to such Series. 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 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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<PAGE>
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
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<PAGE>
Owner of any Note being redeemed or purchased, and to the Auction Agent with
respect to the Auction Rate Notes, designated for 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. Any moneys transferred to the
Note Redemption Fund and not specifically required to be deposited to any
Account therein will be deposited in the Senior Note Redemption Account of the
Note Redemption Fund unless the Trustee receives an Issuer Order as described
below. 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 (I) 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 THE
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, AND (II) 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
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<PAGE>
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 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,
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<PAGE>
(c) Reserve Fund,
(d) Interest Fund, including a Senior Interest Account, a Sub-
ordinate Interest Account and a Junior-Subordinate Interest Account
therein,
(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, the Series 1996B Notes and
the Series 1996C 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.
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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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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Revenue Received by Trustee Subsequent to Date of Issuance
(Principal and Interest Received on Financed Eligible Loans)
- ------------------------------
| Student Loan ---------------------------------- Principal Received on Financed
| Holding Fund | | Eligible Loans (allocated by
- ------------------------------ Series)
|Interest Received on ----------------------------------
|Financed Eligible Loans ----- Student Loan Fund -----------------
(Not Allocated by Series) | |
- ------------------------------ | ---------------------------------- |
| Revenue Fund | | | |Principal |
- ------------------------------ | Financed | Original Note |Received on |
TRANSFERS | Eligible | Proceeds Used to |Financed |
| Loan Notes | Purchase identified |Eligible Loans |
- ------------------------------ | | Eligible Loans on |Used to Purchase|
| Pay Program Expenses* | | | Date of Issuance |Additional |
| (as due) | | | for each Series |Eligible Loans |
- ------------------------------ | | or as specified in |Prior to End of |
| | the Prospectus |Recycling |
- ------------------------------ | | Supplement |period for |
| Interest Fund | each Series |
| (non-Transfer Dates) | ------------------- ------------------- ------------------- |
- ------------------------------ | Note Account | | Loan Account | | Recycling | |
ON TRANSFER DATES | | | | | Account | |
- ------------------------------ ------------------- ------------------- ----------------- |
| Estimated Amount to | |
| Operating Fund | --------------------------------------------------^ |
| (to pay Maintenance and | | |
| Operating Expenses) | | |
- ------------------------------ | Principal Received on |
| Financed Eligible Loans |
- ------------------------------ | after End of Recycling |
| Note Redemption Fund | | Period for each Series |
|(if deficiency exists in | ---------------------------------
|amounts to pay Noteholders | |
| Principal when due) | | | ----------------------------------
- ------------------------------ --------------- Note Redemption Fund ------
| |
- ------------------------------ | | ---------------------------------------- |
| Net Losses | | | | | |
|(to Recycling Account or, | | | |
|after Recycling Period, to | | | | | |
| the Note Redemption Fund) | | | | | |
- ------------------------------ | | ------------------------- | |
| Senior Note | | |
- ------------------------------ | | | Redemption Account | | |
| Reserve Fund | | | | (to pay principal on | | |
| (to fund any shortfall) | | | | Senior Notes when due)| | |
- ------------------------------ | | ------------------------- |
| | ^ ------------------------ |
- ------------------------------ | | | | Subordinate Note | |
| Senior Note Redemption | | | | | Redemption Account | |
| Account ----------- | (to pay principal on| |
| (until parity reached) | | | | Subordinate Notes | |
- ------------------------------ | | | when due) | |
| | ------------------------
- ------------------------------ | | -----------------------------
| Recycling Account | | ^ | Junior-Subordinate |
|(prior to End of Recycling ----- | Note Redemption Account |
| at option of the Issuer) | | | (to pay principal on |
- ------------------------------ | | Junior-Subordinate |
| | Notes when due) |
- ------------------------------ | -----------------------------
| Note Redemption Fund | ^
|(after End of Recycling at ---
| option of the Issuer) |
- ------------------------------
- ------------------------------
| General Fund |
|(for account of the Issuer) |
- ------------------------------
- ---------------
*Program Expenses include fees and expenses of the Servicer, Subservicer,
Trustee, Auction Agent, Broker-Dealer, Calculation Agent and Rating Agencies,
and other expenses of the Trust Estate (other than Maintenance and Operating
Expenses).
</TABLE>
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<PAGE>
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 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
"-Revenue Fund" below, other than clauses (k) through (l) under "-Revenue Fund"
below, then, but only after required transfers from the Note Redemption Fund and
the Student Loan Holding 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
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 Senior Notes
coming due on such Transfer Date (if such Transfer Date is a Stated Maturity) if
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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.
If the Reserve Fund is used for the purposes described in the paragraph
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.
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.
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 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 Recycling Account designated with respect to any Series of the
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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 any other
Account of the Interest Fund, from 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, from the Student Loan Holding Fund, from the Reserve Fund
and from Accounts in the Student Loan Fund (in the order provided under
"-Student Loan Fund" above). 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
(after first making any required transfers from the Senior Interest Account),
from the Junior-Subordinate Note Redemption Account of the Note Redemption Fund,
if any, the Subordinate Note Redemption Account of the Note Redemption 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). The money in the Subordinate Interest Account of the Interest Fund
required for the 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.
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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 (after first making any required transfers from the
Senior Interest Account and the Subordinate Interest Account) from the
Junior-Subordinate Note Redemption Account of the Note Redemption 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). 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 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.
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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 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
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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 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.
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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
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required to pay expected Maintenance and Operating Expenses, the Issuer may
direct the Trustee by Issuer Order to transfer additional amounts from 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.
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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 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.
"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:
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(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 a
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.
"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."
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"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.
"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
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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."
"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.
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"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 "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
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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; 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
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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.
"SUBMITTED BID" has the meaning set forth under "-Auction Procedures."
"SUBMITTED HOLD ORDER" has the meaning set forth under "-Auction
Procedures."
"SUBMITTED ORDERS" 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.
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"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.
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
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(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
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
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Order Number Cumulative Order Number of Cumulative
Number of Units Total (Units) Percent Number Units Total (Units) Percent
- ------ -------- ------------- ------- ------ ----- ----------- -------
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%
(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.
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.
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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 NonPayment 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 NonPayment 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.
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.
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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.
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
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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 Carryover 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.
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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
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
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;
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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 Out-
standing 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.
(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 Out-
standing Auction Rate Notes specified in
such Sell Order; or
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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
c. the principal amount of Auction
Rate Notes,if any, subject to any Sell Order
placed by such Existing Owner;
and
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(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.
(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);
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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 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
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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
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
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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;
(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
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(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
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
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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 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
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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.
(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
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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 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.
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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 NonPayment 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
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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.
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.
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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 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
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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
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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.
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
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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
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;
(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
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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 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
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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
(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
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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.
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
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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:
Bond Equivalent Yield = Q X N 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.
"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.
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"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., New York City time on such LIBOR
Determination Date by three major banks in New York, New York selected by (x)
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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.
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.
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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 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
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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
(ii) advise the Depository, so long as the ownership of
the LIBOR Rate Notes of any Class is maintained in book-entry
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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.
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.
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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
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
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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 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.
DTC's practice is to credit Direct Participant's accounts on the due date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on the due date. 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
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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.
(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
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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.
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.
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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.
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
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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 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.
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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 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
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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
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
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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.
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.
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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 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:
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(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 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
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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 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
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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, 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.
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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
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
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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 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
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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 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.
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(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 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
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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 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.
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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.
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
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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.
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.
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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 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
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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 (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.
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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, 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:
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(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;
(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,
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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.
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
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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 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 Corporation
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
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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 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 approximately $542 million prior to the date hereof with
the proceeds of Prior 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."
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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."
REPRESENTATIONS AND WARRANTIES-
PORTFOLIO 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 will be described in the
Prospectus Supplement of such Series. Each Student Loan Purchase Agreement with
respect to a Seller will contain portfolio characteristic requirements
applicable to the Financed Eligible Loans acquired thereunder at the respective
dates of acquisition.
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:
(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
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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.
(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
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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 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,
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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
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
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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.
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
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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
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
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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 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.
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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."
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.
Directors are required to be elected at each annual meeting of the shareholders.
The present directors and their addresses and principal occupations or
affiliations are as follows:
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<TABLE>
<CAPTION>
Principal Officers and
Other Occupation Directors Term
Name of Director Offices Held Age Address or Affiliation From To*
---------------- ------------ --- ------- -------------- ---- --
<S> <C> <C> <C> <C> <C> <C>
Michael S. Dunlap Chairman 33 4732 Calvert Street Executive Vice February Present
Lincoln, Nebraska 68506 President of 1996
Union Bank and
Trust Company
Stephen F. President 44 6991 East Camelback President of February Present
Butterfield Road, Suite B290 Union Financial 1996
Scottsdale, Arizona 85251 Services, Inc.
Ronald W. Page Vice 48 3015 S. Parker Road Senior Vice February Present
President, Aurora, CO 80014 President of 1996
Treasurer and Union Financial
Secretary Services, Inc.
Ross Wilcox -- 54 4732 Calvert Street Chief Executive February Present
Lincoln, Nebraska 68506 Officer of Union 1996
Bank and Trust
Company
Dr. Paul R. Hoff -- 62 Hernia Hill, Rural Route Retired February Present
Seward, Nebraska 68434 Physician 1996
</TABLE>
- -------------
(*) Each director holds office until the next annual meeting of shareholders
following his or her election until such director's successors shall
have been elected and qualified. The Issuer held its first annual
shareholders meeting on March 20, 1997.
The Board of Directors and executive officers 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.
MICHAEL S. DUNLAP, CHAIRMAN OF THE BOARD. As the Chairman of the Board
of Directors, 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
is also a director of Stratus Fund, Inc., Comprehensive Assistance in Student
Lending Corporation, Union Bank and Trust Company, Union Financial Services,
Inc., Union Financial Services-2, Inc., UNIPAC and various other organizations.
Mr. Dunlap received a Bachelor of Science degree in finance and accounting and a
Juris Doctor degree from the University of Nebraska.
STEPHEN F. BUTTERFIELD, PRESIDENT AND DIRECTOR. As 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 the Issuer's 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.
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Prior to his work in the student loan industry, Mr. Butterfield spent 15 years
as an investment banker specializing in municipal finance. Mr. Butterfield is a
director of Outdoor Systems, Inc. Union Financial Services-2, Inc. and
Comprehensive Assistance in Student Lending Corporation. Mr. Butterfield
received a Bachelor of Science degree in Business from Arizona State University.
RONALD W. PAGE, VICE PRESIDENT, TREASURER, SECRETARY AND DIRECTOR. 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 is a director of Union Financial Services-2, Inc. 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.
ROSS WILCOX, DIRECTOR. Mr. Wilcox is the Chief Executive Officer of
Union Bank and Trust Company and has been employed or affiliated with Union Bank
and Trust Company for 30 years. Mr. Wilcox is the Chairman of the Board for
Mills County State Bank and is on the Board of Directors for UNIPAC, Southeast
Lincoln Insurance Agency and the Lincoln Chamber of Commerce.
DR. R. PAUL HOFF, DIRECTOR. Dr. Hoff is a medical doctor who practiced
as a family physician in Seward, Nebraska for approximately 30 years, until his
retirement two years ago. Dr. Hoff also serves as member of the Board of
Directors of Packers Service Group, Inc. Dr. Hoff has been involved in a number
of business enterprises over the years and currently owns and operates a retail
antique store in Ennis, Montana.
The Issuer's executive officers are elected annually by the Board of
Directors and serve at the discretion of the Board. The Issuer's directors hold
office until the next annual meeting of stockholders and until their successors
have been duly elected and qualified.
UFS provides certain administrative services to the Issuer in connection
with the operation of the Issuer's Student Loan Purchase Program. UFS receives
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 0.15% of the Issuer's outstanding assets
per month or such other amount as may be specified in the related Prospectus
Supplement. UFS also receives compensation from the Issuer for services provided
in connection with structuring, negotiating and implementing the Issuer's
financing programs. The amount of such fees paid to UFS, if any, in connection
with issuance of the Offered Notes will be described in the applicable
Prospectus Supplement.
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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 March 1, 1997, the Issuer had purchased approximately $542 million
aggregate principal amount of Eligible Loans from Union Bank, as Seller with the
proceeds of Prior Notes. The Issuer has entered into Student Loan Purchase
Agreements with Union Bank with respect to such purchases. Pursuant to the
Student Loan Purchase Agreements, the Seller is required to repurchase, at the
request of the Issuer or the 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.
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THE SERVICING AGREEMENTS
The Issuer has entered into an Amended and Restated Servicing Agreement
with Union Bank dated as of June 19, 1996 (the "Servicing Agreement") 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. Under the
terms of the Servicing Agreement, 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 servicing fees, and Union Bank,
pursuant to the Subservicing Agreement, pays UNIPAC subservicing fees and
certain expenses for the services which UNIPAC provides. 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.
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
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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 650 people. In December 1989, UNIPAC opened a second servicing
center in Lincoln, Nebraska, which currently employs approximately 298 people.
As of May 15, 1997, UNIPAC's servicing volume in its Colorado office was
approximately $4.4 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 $2.0 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."
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
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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 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
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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.
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
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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 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
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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 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.
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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.
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
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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 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
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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%.
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.
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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 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.
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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 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
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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.
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.
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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 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
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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.
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
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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 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:
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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.
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
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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 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
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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 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
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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 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%.
UPDATES
Updates or changes in the Federal Family Education Loan Program, if any,
will be described in the Prospectus Supplement.
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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 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 up
but less than 9% 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%
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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.
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
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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.
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
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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 Prior 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 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
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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.
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
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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.
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,
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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, 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
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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 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 ss. 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
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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 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 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
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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 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
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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.
LEGAL MATTERS
Certain legal matters will be passed upon by Ballard Spahr Andrews &
Ingersoll, Denver, Colorado as Issuer's Counsel and by Kutak Rock, Denver,
Colorado as Note Counsel. 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.
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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........................................................130
1993 Technical Amendments..............................................119
427A Loans ........................................................119
8/10% loans ........................................................119
91-day Treasury Bills...................................................17
Accrual Notes .........................................................17
Additional Notes........................................................ix
After-Tax Equivalent....................................................39
Aggregate Market Value...............................................xxvii
All Hold Rate .........................................................39
Applicable LIBOR-Based Rate.............................................39
Applicable Rate.................................................16, 17, 71
Auction .........................................................39
Auction Agent .........................................................39
Auction Agent Agreement............................................xii, 39
Auction Agent Fee.......................................................39
Auction Date .....................................................14, 39
Auction Note Interest Rate..............................................40
Auction Period .....................................................14, 40
Auction Period Adjustment...........................................40, 66
Auction Procedures......................................................40
Auction Rate .....................................................14, 40
Authorized Denominations............................................40, 72
Available Auction Rate Notes........................................40, 57
Beneficial Owner........................................................79
Bid .....................................................40, 53
Bid Auction Rate........................................................40
Bid/Hold .........................................................46
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Bidder .....................................................40, 53
Bond Equivalent Yield...................................................41
Bond-Equivalent Yield...................................................72
Book-entry Form.........................................................41
Broker-Dealer .........................................................41
Broker-Dealer Agreement.................................................41
Broker-Dealer Fee.......................................................41
Broker-Dealer Fee Rate..................................................41
Business Day .....................................................41, 72
Buyer's Broker-Dealer...................................................68
Calculation Agent.......................................................72
Carry-over Amount.......................................................41
Cash Flow Certificate..................................................xix
Cede .....................................................xxviii
Class .........................................................ix
Class A-1 Notes..........................................................x
Class A-2 Notes..........................................................x
Class A-3 Notes.........................................................xi
Class A-4 Notes.........................................................xi
Class A-5 Notes.........................................................xi
Class A-6 Notes.........................................................xi
Class B Notes ......................................................ix, x
Class B-2 Notes.........................................................xi
Class B-3 Notes.........................................................xi
Class B-4 Notes.........................................................xi
Class C Notes .........................................................ix
Closing Date .........................................................42
Code ........................................................137
Commercial Paper Dealer.................................................42
Commission ..........................................................i
Custodian ..........................................................x
Custodian Agreement....................................................xii
Date of Issuance......................................................xxii
Deferment Periods......................................................121
Deferral Phase ........................................................xiv
Department ....................................................xiv, xv
Depository .........................................................72
Disqualified Persons...................................................142
DOL ........................................................142
DTC .....................................................xxviii
Eligible Carry-over Make-Up Amount......................................42
Eligible Lenders.........................................................x
Eligible Loan .......................................................xiii
ERISA ........................................................142
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ERISA Plans ........................................................142
Events of Default.......................................................87
Exchange Act ..........................................................i
Existing Owner .........................................................42
Existing Owner Registry.................................................42
FDIC .........................................................11
FDSL Program ........................................................131
Federal Consolidation Loans............................................117
Federal Family Education Loan Program..................................117
Federal Family Education Loans.........................................117
Federal PLUS Loans.....................................................117
Federal Reinsurance Agreements.........................................135
Federal SLS Loans......................................................118
Federal Stafford Loans.................................................117
Federal Supplemental Loans for Students................................118
FFEL ..........................................................8
FFEL Program ........................................................130
Financed Eligible Loans................................................xii
Fiscal Year .........................................................83
FISLP ........................................................117
Forbearance Periods.....................................................11
Grace Period ........................................................121
Grace Periods .........................................................11
Guarantee Agencies.......................................................i
Guarantee Agency..................................................xiii, xv
Guarantee Agreements...................................................xii
Guarantee Payments.......................................................2
Higher Education Act.................................................xv, 2
Hold Order .....................................................42, 53
Holder .........................................................72
IHE ........................................................131
Indenture ..........................................................x
Index Rate Notes......................................................xvii
Index Rates .........................................................11
Indirect Participants...............................................ii, 79
Initial Auction Agent...................................................42
Initial Auction Agent Agreement.........................................42
Initial Interest Payment Date...........................................72
Initial Interest Period.................................................72
Initial Period .........................................................42
Initial Period Interest.................................................72
Initial Rate .........................................................43
Initial Rate Adjustment Date............................................43
Insolvency ..........................................................4
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Insolvency Laws........................................................112
Insolvency Proceeding...................................................12
Interest Amount.........................................................73
Interest Payment Date.................................xvii, 15, 16, 43, 73
Interest Period.............................................15, 16, 43, 73
Interest Rate Adjustment Date...........................................43
Interest Rate Determination Date........................................43
IRAs ........................................................142
Issuer ..........................................................i
Issuer Order .......................................................xxii
Junior-Subordinate Notes............................................xi, 14
L/C Bank ........................................................110
LIBOR Determination Date................................................73
LIBOR Rate Notes......................................................xvii
LIBOR-Based Rate........................................................73
Loan Rates .........................................................11
Maintenance and Operating Expenses................................xxvi, 36
Market Agent .........................................................43
Maximum Auction Rate..........................................xvii, 14, 43
Maximum Interest Rate...................................................73
National Direct Student Loan...........................................125
Net Loan Rate .........................................................43
Non-Payment Rate........................................................44
Notes .........................................................ix
Offered Notes .........................................................ix
One-Month LIBOR.....................................................44, 73
One-Year LIBOR .........................................................44
Operating Fund .........................................................36
Order .....................................................44, 53
Outstanding Notes......................................................xii
Participant .........................................................74
Participants .....................................................ii, 78
Parties in Interest....................................................142
Payment Default.....................................................44, 74
Person .........................................................74
Placement Agents.......................................................144
Plan ........................................................142
Plans ........................................................142
Potential Bid Orders....................................................47
Potential Owner.........................................................45
prepayments .........................................................10
Prior Class A Notes.....................................................xi
Prior Class B Notes.....................................................xi
Prospectus Supplement...................................................ix
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PSA .........................................................45
PTCE ........................................................143
Qualified Retirement Plans.............................................142
Quarterly Average Auction Rate..........................................45
Quarterly Average T-Bill Rate...........................................45
Rating Agencies.......................................................xxix
Rating Agency .......................................................xxix
Record Date ...............................................xvii, 15, 74
Redemption Date.........................................................74
Registered Owners..................................................xii, 13
Registered Owners Approval..............................................88
Registration Statement...................................................i
Regular Record Date.....................................................45
Regulations ........................................................142
Repayment Phase........................................................xiv
Reserve Fund Requirement............................................xxviii
Reuters Screen LIBOR Page...............................................45
S&P .........................................................45
SEC .........................................................74
Secretary .......................................................xxiv
Securities Depository...................................................72
Securities Exchange Act.................................................74
Sell Order .....................................................45, 53
Sell Orders .........................................................46
Seller .................................................ix, x, 104
Seller's Broker-Dealer..................................................68
Sellers .....................................................x, 104
Senior Notes .....................................................xi, 14
Series .........................................................ix
Series 1996A Notes.......................................................x
Series 1996B Notes.......................................................x
Series 1996C Notes......................................................xi
Series 1997A Notes......................................................xi
Service ........................................................138
Servicer ..........................................................x
Servicing Agreement....................................................116
Six-Month LIBOR.........................................................44
Special Record Date.....................................................18
Sponsor ..........................................................4
State .........................................................82
Stated Maturity......................................................xviii
Student Loan .......................................................xiii
Student Loan Fund......................................................xii
Student Loan Portfolio.................................................xiv
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Student Loan Purchase Agreement.........................................ix
Submission Deadline.....................................................45
Submitted Bid .....................................................45, 57
Submitted Bids .........................................................57
Submitted Hold Order................................................45, 57
Submitted Hold Orders...................................................57
Submitted Order.....................................................45, 57
Submitted Orders........................................................57
Submitted Sell Order................................................45, 57
Submitted Sell Orders...................................................57
Subordinate Notes...................................................xi, 14
Subservicer ..........................................................x
Subservicing Agreement.................................................116
Subsidized Federal Stafford Loans......................................117
Substitute Auction Agent................................................45
Substitute Auction Agent Agreement......................................46
Sufficient Bids.....................................................46, 58
Supplemental Indenture...................................................x
Tax-Favored Plans......................................................142
Three-Month LIBOR.......................................................44
Transfer Date .......................................................xxvi
Transfer Taxes ........................................................108
Treasury Rate Notes...................................................xvii
Trust Estate .........................................................22
UFS ...................................................112, 144
Underwriters ........................................................144
Union Bank ....................................................ix, 104
UNIPAC .....................................................x, 116
United States Treasury Security Rate....................................46
Unsubsidized Federal Stafford Loans....................................117
Variable Rate .........................................................46
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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
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the Indenture when due and to maintain the Reserve Fund Requirement at a level
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 A-5 NOTES" shall mean, with respect to the Series 1996C Notes,
the $225,000,000 of Class A Notes designated as Class A-5.
"CLASS A-6 NOTES" shall mean, with respect to the Series 1996C Notes,
the $75,500,000 of Class A Notes designated as Class A-6.
"CLASS B NOTES" shall mean the Issuer's Taxable Student Loan
Asset-Backed Notes issued pursuant to the Indenture and designated as Class B.
The Class B Notes were defeased on March 20, 1997, and are no longer Outstanding
under the Indenture.
"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.
The Class B-2 Notes were defeased on March 20, 1997, and are no longer
Outstanding under the Indenture.
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"CLASS B-3 NOTES" shall mean the Issuer's Taxable Student Loan
Asset-Backed Notes issued pursuant to the Indenture and designated as Class B-3.
"CLASS B-4 NOTES" shall mean the Issuer's Taxable Student Loan
Asset-Backed Notes issued pursuant to the Indenture and designated as Class B-4.
"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.
"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 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 attached to the Indenture as an Exhibit 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
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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.
"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
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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.
"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
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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, 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.
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"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.
"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. and the Promissory Note dated as of June 19, 1996 between
the Issuer and Lehman Brothers Holdings Inc.
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"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;
(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;
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(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 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'S COUNSEL" shall mean Ballard Spahr Andrews & Ingersoll,
Denver, Colorado.
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"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.
"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.
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"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 Prior Notes, the Offered Notes and any
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.
"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.
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"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))),
(ii) the Issuer's Taxable Student Loan Asset-Backed Notes, Series 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))), and (iii) the Issuer's Taxable Student Loan
Asset-Backed Notes, Series 1996C issued pursuant to the Indenture in the
aggregate principal amount of $300,500,000 and consisting of $225,000,000 of
Senior Treasury Rate Class A-5 Notes and $75,500,000 Senior Auction Rate Class
A-6 Notes.
"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, (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 (iii) the Issuer's Taxable Student Loan
Asset-Backed Notes, Series 1996C issued pursuant to the Indenture consisting of
$15,600,000 Subordinate LIBOR Rate Class B-3 Notes, and (iv) the Issuer's
Taxable Student Loan Asset-Backed Notes, Series 1997A issued pursuant to the
Indenture and consisting of $30,800,000 Subordinate Class 1997B-4 LIBOR Rate
Notes. The Class B and Class B-2 Notes were defeased on March 20, 1997, and are
no longer Outstanding under the Indenture.
"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.
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"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.
"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
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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.
"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."
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"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. The Class B and
Class B-2 Notes were defeased on March 20, 1997, and are no longer Outstanding
under the Indenture.
"SERIES 1996C NOTES" means the Union Financial Services-1, Inc., Taxable
Student Loan Asset-Backed Notes, Series 1996C issued pursuant to the Indenture
in the aggregate principal amount of $316,100,000, consisting of Class A-5
Notes, Class A-6 Notes and Class B-3 Notes.
"SERIES 1997A NOTES" shall mean the Union Financial Services-1, Inc.,
Taxable Student Loan Asset-Backed Notes, Series 1997A issued pursuant to the
Indenture in the aggregate principal amount $30,800,000, consisting of Class B-4
Notes.
"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.
"STATED MATURITY" shall mean the date specified in the Notes as the
fixed date on which principal of such Notes is due and payable.
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"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.
"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
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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) 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
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Auction or 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
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ownership. We authorize and instruct our agent member to disclose to the
applicable trust company or remarketing agent such 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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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
Terms of the Offering....................................................S-2
Previously Issued Notes.................................................S-14
[Credit Enhancement]....................................................S-15
Estimated Characteristics of the Financed Eligible Loans................S-16
Certain Information Relating to the Guarantee Agencies..................S-22
Plan of Distribution....................................................S-25
[Legal Matters].........................................................S-25
[Other Information].....................................................S-25
PROSPECTUS
PROSPECTUS SUPPLEMENT.................................................... i
AVAILABLE INFORMATION.................................................... i
REPORTS TO NOTEHOLDERS.................................................. ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..........................iii
SUMMARY OF THE OFFERING.................................................. ix
RISK FACTORS............................................................. 1
DESCRIPTION OF THE NOTES................................................. 14
SECURITY AND SOURCES OF PAYMENT FOR THE NOTES............................ 22
CERTAIN DEFINITIONS AND PROVISIONS RELATED
TO AUCTION RATE NOTES AND AUCTION PROCEDURES..................... 38
AUCTION RATE NOTE SETTLEMENT PROCEDURES.................................. 67
CERTAIN DEFINITIONS AND PROVISIONS
RELATED TO LIBOR RATE NOTES...................................... 70
BOOK-ENTRY REGISTRATION.................................................. 77
ADDITIONAL NOTES......................................................... 79
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE........................... 80
SELLER REPRESENTATIONS AND WARRANTIES....................................103
DESCRIPTION OF CREDIT ENHANCEMENT........................................108
THE ISSUER...............................................................111
THE ISSUER'S STUDENT LOAN PURCHASE PROGRAM...............................113
DESCRIPTION OF THE FEDERAL FAMILY EDUCATION LOAN PROGRAM.................116
GUARANTEE AGENCIES.......................................................133
WEIGHTED AVERAGE LIFE OF THE NOTES.......................................135
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................136
ERISA CONSIDERATIONS.....................................................140
CERTAIN RELATIONSHIPS AMONG FINANCING PARTICIPANTS.......................142
PLAN OF DISTRIBUTION.....................................................143
LEGAL MATTERS............................................................144
FINANCIAL INFORMATION....................................................144
RATINGS .................................................................144
INDEX TO AND GLOSSARY OF CERTAIN TERMS...................................145
APPENDIX I-FORM OF MASTER PURCHASER'S LETTER.............................I-1
<PAGE>
[OUTSIDE BACK COVER]
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.
<PAGE>
$------------
UNION FINANCIAL SERVICES-1, INC.
ISSUER
TAXABLE STUDENT LOAN ASSET-BACKED NOTES
SERIES 199_-_
$_______________ [Auction] [Index] Rate Notes, Class ____
$_______________ [Auction] [Index] Rate Notes, Class ____
$_______________ [Auction] [Index] Rate Notes, Class ____
PROSPECTUS SUPPLEMENT
[NAME OF [UNDERWRITER] [PLACEMENT AGENT]]
[DATE]
[OUTSIDE BACK COVER]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be borne by the
registrant, other than the underwriting discounts and commissions, in connection
with the issuance and distribution of the Offered Notes hereunder.
SEC registration fee......................... $304
*Accounting fees and expenses................ (1)
*Legal fees and expenses..................... (1)
*Printing costs.............................. (1)
*Blue Sky fees and expenses.................. (1)
*Trustee's fees.............................. (1)
*Rating Agency fees.......................... (1)
Miscellaneous................................ (1)
Total................................ $ (1)
- --------------------
*Estimates based on the offering of a single Series of Offered Notes in the
aggregate principal amount of $1 million.
(1) To be supplied by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Chapter 78, Section 78.751 of the Nevada Revised Statutes gives Nevada
corporations broad powers to indemnify their present and former directors and
officers, and those of affiliated corporations and other enterprises, against
expenses incurred in the defense or settlement of any legal proceeding to which
they are made parties by reason of being such directors or officers, subject to
specified conditions and exclusions. Section 78.751 also gives a director or
officer who successfully defends an action the right to be so indemnified.
Section 78.752 authorizes a Nevada corporation to buy directors' and officers'
liability insurance.
The registrant has adopted a bylaw which makes indemnification
mandatory under certain circumstances for a person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, by reason of the fact that he is or was a director or
officer of the registrant or of affiliated corporations or other entities. Such
persons must be indemnified against reasonably incurred expenses (including
attorneys' fees), judgments, penalties, fines and amounts paid in settlement if
it is determined in accordance with the procedures set forth in the bylaws that
such person conducted himself in good faith and that he reasonably believed (a)
II-1
<PAGE>
in the case of conduct in his official capacity with the registrant, that his
conduct was in the registrant's best interest, or (b) in all other cases (except
criminal cases), that his conduct was at least not opposed to the registrant's
best interests, or (c) in the case of any criminal proceeding, that he had no
reasonable cause to believe his conduct was unlawful. The registrant must also
indemnify any such person who was wholly successful in defense of any action,
suit, or proceeding as to which he was entitled to indemnification against
expenses (including attorneys' fees) reasonably incurred by him in connection
with the proceeding. No indemnification shall be made to such persons with
respect to any claim, issue or matter in connection with a proceeding by or in
the right of registrant in which the person is adjudged liable to the
registrant, or in connection with any proceeding charging that the person
derived an improper personal benefit in which he was adjudged liable on the
basis that he derived an improper personal benefit.
Pursuant to agreements which the registrant may enter into with
underwriters or agents (forms of which are included as exhibits to this
Registration Statement), officers and directors of the registrant, and
affiliates thereof, may be entitled to indemnification by such underwriters or
agents against certain liabilities, including liabilities under the Securities
Act of 1933, as amended, arising from information which has been furnished to
the registrant by such underwriters or agents that appear in the Registration
Statement or any Prospectus.
ITEM 16. EXHIBITS.
The following is a complete list of exhibits filed as part of the
Registration Statement. As indicated below, certain of the Exhibits have been
incorporated by reference from the Registrant's Registration Statement on Form
S-3 (File No. 333-08929) filed with the Securities and Exchange Commission in
October 1996, the registrant's Current Report on Form 8-K dated January 7, 1997
and the registrant's annual report on Form 10-K for fiscal year ended December
31, 1996. Exhibit numbers correspond to the numbers in the Exhibit Table of Item
601 of Regulation S-K.
Exhibit No. Description
1.1 Form of [Underwriting] [Distribution] Agreement* (From Exhibit 1.1)
4.1 Second Amended and Restated Indenture, dated as of November 1, 1996, by and
between the Issuer and Norwest Bank Minnesota, National Association,
excluding Exhibits E-1, E-2, F-1 and F-2 thereto ** (From Exhibit 99.1)
4.1.1 First Supplement to Second Amended and Restated Indenture of Trust, dated
as of March 1, 1997, between the Issuer and Norwest Bank Minnesota,
National Association.
4.2 Form of Supplemental Indenture* (From Exhibit 4.2)
4.2.1 Series 1996C Supplemental Indenture of Trust, dated as of November 1,
1996, by and between the Issuer and Norwest Bank Minnesota, National
Association, excluding Exhibits D and E thereto ** (From Exhibit 99.2)
II-2
<PAGE>
4.2.2 Series 1997A Supplemental Indenture of Trust, dated as of March 1, 1997,
between the Issuer and Norwest Bank Minnesota, National Associtation,
excluding Exhibit B-1 thereto.
5.1 Opinion of 0Kutak Rock as to the validity of the Notes. (1)
8.1 Opinion of Kutak Rock Regarding Tax Matters. (1)
10.1 Administrative Services Agreement, dated as of August 1, 1996, by and
between Union Financial Services, Inc. and the Issuer*** (From Exhibit
10.1)
10.1.1 Amendment to Administrative Services Agreement, dated as of November 1,
1996, by and between Union Financial Services, Inc. and the Issuer*** (From
Exhibit 10.1.1)
10.2 Amended and Restated Servicing Agreement, dated as of June 19, 1996, by and
between Union Bank and Trust Company and the Issuer** (From Exhibit 10.2)
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Kutak Rock (included in Exhibits 5.1 hereto) (1)
24.1 Power of Attorney (included on page II-5 of the Registration Statement)
24.2 Consent of KPMG Peat Marwick LLP, Independent Auditors
25.1 Statement of Eligibility of Trustee on Form T-1
27.1 Financial Data Schedules
99.1 Loan Sale and Commitment Agreement, dated as of March 1, 1996, by and
between Union Bank and Trust Company and the Issuer* (From Exhibit 99.1)
99.2 Loan Sale and Commitment Agreement, dated as of June 19, 1996, by and
between Union Bank and Trust Company and the Issuer*** (From Exhibit 99.2)
99.3 Loan Sale and Commitment Agreement, dated as of November 1, 1996, by and
between Union Bank and Trust Company and the Issuer** (From Exhibit 99.3)
--------------------
* Previously filed in the Registrant's Registration Statement on Form S-3
(File No. 333-08929) filed with the Securities and Exchange Commission
in October 1996 and incorporated herein by reference.
II-3
<PAGE>
** Previously filed in the Registrant's Current Report on Form 8-K dated
January 7, 1997 and incorporated herein by reference.
*** Previously filed in the Registrant's Annual Report on Form 10-K for
fiscal year ended December 31, 1997 and incorporated herein by
reference.
(1) To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to the Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) (ss. 230.42(b) of this
chapter) if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that for purposes of
determining any liability under the Act, each filing of the Registrant's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
II-4
<PAGE>
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions in Item 15, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
or 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(l) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
posteffective amendment that contains a form of prospectus shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering hereof.
The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"), in accordance with the rules and regulations
prescribed by the Commission under Section 305(b) (2) of the Trust Indenture
Act.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Denver, State of Colorado, on May 28, 1997.
UNION FINANCIAL SERVICES-1, INC.,
a Nevada corporation
By /s/ Ronald W. Page
-----------------------------
Ronald W. Page, Vice-President and
Secretary
II-6
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below and appoints Stephen F. Butterfield and Ronald W. Page, his true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement on Form S-3 and file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto such attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, to all intents and purposes and
as full as they might or could do in person, hereby ratifying and confirming all
that such attorneys-in-fact and agents, or their substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
----------- ----------- --------
/s/ Michael S. Dunlap Chairman of the Board May 28, 1997
- ---------------------------
Michael S. Dunlap (Principal Executive Officer)
/s/ Stephen F. Butterfield President and Director May 28, 1997
- ----------------------------
Stephen F. Butterfield
/s/ Ronald W. Page Vice-President, Secretary, May 28, 1997
- ----------------------------
Ronald W. Page Treasurer and Director
(Principal Financial and
Accounting Officer)
/s/ Ross Wilcox Director May 28, 1997
- ----------------------------
Ross Wilcox
/s/ Dr. Paul Hoff Director May 28, 1997
- ----------------------------
Dr. Paul Hoff
II-7
<PAGE>
EXHIBITS
TO
FORM S-3
The following is a complete list of exhibits filed as part of the
Registration Statement. As indicated below, certain of the Exhibits have been
incorporated by reference from the Registrant's Registration Statement on Form
S-3 (File No. 333-08929) filed with the Securities and Exchange Commission in
October 1996, the registrant's Current Report on Form 8-K dated January 7, 1997
and the registrant's annual report on Form 10-K for fiscal year ended December
31, 1996. Exhibit numbers correspond to the numbers in the Exhibit Table of Item
601 of Regulation S-K.
Exhibit No. Description
1.1 Form of [Underwriting] [Distribution] Agreement* (From Exhibit 1.1)
4.1 Second Amended and Restated Indenture, dated as of November 1, 1996, by and
between the Issuer and Norwest Bank Minnesota, National Association,
excluding Exhibits E-1, E-2, F-1 and F-2 thereto ** (From Exhibit 99.1)
4.1.1 First Supplement to Second Amended and Restated Indenture of Trust, dated
as of March 1, 1997, between the Issuer and Norwest Bank Minnesota,
National Association.
4.2 Form of Supplemental Indenture* (From Exhibit 4.2)
4.2.1 Series 1996C Supplemental Indenture of Trust, dated as of November 1,
1996, by and between the Issuer and Norwest Bank Minnesota, National
Association, excluding Exhibits D and E thereto ** (From Exhibit 99.2)
4.2.2 Series 1997A Supplemental Indenture of Trust, dated as of March 1, 1997,
between the Issuer and Norwest Bank Minnesota, National Associtation,
excluding Exhibit B-1 thereto.
5.1 Opinion of 0Kutak Rock as to the validity of the Notes. (1)
8.1 Opinion of Kutak Rock Regarding Tax Matters. (1)
10.1 Administrative Services Agreement, dated as of August 1, 1996, by and
between Union Financial Services, Inc. and the Issuer*** (From Exhibit
10.1)
10.1.1 Amendment to Administrative Services Agreement, dated as of November 1,
1996, by and between Union Financial Services, Inc. and the Issuer*** (From
Exhibit 10.1.1)
10.2 Amended and Restated Servicing Agreement, dated as of June 19, 1996, by and
between Union Bank and Trust Company and the Issuer** (From Exhibit 10.2)
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Kutak Rock (included in Exhibits 5.1 hereto) (1)
24.1 Power of Attorney (included on page II-5 of the Registration Statement)
24.2 Consent of KPMG Peat Marwick LLP, Independent Auditors
25.1 Statement of Eligibility of Trustee on Form T-1
27.1 Financial Data Schedules
99.1 Loan Sale and Commitment Agreement, dated as of March 1, 1996, by and
between Union Bank and Trust Company and the Issuer* (From Exhibit 99.1)
99.2 Loan Sale and Commitment Agreement, dated as of June 19, 1996, by and
between Union Bank and Trust Company and the Issuer*** (From Exhibit 99.2)
99.3 Loan Sale and Commitment Agreement, dated as of November 1, 1996, by and
between Union Bank and Trust Company and the Issuer** (From Exhibit 99.3)
--------------------
* Previously filed in the Registrant's Registration Statement on Form S-3
(File No. 333-08929) filed with the Securities and Exchange Commission
in October 1996 and incorporated herein by reference.
** Previously filed in the Registrant's Current Report on Form 8-K dated
January 7, 1997 and incorporated herein by reference.
*** Previously filed in the Registrant's Annual Report on Form 10-K for
fiscal year ended December 31, 1997 and incorporated herein by
reference.
(1) To be filed by amendment.
EXHIBIT 4.1.1
FIRST SUPPLEMENT TO
SECOND AMENDED AND RESTATED INDENTURE OF TRUST
BETWEEN
UNION FINANCIAL SERVICES-1, INC.
AND
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
AS TRUSTEE
DATED AS OF MARCH 1, 1997
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS AND AUTHORITY
Section 1.01. Definitions.................................. 1
Section 1.02. Authority for First Supplement............... 2
ARTICLE II
AMENDMENTS TO THE ORIGINAL INDENTURE
Section 2.01. ............................................. 1
Amendment of Section 2.02(d) of the Original Indenture..... 2
Section 2.02. Amendment of Section 5.02 of the
Original Indenture....................... 3
ARTICLE III
MISCELLANEOUS............................................... 3
i
<PAGE>
This First Supplement to Second Amended and Restated Indenture of Trust,
dated for convenience of reference as of March 1, 1997 (this "First
Supplement"), by and between UNION FINANCIAL SERVICES-1, INC., a corporation
duly organized and existing under the laws of the State of Nevada (the
"Issuer"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking
association duly organized and existing under the laws of the United States of
America having its principal trust office in Minneapolis, Minnesota (said
banking corporation and any trust company or bank becoming successor trustee
under this First Supplement being herein called the "Trustee"),
W I T N E S S E T H:
WHEREAS, the Issuer and the Trustee, entered into that Indenture of
Trust dated as of March 1, 1996 (as amended by that Amended and Restated
Indenture of Trust dated as of June 15, 1996 and that Second Amended and
Restated Indenture of Trust dated as of November 1, 1996, the "Original
Indenture"), pursuant to which the Issuer issues in series from time to time its
Taxable Student Loan Asset-Backed Notes (the "Notes") for the purpose of
financing the acquisition of qualifying student loans; and
WHEREAS, Sections 8.01 and 8.02 of the Original Indenture permit the
Issuer and the Trustee to enter into supplements to the Original Indenture and
the Issuer and the Trustee are making certain changes set forth in Article II
hereof pursuant to such Sections.
NOW, THEREFORE, in consideration of the premises, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS AND AUTHORITY
Section 1.01. DEFINITIONS. Except as provided in the definitions in
this Section and in Section 2.01 below, all defined terms contained in the
Original Indenture shall have the same meanings in this First Supplement as such
terms are given in the Original Indenture.
As used in this First Supplement, the following terms shall have the
following respective meanings:
"ORIGINAL INDENTURE" means the Indenture of Trust dated as of March 1,
1996, between the Issuer and the Trustee, as amended by that Amended and
Restated Indenture of Trust dated as of June 15, 1996 and that Second Amended
and Restated Indenture of Trust dated as of November 1, 1996.
"FIRST SUPPLEMENT" means this First Supplement to Second Amended and
Restated Indenture of Trust, as amended or supplemented in accordance with the
terms hereof and of the Original Indenture.
<PAGE>
In this First Supplement, unless the context otherwise requires, words of
the masculine gender include correlative words of the feminine and neuter
genders, words importing the singular number include the plural number and vice
versa, and words importing persons include corporations and associations,
including public bodies, as well as natural persons.
The terms "hereby," "hereof," "hereto," "herein," "hereunder" and any
similar terms, used in this First Supplement, refer to this First Supplement.
Section 1.02. AUTHORITY FOR FIRST SUPPLEMENT. This First Supplement is
entered into pursuant to the provisions of the Original Indenture in order to
supplement and amend the original Indenture as provided in Article II hereof.
ARTICLE II
AMENDMENTS TO THE ORIGINAL INDENTURE
Section 2.01. AMENDMENT OF SECTION 2.02(D) OF THE ORIGINAL INDENTURE.
Section 2.02(d) Original Indenture is hereby amended to read as follows:
(d) PARTIAL REDEMPTION OF SERIES 1996A NOTES AND SERIES
1996B NOTES.
(i) (A) If less than all of the Series 1996A Notes are to be
redeemed pursuant to Section 2.02(a) or 2.02(b) hereof, the
class and subclass of Series 1996A Notes to be redeemed
shall be redeemed as directed by an Issuer Order. If less
than all of the Series l996B Notes are to be redeemed
pursuant to Section 2.02(a) or 2.02(b) hereof, the class or
subclass of Series 1996B Notes to be redeemed shall be
redeemed as directed by an Issuer Order. If less than all of
the Series 1996A Notes or Series 1996B Notes of any Stated
Maturity of any class or subclass of the Series 1996A Notes
or Series 1996B Notes are to be redeemed, such Series 1996A
Notes or Series 1996B Notes of the same Stated Maturity to
be redeemed shall be selected by lot in such manner as the
Trustee shall determine.
Section 2.02. AMENDMENT OF SECTION 5.02 OF THE ORIGINAL INDENTURE. The
second sentence of the third paragraph of Section 5.02 of the Original Indenture
is hereby amended as follows:
"The Issuer may use proceeds in any Recycling Account of
the Student Loan Fund to purchase Eligible Loans which have
a stated maturity shorter than the longest Stated Maturity
of any Series of Notes then Outstanding."
2
<PAGE>
ARTICLE III
MISCELLANEOUS
This First Supplement may be simultaneously executed in several
counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
duly executed, all as of the date first above written.
UNION FINANCIAL SERVICES-1, INC.
By /s/ Stephen F. Butterfield
Stephen F. Butterfield, President
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Trustee
By /s/ Polly B. Burg
Assistant Vice President
4
EXHIBIT 4.1.1
FIRST SUPPLEMENT TO
SECOND AMENDED AND RESTATED INDENTURE OF TRUST
BETWEEN
UNION FINANCIAL SERVICES-1, INC.
AND
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
AS TRUSTEE
DATED AS OF MARCH 1, 1997
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS AND AUTHORITY
Section 1.01. Definitions.................................. 1
Section 1.02. Authority for First Supplement............... 2
ARTICLE II
AMENDMENTS TO THE ORIGINAL INDENTURE
Section 2.01. ............................................. 1
Amendment of Section 2.02(d) of the Original Indenture..... 2
Section 2.02. Amendment of Section 5.02 of the
Original Indenture....................... 3
ARTICLE III
MISCELLANEOUS............................................... 3
i
<PAGE>
This First Supplement to Second Amended and Restated Indenture of Trust,
dated for convenience of reference as of March 1, 1997 (this "First
Supplement"), by and between UNION FINANCIAL SERVICES-1, INC., a corporation
duly organized and existing under the laws of the State of Nevada (the
"Issuer"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking
association duly organized and existing under the laws of the United States of
America having its principal trust office in Minneapolis, Minnesota (said
banking corporation and any trust company or bank becoming successor trustee
under this First Supplement being herein called the "Trustee"),
W I T N E S S E T H:
WHEREAS, the Issuer and the Trustee, entered into that Indenture of
Trust dated as of March 1, 1996 (as amended by that Amended and Restated
Indenture of Trust dated as of June 15, 1996 and that Second Amended and
Restated Indenture of Trust dated as of November 1, 1996, the "Original
Indenture"), pursuant to which the Issuer issues in series from time to time its
Taxable Student Loan Asset-Backed Notes (the "Notes") for the purpose of
financing the acquisition of qualifying student loans; and
WHEREAS, Sections 8.01 and 8.02 of the Original Indenture permit the
Issuer and the Trustee to enter into supplements to the Original Indenture and
the Issuer and the Trustee are making certain changes set forth in Article II
hereof pursuant to such Sections.
NOW, THEREFORE, in consideration of the premises, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS AND AUTHORITY
Section 1.01. DEFINITIONS. Except as provided in the definitions in
this Section and in Section 2.01 below, all defined terms contained in the
Original Indenture shall have the same meanings in this First Supplement as such
terms are given in the Original Indenture.
As used in this First Supplement, the following terms shall have the
following respective meanings:
"ORIGINAL INDENTURE" means the Indenture of Trust dated as of March 1,
1996, between the Issuer and the Trustee, as amended by that Amended and
Restated Indenture of Trust dated as of June 15, 1996 and that Second Amended
and Restated Indenture of Trust dated as of November 1, 1996.
"FIRST SUPPLEMENT" means this First Supplement to Second Amended and
Restated Indenture of Trust, as amended or supplemented in accordance with the
terms hereof and of the Original Indenture.
<PAGE>
In this First Supplement, unless the context otherwise requires, words of
the masculine gender include correlative words of the feminine and neuter
genders, words importing the singular number include the plural number and vice
versa, and words importing persons include corporations and associations,
including public bodies, as well as natural persons.
The terms "hereby," "hereof," "hereto," "herein," "hereunder" and any
similar terms, used in this First Supplement, refer to this First Supplement.
Section 1.02. AUTHORITY FOR FIRST SUPPLEMENT. This First Supplement is
entered into pursuant to the provisions of the Original Indenture in order to
supplement and amend the original Indenture as provided in Article II hereof.
ARTICLE II
AMENDMENTS TO THE ORIGINAL INDENTURE
Section 2.01. AMENDMENT OF SECTION 2.02(D) OF THE ORIGINAL INDENTURE.
Section 2.02(d) Original Indenture is hereby amended to read as follows:
(d) PARTIAL REDEMPTION OF SERIES 1996A NOTES AND SERIES
1996B NOTES.
(i) (A) If less than all of the Series 1996A Notes are to be
redeemed pursuant to Section 2.02(a) or 2.02(b) hereof, the
class and subclass of Series 1996A Notes to be redeemed
shall be redeemed as directed by an Issuer Order. If less
than all of the Series l996B Notes are to be redeemed
pursuant to Section 2.02(a) or 2.02(b) hereof, the class or
subclass of Series 1996B Notes to be redeemed shall be
redeemed as directed by an Issuer Order. If less than all of
the Series 1996A Notes or Series 1996B Notes of any Stated
Maturity of any class or subclass of the Series 1996A Notes
or Series 1996B Notes are to be redeemed, such Series 1996A
Notes or Series 1996B Notes of the same Stated Maturity to
be redeemed shall be selected by lot in such manner as the
Trustee shall determine.
Section 2.02. AMENDMENT OF SECTION 5.02 OF THE ORIGINAL INDENTURE. The
second sentence of the third paragraph of Section 5.02 of the Original Indenture
is hereby amended as follows:
"The Issuer may use proceeds in any Recycling Account of
the Student Loan Fund to purchase Eligible Loans which have
a stated maturity shorter than the longest Stated Maturity
of any Series of Notes then Outstanding."
2
<PAGE>
ARTICLE III
MISCELLANEOUS
This First Supplement may be simultaneously executed in several
counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
duly executed, all as of the date first above written.
UNION FINANCIAL SERVICES-1, INC.
By /s/ Stephen F. Butterfield
Stephen F. Butterfield, President
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Trustee
By /s/ Polly B. Burg
Assistant Vice President
4
EXHIBIT 12.1
STATEMENT OF COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed
charges for the Issuer for each of the following periods.
The ratio of earnings to fixed charges has been computed by
dividing earnings by fixed charges. Earnings consist of income from operations
before income taxes plus fixed charges. Fixed charges consist of interest on all
indebtedness plus amortization of debt issuance costs.
Quarter Ended Period from inception
March 31, 1997 (February 28, 1996 to
December 31, 1996
------------------ ------------------
Earnings............................. $8,794,387 $11,424,421
Fixed Charges........................ 8,184,324 12,238,247
Ratio................................ 1.0745 *
* For the period from inception (February 28, 1996) to December 31, 1996,
earnings were inadequate to cover fixed charges by a deficiency of $813,826.
<PAGE>
EXHIBIT 24.2
KPMG PEAT MARWICK
TWO CENTRAL PARK PLAZA
ACCOUNTANTS CONSENT
The Board of Directors
Union Financial Services-1, Inc.
We consent to the incorporation by reference in the registration statement
on Form S-3 relating to Union Financial Services-1, Inc. issue of $1,000,000 of
Taxable Student Loan Asset-Backed Notes of our report, dated February 7, 1997,
except note 12, which is as of March 20, 1997, relating to the balance sheet of
Union Financial Services-1, Inc. as of December 31, 1996, and related statements
of operations, stockholders' deficit and cash flows for the period from
inception (February 28, 1996) to December 31, 1996, which report appears in the
December 31, 1996 annual report on Form 10-K of Union Financial Services-1, Inc.
/s/ KPMG PEAT MARWICK LLP
Lincoln, Nebraska
June 5, 1997
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
Washington. D.C 20549
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATTON
(Exact name of trustee as specified in its charter)
A U.S. NATIONAL BANKING ASSOCIATION 41-1592157
(Jurisdiction of incorporation of (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
SIXTH STREET AND MARQUETTE AVENUE
Minneapo1is, Minnesota
(Address of principal executive offices) 55479
(Zip code)
Stan1ey S. Stroup, General Counsel
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
Sixth Street and Marquette Avenue
Minneapo1is, Minnesota 55479
(612) 667-1234
(Agent for Service)
Union Financial Services-1, Inc.
(Exact name of obligor as specified in its charter)
NEVADA 86-0817755
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
6991 EAST CAMELBACK ROAD, SUITE B290
SCOTTSDALE, AZ 85251
(Address of principal executive offices) (Zip code)
$1,000,000 Notes
(Title of the indenture securities)
<PAGE>
Item I. General Information.Furnish the fo11owing information as to the trustee:
(a) Name and address of each examining or supervising
authority to which it is subject.
Comptroller of the Currency
Treasury Department
Washington, D.C.
Federal Deposit Insurance Corporation
Washington, D.C.
The Board of Governors of the Federal Reserve System
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust
powers.
The trustee is authorized to exercise corporate
trust powers.
Item 2. Affiliations with Obligor. If the ob1igor is an affiliate of the
trustee, describe each such affiliation.
None with respect to the trustee.
No responses are included for Items 3-14 of this Form T-1 because the obligor is
not in default as provided under Item 13.
Item 15. Foreign Trustee. Not applicable.
Item 16. List of Exhibits. List below all exhibits filed as a part of this
Statement of Eligibility. Norwest Bank incorporates
by reference into this Form T-1 the exhibits
attached hereto.
Exhibit 1. a. A copy of the Articles of Association of the trustee
now in effect.*
Exhibit 2. a. A copy of the certificate of authority of the
trustee to commence business issued June 28, 1872,
by the Comptroller of the Currency to The
Northwestern National Bank of Minneapolis.*
b. A copy of the certificate of the Comptroller of the
Currency dated January 2, 1934, approving the
consolidation of The Northwestern National Bank of
Minneapolis and The Minnesota Loan and Trust Company
of Minneapolis, with the surviving entity being
titled Northwestern National Bank and Trust Company
of Minneapolis.*
c. A copy of the certificate of the Acting
Comptroller of the Currency dated January 12, 1943,
as to change of corporate title of
Northwestern National Bank and Trust Company
of Minneapolis to Northwestern National Bank
of Minneapolis.*
<PAGE>
d. A copy of the letter dated May 12, 1983 from the
Regional Counsel Comptroller of the Currency,
acknowledging receipt of notice of name change
effective May 1,l983 from Northwestern National Bank
of Minneapolis Norwest Bank Minneapolis, National
Association.*
e. A copy of the letter dated January 4, 1988 from the
Administrator of National Banks for the Comptroller
of the Currency certifying approval of consolidation
and merger effective January 1, 1988 of Norwest Bank
Minneapolis, National Association with various other
banks under the title of "Norwest Bank Minnesota,
National Association."*
Exhibit 3. A copy of the authorization of the trustee to exercise
corporate trust powers issued January 2, 1934, by the Federal
Reserve Board.*
Exhibit 4. Copy of By-laws of the trustee as now in effect.*
Exhibit 5. Not applicable.
Exhibit 6. The consent of the trustee required by Section 321(b) of the Act.
Exhibit 7. A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its supervising
or examining authority.
Exhibit 8. Not applicable.
Exhibit 9. Not applicable.
* Incorporated by reference to exhibit number 25 filed with registration
statement number 33-66026.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the
trustee, Norwest Bank Minnesota National Association, a national banking
association organized and existing under the laws of the United States of
America, has duly caused this statement of eligibility to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of
Minneapolis and the State Minnesota on the 29th day of May, 1997.
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
/S/ Cynthia Woodward
Corporate Trust Officer
<PAGE>
EXHIBIT 6
May 29, 1997
Security and Exchange Commission
Washington, D.C. 20549
Gentlemen:
In accordance with Section 321(b) of the Trust Indenture Act of 1939, as
amended, the undersigned hereby consents that reports of examination of the
undersigned made by Federal, State, Territorial, or District authorities
authorized to make such examination may be furnished by such authorities to the
Securities and Exchange Commission upon its request therefor.
Very truly yours,
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
/s/ Cynthia Woodward
Corporate Trust Officer
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<PERIOD-END> DEC-31-1996
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