As filed with the Securities and Exchange Commission on April 5, 1999
Registration No. 333-_____
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.)
1801 California Street, Suite 3920, Denver, Colorado 80202, (303) 292-0995
(Address, including ZIP code, and telephone number,
including area code, of registrant's principal executive offices)
Ronald W. Page, Vice President
Union Financial Services-1, Inc.
1801 California Street, Suite 3920, Denver, Colorado 80202, (303) 292-0995
(Name, address, including ZIP code, and telephone number,
including area code, of agent for service)
--------------------
Copies To:
Thomas H. Duncan, Esq.
Ballard Spahr Andrews & Ingersoll, LLP
1225 Seventeenth Street, Suite 2300
Denver, Colorado 80202
(303) 292-2400
Approximate date of commencement of proposed sale to the public: From time to
time 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. [ ]
<PAGE>
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. o
<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(1) offering price per aggregate offering fee(3)
registered unit(2) price(2)
- ----------------------- -------------- ------------------ -------------------- ===============
Notes $1,000,000 100% $1,000,000 $278.00
- ----------------------- -------------- ------------------ -------------------- ===============
(1)The amount of securities being registered represents the maximum aggregate
principal amount of securities currently expected to be offered for sale.
(2)Estimated solely for the purpose of calculating the registration fee pursuant
to Rule 457.
(3)Registration fee is calculated on the basis of $278 per million offered.
</TABLE>
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.
2
<PAGE>
Information contained herein is not complete and may be changed. We may not sell
these securities until the Registration Statement filed with the Securities and
Exchange Commission becomes effective. This Prospectus Supplement and Prospectus
is not an offer to sell or the solicitation of an offer to by these securities
in any state in which such offer is not permitted.
SUBJECT TO COMPLETION, Dated __________ __, ____
PROSPECTUS SUPPLEMENT
(To Prospectus dated __________ __, ____)
$-----------
UNION FINANCIAL SERVICES-1, INC.
STUDENT LOAN ASSET-BACKED NOTES
SERIES ____-_
We are offering $___________ aggregate principal amount of our Student
Loan Asset-Backed Notes, Series ____. The Series ____ Notes will consist of the
following _____ classes:
<TABLE>
<CAPTION>
Original Proceeds
Principal Interest Final Legal Price to Underwriting to
Amount Rate Maturity Public Discount Issuer
--------- -------- ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Senior Class Notes,
[Fixed][Auction][Index] $ $
Rate
Senior Class Notes,
[Fixed] [Auction] $ $
[Index] Rate
Subordinate Class
Notes, [Fixed] $ $
[Auction][Index] Rate
Subordinate Class
Notes, [Fixed] $ $
[Auction] [Index] Rate
Junior Subordinate
Class Notes, [Fixed] $ $
[Auction] [Index] Rate
Junior Subordinate
Class Notes, [Auction] $ $
[Index] Rate ---------- --------- ----------- ------------ ----------- ----------
</TABLE>
Total
The Series ____ Notes, along with all other Notes that we have issued or
may issue in the future, will be collateralized by a portfolio of student loans
that have the characteristics described herein, moneys paid on the student loans
and funds in accounts created under an Indenture of Trust pursuant to which the
Series ____ Notes are issued.
[We have previously issued $_________ of our Student Loan Asset-Backed
Notes secured by the trust estate created under the Indenture of Trust,
$___________ of which currently remain outstanding. Of the outstanding Notes,
$___________ are Class _______Notes and $__________ are Class ____ Notes and
$______ are Class ___ Notes.] The Series ____ Notes will consist of $___________
Class A-_ Notes, $__________ Class A-_ Notes, $_____ Class B-__ Notes, $_____
Class B-__ Notes, $_____ Class C-__ Notes, and $________ Class C-________ Notes.
All of the Class A Notes, regardless of when issued, are senior to the Class B
Notes with respect to payment of principal and interest [and all of the Class C
Notes, regardless of when issued, are subordinated to the Class B Notes with
respect to payment of principal and interest]. We may issue in the future
additional Class A Notes [and] Class B Notes [and Class C Notes].
Neither the securities and exchange commission nor any state securities
commission has approved or disapproved these securities or passed upon the
accuracy or adequacy of this prospectus supplement or the accompanying
prospectus. Any representation to the contrary is a criminal offense.
3
<PAGE>
- --------------------------------------------------------------------------------
The Series _____ Notes are obligations of our company payable solely from
the collateral described herein. [The Series Notes are insured as to timely
payments of principal of an interest on by [Note Insurer]]. [The Series _____
Notes are not insured or guaranteed by any government agency or instrumentality,
or by any affiliate of our company, [by any insurance company] or by any other
person or entity. This Prospectus Supplement may be used to offer and sell the
Series _____ Notes only if accompanied by the Prospectus.
- --------------------------------------------------------------------------------
You should consider carefully the "Risk Factors" beginning on page __ of
this Prospectus Supplement and on page __ of the Prospectus.
- --------------------------------------------------------------------------------
_________________ ,the underwriters, are offering the Series _____ Notes
subject to approval of certain legal matters by counsel for the underwriters.
The underwriters reserve the right to withdraw, cancel or modify their offers
and to reject orders in whole or in part. We expect that the Series ____ Notes
will be delivered in book-entry-only form through the Same Day Funds Settlement
System of The Depository Trust Company, Cedelbank, S.A. and the Euroclear System
on or about ______________ __, ____.
PaineWebber Incorporated
The date of this Prospectus Supplement is __________, ___ .
4
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
SUMMARY.....................................................................S-4
RISK FACTORS...............................................................S-11
THE SELLERS................................................................S-12
[PREVIOUSLY ISSUED NOTES...................................................S-13
CREDIT ENHANCEMENT.........................................................S-13
USE OF PROCEEDS............................................................S-16
CHARACTERISTICS OF THE FINANCED STUDENT LOANS..............................S-17
INFORMATION RELATING TO THE GUARANTEE AGENCIES.............................S-25
RATIO OF EARNINGS TO FIXED CHARGES.........................................S-27
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS..........................S-27
PLAN OF DISTRIBUTION.......................................................S-28
LEGAL MATTERS..............................................................S-29
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.................................................... 13
Security and Sources of Payment for the Notes............................... 21
Definitions and Provisions Related to ARC Notes and Auction Procedures...... 38
ARC Note Settlement Procedures.............................................. 67
Definitions and Provisions Related to Libor Rate Notes...................... 70
Book-entry Registration..................................................... 77
Additional Notes............................................................ 81
Summary of Certain Provisions of the Indenture.............................. 83
Seller Representations and Warranties.......................................105
Description of Credit Enhancement...........................................110
The Company..................................................................112
The Company's Student Loan Purchase Program..................................115
Description of the Federal Family Education Loan Program....................118
Guarantee Agencies..........................................................135
Weighted Average Life of the Notes..........................................137
Certain Federal Income Tax Consequences.....................................138
ERISA Considerations........................................................142
Certain Relationships among Financing Participants..........................144
Plan of Distribution........................................................144
Legal Matters...............................................................145
Financial Information.......................................................146
Ratings.....................................................................146
Index to and Glossary of Certain Terms......................................147
Appendix I-Global Clearance, Settlement and Tax Documentation Procedures....I-1
S-1
<PAGE>
Important Notice About Information Presented in the
Prospectus Supplement and the Accompanying Prospectus
We provide information to you about the Series _____ Notes in two
separate documents that progressively provide more detail: (a) this Prospectus
Supplement, which describes the specific terms of the Series _____ Notes, and
(b) the accompanying Prospectus, which provides general information, some of
which may not apply to the Series _____ Notes. You are urged to read both the
Prospectus and this Prospectus Supplement in full to obtain information
concerning the Series ____ Notes. You may not purchase the Series ____ Notes
unless you have received both the Prospectus and this Prospectus Supplement.
If there is a conflict between this Prospectus Supplement and the
accompanying Prospectus, you should rely on the information in this Prospectus
Supplement.
Cross-references are included in this Prospectus Supplement and the
accompanying Prospectus to captions in the materials where you can find further
discussions about related topics. The table of contents on the preceding page
provides the pages on which these captions are located.
You can find a listing of the pages where capitalized terms used in this
Prospectus Supplement and the accompanying Prospectus are defined under the
caption "Index to and Glossary of Defined Terms" beginning on page ___ in the
accompanying Prospectus. Any capitalized terms that are used but not defined in
this Prospectus Supplement have the meanings assigned in the Prospectus.
S-2
<PAGE>
SUMMARY
The following summary is a very general overview of the terms of the
Series _____ Notes and does not contain all of the information that you need to
consider in making your investment decision. Before deciding to purchase the
Series _____ Notes, you should consider the more detailed information appearing
elsewhere in this Prospectus Supplement and in the Prospectus. This Prospectus
Supplement contains forward-looking statements that involve risks and
uncertainties. See "Special Note Regarding Forward Looking Information" in the
Prospectus.
S-3
<PAGE>
Securities Offered
The Student Loan Asset-Backed Notes, Series _____, have an aggregate
stated principal balance of $_____ and consist of the following classes:
. $ Senior Class ____ A-__
Notes, [Fixed] [Auction]
[Index] Rate;
[. $ Senior Class ____ A-__
Notes, [Fixed] [Auction]
[Index] Rate;]
. $ Subordinate Class ____
B-__ Notes [Fixed]
[Auction]
[Index] Rate;
[. $ Subordinate Class ____
B-__ Notes [Fixed]
[Auction]
[Index] Rate;]
[. $ Junior Subordinate
Class ____ C-__ Notes
[Fixed] [Auction] [Index]
Rate;]
[. $ Junior Subordinate
Class ____ C-__ Notes,
[Fixed] [Auction] [Index]
Rate.]
Designations
. The Class ____A-_ Notes and the Class ____A-_ Notes are referred
to collectively herein as the "Class ____ A Notes."
[. The Class ____ [A-] [B-] [C-]Notes are referred to collectively
herein as the "Fixed Rate Notes."]
[. The Class ____A-__ Notes, Class ____B-__ Notes and Class ___C-_
Notes are referred to collectively herein as the "ARC Notes."]
[. The Class ____A-__ Notes, Class ____B-_ Notes, and Class ___C-__
Notes are referred to collectively herein as the "Index Rate
Notes."]
Closing Date
------------- --, -----.
Denominations
We will issue the Class __ [Fixed] [Auction] [Index] Rate Notes in
minimum denominations of [$__________] [or any integral multiple thereof] [ and
in $__________ increments above such amount] [and the Class __ [Fixed] [Auction]
[Index] Rate Notes will be issued in minimum denominations of [$__________] [or
any integral multiple thereof] [and in $__________ increments above such
amount].
Interest Rates
[Fixed Rate Notes]
[The Fixed Rate Notes will bear interest at the following rates per
annum:
Class ______ %
Class ______ %]
[ARC Notes]
[The ARC Notes will bear interest as set forth below:]
[Class _______ ARC Notes
S-4
<PAGE>
"Auction Period" means for periods beginning _______ __, ____,
initially, __ days.
"Initial Auction Date" means _______ __, ____.
"Initial Rate" means ____%.
"Initial Rate Adjustment Date" means _______ __, ____.]
[Class _______ ARC Notes
"Auction Period" means for periods beginning _______ __, ____,
initially, __ days.
"Initial Auction Date" means _______ __, ____.
"Initial Rate" means ____%.
"Initial Rate Adjustment Date" means _______ __, ____.]
[For each Auction Period, the interest rate for a class of ARC Notes
will equal the lower of:
o the rate determined pursuant to the auction procedures described
in the accompanying Prospectus under "Definitions and Provisions
Related to ARC Notes and Auction Procedures;" and
o a "Maximum Auction Rate," generally equal to the greater of the
rate of interest on certain United States Treasury Securities,
plus a margin that varies from 1.20% to 1.75% depending upon the
ratings assigned to the Notes.
[We may change the length of the Auction Period for any class of ARC
Notes as described in the Prospectus under the heading "Definitions and
Provisions Related to ARC Notes and Auction Procedures Auction Note Interest
Rate."]
[LIBOR Rate Notes]
[The LIBOR Rate Notes will bear interest as set forth below:]
[Class _____ LIBOR Rate Notes
"Initial Interest Payment Date" means __________________________.
"Initial Interest Period" means ______________________.
"LIBOR-Based Rate" means _________________.]
[Class _____ LIBOR Rate Notes
"Initial Interest Payment Date" means __________________________.
"Initial Interest Period" means ______________________.
"LIBOR-Based Rate" means _________________.]
[For each Interest Period, the LIBOR Rate Notes will bear interest at
the lower of:
o [one month] [three month] [six month] LIBOR Rate plus _____%; or
o Describe the interest rate cap.]
[We may change the length of the Interest Period for the LIBOR Rate
Notes as described in the accompanying Prospectus under the heading "Definitions
and Provisions Related to LIBOR Rate Notes."]
[Treasury Rate Notes]
[The Treasury Rate Notes will bear interest as set forth below:]
[Class ___ __ Treasury Rate Notes
"Initial Interest Payment Date" means __________________________.
"Initial Interest Period" means ______________________.
"Treasury-Based Rate" means _________________.]
[Class ___ __ Treasury Rate Notes
"Initial Interest Payment Date" means __________________________.
"Initial Interest Period" means ______________________.
"Treasury-Based Rate" means _________________.]
S-5
<PAGE>
[For each Interest Period, the Treasury Rates Notes will bear interest
at the lower of:
o The ___________________ Treasury Bill Rate plus _____%; or
o Describe the interest rate cap.]
[Accrual Notes]
The Accrual Notes will not receive payments of interest until [designate
interest accrual date]. Until such time, interest accrued during each interest
period will be capitalized and added to their principal balance. [Beginning
__________ __, ____] [upon the occurrence of [describe event]], the Accrual
Notes will be entitled to receive payments of interest on each [describe
Interest Payment Date.] The Accrual Notes shall be designated as [Senior]
[Subordinate] [Junior-Subordinate] Notes under the Indenture.]
[The Accrual Notes will accrue interest as set forth below:
"Accrual Rate" means ________________.
"Interest Accrual Date" means _____________.
"Interest Payment Date" means _____________.]
Distributions on the Series _____ Notes
Interest Payments. On the first business day of each month, commencing
________ _, ____, we will pay the holders of each class of Fixed Rate Notes the
interest accrued on their Notes during the preceding interest accrual period at
the respective interest rates listed on the cover page. Interest will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
For the interest payment due __________, ____, the interest accrual period will
begin on __________, ____ and end on _________, ____. For all other interest
payment dates, the interest accrual period will be the preceding calendar month.
On the first business day after each Auction Period for a class of ARC
Notes, we will pay the holders of the class of Notes the interest accrued on
their ARC Notes during the preceding Auction Period at the applicable interest
rate. Interest will be calculated on the basis of a [360-day] [365-day] year and
the actual number of days elapsed during the related Auction Period.
On the first business day of each month, commencing _________ __, ____,
we will pay the holders of each class of [LIBOR] [Treasury] Rate Notes the
interest accrued on their Notes during the preceding interest accrual period at
the applicable interest rate. Interest will be calculated on the basis of a
360-day year consisting of twelve 30-day months.
[Add description of Accrual Note Payments, if any.]
Principal Redemptions. Except in certain circumstances that we consider
unlikely to occur, we will not redeem any series or class of our Notes issued
under the Indenture of Trust (regardless of when issued) until
______________________. Commencing in ______________________, to the extent
funds are available in the Acquisition Fund created under the Indenture we will
redeem our [specify class] Notes each month in the amount necessary to reduce
their principal balance to the percentage of their original principal balance
set forth for such month on Exhibit 1:
[Except in certain circumstances that we consider unlikely to occur, we
will not redeem any other series or class of our Notes (regardless of when
issued) until ______________________. Commencing in ______________________, to
the extent funds are available in the Acquisition Fund we will redeem our Notes
as follows:
o first, the [specify class] Notes each month in the amount needed
to reduce their principal balance to the percentage of their
original principal balance set forth for such month on Exhibit 1;
o second, after the [specify class] Notes have been redeemed in
full (which is scheduled to occur on ____ _, ____), the [specify
class] Notes each month in the amount needed to reduce their
principal balance to the percentage of their original principal
balance set forth for such month on Exhibit 1; and
S-6
<PAGE>
o third, after the [specify class] Notes have been redeemed in full
(which is scheduled to occur on ____ _, ____), the [specify
class] Notes each month in the amount needed to reduce their
principal balance to the percentage of their original principal
balance set forth for such month on Exhibit 1.]
o [Specify principal payments for other classes of Notes]
[Beginning in ____, ____or such later date as approved in writing by the
rating agencies rating our Notes, if funds remain in the Acquisition Fund after
redeeming the [specify class] Notes as described above, we also intend to redeem
our remaining Notes as follows:
o first, all [specify class] ARC Notes (including classes now or
previously issued and those that may be issued in the future)
will be redeemed in the order that we may determine in our sole
discretion from time to time;
o second, after all [specify class] ARC Notes have been redeemed in
full, all [specify class] Notes (including those now or
previously issued and those that may be issued in the future)
will be redeemed in the order that we may determine from time to
time in our sole discretion, subject to the limitations described
in the attached Prospectus under "Description of the Notes -
Notice and Partial Redemption of Notes";
o third, the [specify class] Notes that remain outstanding, in that
order, until each such class has been redeemed in full; and
o fourth, any [specify class] Notes (including those now or
previously issued and those that may be issued in the future)
that remain outstanding will be redeemed in the order that we may
determine in our sole discretion from time to time.]
[Notwithstanding the foregoing, we have the option of redeeming some or
all of the Class B Notes prior to redeeming the Class A Notes if the ratio of
our assets to our liabilities exceeds certain levels (currently ___% of Class A
Notes). ] [See "Description of the Notes - Notice and Partial Redemption of
Notes" in the Prospectus.]
Pool Characteristics
The portfolio of student loans [currently held in the trust estate and]
that we expect to acquire with the proceeds of the Series _____ Notes and to
pledge to the Trustee under the Indenture, which are referred to as the financed
student loans, is described below under "Characteristics of the Financed
Eligible Loans."
[Servicer and Subservicer
Union Bank and Trust Company, Lincoln, Nebraska ("Union Bank") will act
as servicer for our student loans. UNIPAC Service Corporation will act as
subservicer and custodian for our student loans. We also expect that
______________________ will act as a subservicer and custodian for a portfolio
of student loans acquired with the proceeds of the Series _____ Notes.] See "The
Issuer's Student Loan Program" and "Certain Relationships Among Financing
Participants" in the Prospectus.]
Indenture
We will issue the Series _____ Notes pursuant to an Indenture of Trust
dated as of ________ _, 19__, between us and Zions First National Bank acting as
Trustee, and a related Series _____ Supplemental Indenture of Trust which are
referred to collectively as the "Indenture".
The Notes are payable solely from the funds and assets held in the trust
estate created under the terms of the Indenture.
S-7
<PAGE>
We [have previously issued, and] may issue in the future Notes of other
series which also [are or] will be secured by the student loans held by the
Trustee under the Indenture. All Notes designated as Class A Notes constitute
"Senior Notes" under the Indenture. All Notes designated as Class B Notes
constitute "Subordinate Notes" under the Indenture. All Notes designated Class C
Notes constitute "Junior Subordinate Notes" under the Indenture.
Mandatory Redemption
The Series _____ Notes are subject to mandatory redemption from moneys
held for that purpose in the Acquisition Fund, as described above under
"Distributions on the Series _____ Notes-Principal Redemptions." If funds are
not available to redeem the Class ___-_ Notes or the Fixed Rate Notes in
accordance with their paydown schedules, we will no longer be able to use
principal payments received on our student loans to purchase additional student
loans. Rather, we will use all such moneys for mandatory redemption of Notes
until such time as the paydown schedules are met. Such an occurrence will not
constitute an event of default under the Indenture, unless our missed payment
was at a scheduled final maturity.
Optional Redemption
The ARC Notes are subject to optional redemption at our direction on any
Interest Payment Date for the Class of ARC Notes being redeemed at a redemption
price equal to the principal amount of such Notes to be redeemed plus interest.
See "Description of the Notes - Optional Redemption" in the Prospectus for
limitations on our ability to redeem Notes at our option.
Extraordinary Optional Redemption
We may redeem the Class ____A-__ Notes, the Class ____A-__ Notes and the
Class ____B-__ Notes at any time if we determine that we are unable to acquire
additional student loans, that the rate of return on student loans has
materially decreased, or that the costs of administering the trust estate have
placed unreasonable burdens upon our ability to perform our obligations under
the Indenture. If less than all of the Class ____A-__ Notes, the Class ____A-__
Notes and the Class ____B-__ Notes are to be subject to extraordinary optional
redemption, we will determine in our sole discretion the class of Notes to be
redeemed. Class ____A-__ Notes, and Class ____A-__ Notes will be redeemed prior
to redemption of the Class ____B-__ Notes, however.
Optional Purchase
If the aggregate principal balance on all of our Notes that remains
outstanding is 10% or less of the initial aggregate principal balance of all our
Notes, we may purchase all of our outstanding Notes at a price equal to the
current value of the Notes plus accrued interest. This will result in our
redeeming of all of the Notes.
Acquisition Fund; Use of Principal Receipts
Approximately $___________ from the proceeds of this offering will be
deposited in the Acquisition Fund on the date the Series _____ Notes are issued.
Those funds will be used to purchase a portfolio of approximately $___________
of student loans on or about that date. [The remaining amounts in Acquisition
Fund will be used to acquire portfolios of student loans on or before ________
__, ___. ] See "Use of Proceeds," "The Sellers" and "Characteristics of the
Financed Student Loans" herein. Proceeds deposited in Acquisition Fund and not
used to purchase student loans on or before ________ __, ____ will be used to
redeem Notes.
We will deposit into the Acquisition Fund all principal receipts
received on student loans acquired with the proceeds of the Series _____ Notes.
We will use funds in the Acquisition Fund to acquire additional student loans[,
to provide for mandatory redemption of Notes] and to make certain other payments
and distributions. [If after _______, ____, the principal balance of the Fixed
Rate Notes exceeds the aggregate principal balance of all our student loans that
bear interest at a fixed rate, we will only purchase student loans that bear
interest at a fixed rate unless each rating agency rating our Notes otherwise
approves.] We may purchase additional student loans using funds in the
Acquisition Fund until ___________, ____. The period during which we may
purchase additional loans may be extended with the written approval of the
rating agencies rating of our Notes [or the Surety Bond provider described
below]. At the end of that period we will no longer purchase additional student
loans with principal receipts and we will use those funds to redeem Notes.
[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.]
S-8
<PAGE>
Certain Federal Income Tax Consequences
Kutak Rock will deliver an opinion that for federal income tax purposes,
the Series _____ Notes will be treated as indebtedness. The owners of the Series
____ Notes will be required to include in income interest on the Series ____
Notes as paid in accordance with their respective accounting methods and the
provisions of the Code. See "Federal Income Tax Consequences" in the Prospectus.
ERISA Considerations
Assuming that the Series ____ Notes should be treated as indebtedness
without substantial equity features, the Series _____ Notes are eligible for
purchase by or on behalf of employee benefit plans, 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 _____ Notes that each
class of the Class _____ Notes be rated _____ and _____ by ___________________
and ___________________, respectively, and that the Class _____-_ Notes be rated
no less than "_" and "_" by _________________ and ___________ respectively. See
"Ratings" in the Prospectus.
S-9
<PAGE>
RISK FACTORS
The discussion under the heading "Risk Factors" in the Prospectus
describes the risks associated with your investment in the Series _____ Notes.
In addition, you should consider the following factors:
Principal Balance of Notes Exceeds Aggregate Principal Balance of Student Loans
On the Closing Date, the aggregate principal balance of the Series ____
Notes [and all other Notes we have issued under the Indenture] will be
approximately ___% of the sum of the aggregate principal balance of the student
loans we own and the other assets pledged or to be pledged as collateral for the
Notes. In addition, we may use the principal receipts from our student loans to
acquire additional student loans at a price that exceeds the principal balance
of those student loans.
As a result, if an event of default should occur under the Indenture and
we were required to redeem all of our Notes, our liabilities may exceed our
assets. If this were to occur, we would be unable to repay in full all of the
holders of our Notes. However, the Class A Notes will be redeemed in full before
we redeem any Class B Notes [and the Class B Notes will be redeemed before the
Class C Notes]. In the absence of any such default, excess interest payments
received on the student loans will be used to pay principal on the Notes.
Year 2000 Compliance
The Year 2000 issue arises from the use by software developers of two
digits rather than four to denote year dates in software programs, computer
hardware operating systems and microprocessors - based embedded controls in
automated equipment. As a result, information systems that operate date
sensitive software or automated equipment that contains date sensitive
microprocessors may interpret "00" to signify 1900 rather than 2000, thereby
impairing the ability of the information systems or automated equipment to
correctly calculate, sequence or recognize dates. This could result in serious
malfunctions or even complete failures of affected systems, including an
inability to process transactions, issue securities or checks, or engage in
normal business activities.
We cannot now determine whether the Year 2000 issue will have a material
adverse effect on our business operations. The conduct of our business in
relationship to purchasing loans or administering the loans we own is not
significantly dependent on our own computer programs. However, our loan
servicers, Trustee, the Guarantee Agencies and the Department of Education all
rely heavily on computer programs and systems for processing transactions
related to student loans.
We have made inquiry of the Trustee, Union Bank and UNIPAC Service
Corporation concerning the Year 2000 issue, and have received assurances that
they are, or are working to become, Year 2000 compliant. We are aware that the
Guarantee Agencies and Department of Education are working to address the Year
2000 issue. The Department of Education has indicated that it expects to
complete all Year 2000 work on its Federal Family Education Loan Program
computer systems in March, 1999. However, we cannot provide any assurance that
the Department of Education or the Guarantee Agencies will become Year 2000
compliant in a timely manner. We cannot influence or control the efforts of
third parties to address the Year 2000 issue, nor can we terminate our
dependence on the servicers, Guarantee Agencies or Department of Education.
Under the reasonably likely worst case scenario, the Year 2000 issue could delay
our receipt of principal and interest payments on our financed student loans and
the receipt of claims payments from the Guarantee Agencies. If that delay
continues for a prolonged period, we may be unable to make timely payments of
principal and interest due on our Notes.
[Add discussion of other risk factors]
S-10
<PAGE>
THE SELLERS
We expect to use the proceeds of the Series _____ Notes to purchase
portfolios of student loans in the amounts and from the parties shown below.
Seller Approximate Balance Sale Date
-------- ------------------- -------------
$
$
$
- ---------------------- $-------------
Total $
We have entered into a loan sale agreement with each of the sellers
identified above. Each seller has made representations and warranties in its
loan sale agreement with respect to the student loans that we will purchase and
has agreed to repurchase any student loans for which any representation or
warranty is later determined to have been materially incorrect. If any of the
sellers fail to deliver the student loans described in their loan sale agreement
and we are not able to purchase other student loans, we will use the funds that
would have been paid to the seller to redeem Series ____ Notes.
S-11
<PAGE>
[PREVIOUSLY ISSUED NOTES]
[Information concerning each outstanding series and class of Notes that
we previously issued and is secured by the trust estate created under the
Indenture is provided below. The financed student loans and other assets pledged
to the Trustee will serve as collateral for the outstanding Notes and any
additional Notes that may be issued under the Indenture in the future, as well
as the Series ____ Notes being offered by means of this Prospectus Supplement
and the attached Prospectus.
<TABLE>
<CAPTION>
Original Outstanding
Principal Principal Amount Interest Maturity
Series Class Date Issued Amount (As of , ) Rate Date
------ ----- ----------- ------ ---------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
[As of the date of this Prospectus Supplement, all payments of scheduled
principal and interest due and payable on each series of Notes specified above
have been paid in full. As of ___________________, the financed student loans
that are in repayment and pledged to the Trustee as collateral for the
outstanding Notes had delinquencies as follows: $___________________ was 30 to
60 days delinquent; $___________________ was 61 to 90 days delinquent;
$___________________ was 91 to 120 days delinquent; and $___________________ was
greater than 120 days delinquent. As of ___________________, there were
$___________________ of our student loans in claim status with a Guarantee
Agency. As of ___________________, the cumulative amount of net losses by
principal balance of the financed student loans was $___________________.]
[The following fees are payable (per annum) with respect to the Notes
previously issued:
<TABLE>
<CAPTION>
Broker Maintenance and
Trustee Servicing Auction Dealer Calculation Agent Operating
Series Fee Fee Agent Fees Fees Fees Expenses
------ --- --- ---------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
[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 Insurance]
[We will obtain Note Insurance for the [Class __ Notes] which will
insure timely payments of interest and payments of principal. Principal payments
will be insured by the insurance provider on the following basis:
[Describe terms of insurance]
S-12
<PAGE>
The amount of the Note Insurance will be [____]% of the aggregate
initial principal amount of the [Class __ Notes] [financed student loans]. The
amount available under the Note 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 student loans]].
The insurance provider is [name of note insurance provider] [which is a
member of [name of insurance group]. The claims paying ability of the [name of
insurance provider] [name of insurance group] is rated "____" by the [name of
rating agency]]. The address of the insurance provider is [address].]
[Reserve Fund]
[The Reserve Fund is currently funded in an amount equal to __% of the
aggregate principal amount of the Notes that we now have outstanding.] We will
make a deposit to the Reserve Fund on the Closing Date in an amount equal to
____ of the principal balance of the Series ____ Notes. If funds available in
the Revenue Fund are not sufficient to make payments when due, moneys in the
Reserve Fund may be used to pay amounts due and payable to Noteholders. Moneys
withdrawn from the Reserve Fund are restored through transfers from the Revenue
Fund or the Acquisition Fund as directed by us and as available. [We are
required to maintain a minimum balance in the Reserve Fund of $_________.]
[Interest Rate Swap]
[The Company and the swap counterparty have entered into an interest
rate swap. Unless terminated earlier, the interest rate swap will terminate on
the _____ payment date. The Company will owe the swap counterparty a net swap
payment when the weighted average discount rate per annum for direct obligations
of the United States with a maturity of 13 weeks plus a specified percentage is
greater than the London Interbank Offered Rate for deposits in U.S. dollars
having a maturity of three months. The swap counterparty will owe the Company a
net swap receipt when the calculation described in the immediately preceding
sentence is negative. The amount of a net swap payment or a net swap receipt is
the product of the difference in the rates described above and the interest rate
swap's scheduled notional amount.
The scheduled notional amount for any quarterly payment date is set
forth in Exhibit __ to this Prospectus Supplement. We expect the scheduled
notional amount for any quarterly payment date to equal approximately [__]% of
the then outstanding principal balance of the Senior Notes and the Subordinate
Notes.
While the interest rate swap is in effect, it will reduce, but not
eliminate, the risk that a note rate will be determined by the interest rate
cap.]
[Insert Description of Interest Rate Swap Party]
[Letter of Credit]
[We will obtain an irrevocable [standby] [direct pay] letter of credit
from [name of bank]. The Letter of Credit will protect [Class __] Noteholders
against losses on financed student loans to the maximum of the stated amount of
the Letter of Credit. The initial Letter of Credit will expire no earlier than
- ----------.
The initial amount of the Letter of Credit will be [__]% of the
aggregate initial principal amount of the [Class __ Notes] [financed student
loans]. The amount available under the Letter of Credit on any subsequent
Interest Payment Date will be equal to this initial amount minus 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].
S-13
<PAGE>
We will be required to renew or replace the Letter of Credit before its
expiration until the [designate Class] Series ____ Notes are no longer
outstanding. If we do 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 bank issuing the Letter of Credit 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].]
Subordinated Notes
The rights of the Class B Noteholders [and the Class C Noteholders] to
receive payments of interest and principal are subordinated to such rights of
the Class A Noteholders. [The rights of the Class C Noteholder to receive
payments of interest and principal are subordinated to such rights of the Class
A Noteholders and the Class B Noteholders.] This subordination is intended to
enhance the likelihood of regular receipt by the Class A Noteholders [, and
secondarily, the Class B Noteholders,] of the full amount of scheduled monthly
payments of principal and interest due them and to protect the Class A
Noteholders[, and secondarily, the Class B Noteholders,] against losses.
Class A Noteholders have a preferential right to receive, before any
distributions to Class B Noteholders, current distributions from the trust
estate and, if necessary, the right to receive future distributions on our
student loans that would otherwise have been payable to the holders of Class B
Notes. The Class B Notes are then entitled to the available amounts, if any,
remaining in the trust estate. [The Class B Noteholders have a preferential
right to receive, before any distributions to the Class C Noteholders, current
distributions from the trust estate and, if necessary, the right to receive
future distributions on our student loans that otherwise would have been payable
to the holders of the Class C Notes. The Class C Notes are then entitled to the
available amounts, if any, remaining in the trust estate.] See "Description of
Credit Enhancement-Subordinates Notes" in the Prospectus.
[Surety Bonds]
[A Surety Bond in the amount of $________ with respect to the Series __
Notes will be obtained by the Company in favor of the Trustee solely on behalf
of the holders of the Series __ Notes. The Surety Bond will provide for coverage
of timely payment of all interest and ultimate payment of all principal due on
the related Series ___ Notes. The Company will pay $________ to the issuer of
the Surety Bond.]
[Description of the issuer of Surety Bond to be provided.]
S-14
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the Series _____
Notes will be applied as follows:
We expect that approximately $___________ of the proceeds deposited to
the Acquisition Fund will be used on the Closing Date to acquire a portfolio of
student loans. [The remaining proceeds deposited to the Acquisition Fund are
expected to be used to acquire portfolios of student loans in _________, ____.]
S-15
<PAGE>
CHARACTERISTICS OF THE
FINANCED STUDENT LOANS*
(As of_____________ __, ____ )
Composition of the [existing Financed Student Loans and additional]
Financed Student Loans expected to be acquired with the proceeds of
Series _____ Notes
Aggregate Outstanding Principal Balance........................... $
Number of Borrowers...............................................
Average Outstanding Principal Balance Per Borrower................ $
Number of Loans...................................................
Average Outstanding Principal Balance Per Loan.................... $
Weighted Average Annual Interest Rate............................. %
Approximate Weighted Average Remaining Term (months) (does not
include school, grace, deferment or forbearance)..................
Weighted Average Remaining Term (months)..........................
Distribution of the Financed Student Loans by Loan Type
Outstanding Percent of Loans
Number of Principal by Outstanding
Loan Types Loans Balance Balance
- ------------------------- ----------------- ------------------- ----------------
Consolidated $ %
PLUS
SLS
Stafford - Subsidized
Stafford - Unsubsidized
Total $ 100.00%
=============== ==================== ======
Distribution of the Financed Student Loans by Interest Rate
Outstanding Percent of Loans
Number of Principal by Outstanding
Interest Rate Loans Balance Balance
------------------- ------------------- ------------------ -----------------
$ %
Total $ 100.00%
=========== ============== ======
Distribution of the Financed Student Loans by School Type
Outstanding Percent of Loans
School Number of Principal by Outstanding
Type Loans Balance Balance
2-Year Institution $ %
4-Year Institution
Proprietry
Unknown
Total $ 100.00%
============= ================ ======
S-16
<PAGE>
Distribution of the Financed Student Loans by Borrower Payment Status
Outstanding Percent of Loans
Borrower Number of Principal by Outstanding
Payment Status Loans Balance Balance
School $ %
Grace
Deferment
Forbearance
Claim
Repayment
First Year Repayment
Second Year Repayment
Third Year Repayment
More than 3 years
Total $ 100.00%
=========== ===================== ======
S-17
<PAGE>
Geographic Distribution of the Financed Student Loans
Outstanding Percent of
Number of Principal Loans
Location(1) Loans Balance by Outstanding
Balance
Alabama
Alaska
American Samoa
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
Northern Mariana
Islands
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 $ 100.00
======= ==================== ======
(1) Based on the permanent billing addresses of the borrowers of the financed
student loans shown on the Servicer's records.
S-18
<PAGE>
Distribution of the Financed Student Loans by Date of
Disbursement
Outstanding Percent of Loans
Disbursement Number of Principal by Outstanding
Date Loans Balance Balance
Pre-October, 1993 $ %
October 1, 1993 and thereafter
Total $ 100.00%
============ =============== ======
Distribution of the Financed Student Loans by
Guarantee Agency
Percentage of
Outstanding Loans
Guarantee Number of Principal by Outstanding
Agency Loans Balance Balance
S-19
<PAGE>
Distribution of the Financed Student Loans by Range of Principal Balance
Percent
Outstanding of Loans by
Number of Principal Outstanding
Principal Balance Range Borrowers Balance Balance
Less than $500 $ %
$500 - $999.00
$1,000 - $1,999.00
$2,000 - $2,999.00
$3,000 - $3,999.00
$4,000 - $5,999.00
$6,000 - $7,999.00
$8,000 - $9,999.00
$10,000 - $14,999.99
$15,000 - $19,999.99
$20,000 or Greater
Total $ 100.00%
============== ================== ======
S-20
<PAGE>
INFORMATION RELATING TO THE GUARANTEE AGENCIES
The payment of principal and interest on all of the student loans held
in the trust estate created under the Indenture which are referred to as the
"financed student loans," will be guaranteed by designated Guarantee Agencies
and will be reinsured by the United States Department of Education. The
guarantee provided by each Guarantee Agency is an obligation solely of that
Guarantee Agency and is not supported by the full faith and credit of the
federal or any state government. However, the Higher Education Act provides that
if the Secretary of Education determines that a Guarantee Agency is unable to
meet its insurance obligations, the Secretary shall assume responsibility for
all functions of the Guarantee Agency under its loan insurance program. For
further information on the Secretary's authority in the event a Guarantee Agency
is unable to meet its insurance obligations see "Description of Guarantee
Agencies" in the Prospectus.
Presented below is information with respect to each Guarantee Agency
that is expected to guaranty 5% or more of our financed student loans as of
________ __, ____. Except as otherwise indicated, the information regarding each
Guarantee Agency has been obtained from the Guarantee Agency. We have not
independently verified this information.
Guarantee Volume. The following table sets forth the approximate
aggregate principal amount of federally reinsured education loans that have
first become committed to be guaranteed by each of the Guarantee Agencies in
each of the five Federal Fiscal Years 1994 through 1998.
Stafford, Unsubsidized Stafford, SLS, PLUS and Consolidated Loans Guaranteed
Dollars in Millions
[Agency] [Agency] [Agency] [Agency] [Agency]
1994
1995
1996
1997
1998
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 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 sets forth each Guarantee Agency's cumulative
cash reserves and their corresponding reserve ratios for the five Federal Fiscal
Years 1994 through 1998:
<TABLE>
<CAPTION>
[Agency] [Agency] [Agency] [Agency] [Agency]
Federal Cumulative Cumulative Cumulative Cumulative Cumulative
Fiscal Cash Reserve Cash Reserve Cash Reserve Cash Reserve Cash Reserve
Year Reserves* Ratio Reserve* Ratio Reserve* Ratio Reserves*Ratio Reserves*Ratio
- -------- --------- ------ --------- -------- --------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994
1995
1996
1997
1998
[Agency] [Agency] [Agency] [Agency]
Federal Cumulative Cumulative Cumulative Cumulative
Fiscal Cash Reserve Cash Reserve Cash Reserve Cash Reserve
Year Reserves* Ratio Reserves* Ratio Reserves* Ratio Reserves* Ratio
- --------- ---------- ---------- ---------- ------- ---------- ------- -------------- -----------
1994
1995
1996
1997
1998
- --------------------
* 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 for the five Federal Fiscal
Years 1994 through 1998.
Recovery Rate
Federal
Fiscal Year [Agency] [Agency] [Agency] [Agency] [Agency] [Agency]
1994
1995
1996
1997
1998
Claims Rate. For each Federal Fiscal Year that a Guarantee Agencies'
claims rate exceeded 5%, the claims of such Guarantee Agency were not fully
reimbursed by the Department. Notwithstanding the claims rate, the Guarantee
Agencies are required to pay the Trustee either 100% or 98% 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 for the last five Federal Fiscal Years 1994 through 1998:*
Claims Rate
Federal
Fiscal Year
[Agency] [Agency] [Agency] [Agency] [Agency] [Agency]
1994
1995
1996
1997
1998
- --------------------
* Data obtained from the Department of Education in reports on "trigger rates."
</TABLE>
S-21
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges
for the Company for each of the periods indicated. 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.
Fiscal Year Fiscal Year Period from inception to
Ended Ended
--------------- -------------------- ------------------------
Earnings ...... $ $ $
Fixed Charges
Ratio..........
S-22
<PAGE>
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement dated as of __________, ____, among the Company and the underwriters
named below, the Company has agreed to sell to each of the underwriters and each
of the underwriters has agreed to purchase from the Company, the principal
amount of the Series _____ Notes set forth opposite its respective name.
Underwriter Class A- Class A- Class B- Class B- Class C- Class C-
- ----------- --------- --------- ------- --------- ---------- -------
Total
The Company has been advised by the underwriters that they propose to
offer the Series _____ ARC Notes to the public initially at the respective
offering prices set forth on the cover page of this Prospectus Supplement. Until
the distribution of Series _____ ARC Notes is completed, the rules of the
Commission may limit the ability of the underwriters and certain selling group
members to bid for and purchase such Series _____ ARC Notes. As an exception to
these rules, the underwriters are permitted to engage in certain transactions
that stabilize the price of the Series _____ Notes. Such transactions consist of
bids of purchase for the purpose of pegging, fixing or maintaining the price of
such Series _____ Notes.
In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Company nor the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Series _____ ARC Notes. In
addition, neither the Company nor the underwriters makes any representation that
the underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
The Company has been advised by the underwriters that they propose to
offer the Fixed Rate Notes from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the Company from the sale of the Fixed Rate Notes are expected to be
approximately $___________, plus accrued interest, but before deducting a
portion of the expenses payable by the Company. In connection with the purchase
and sale of the Series _____ Notes, the underwriters may be deemed to have
received compensation in the form of underwriting discounts and commissions.
The Company has been advised by the underwriters that they presently
intend to make a market in the Series _____ Notes. However, they are not
obligated to do so, any market-making may be discontinued at any time, and there
can be no assurance that an active public market for the Series _____ Notes will
develop.
From time to time the underwriters or their affiliates may perform
investment banking and advisory services for, and may provide general financing
and banking services to, affiliates of the Company.
The Underwriting Agreement provides that the Company will indemnify
the underwriters against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended, and the Company has agreed to reimburse
the underwriters for the fees and expenses of counsel to the underwriters.
S-23
<PAGE>
LEGAL MATTERS
Certain legal matters, including certain income tax matters, will be
passed upon for the Company by Kutak Rock, Denver, Colorado. Certain legal
matters will be passed upon for the underwriters by Stroock & Stroock & Lavan
LLP, New York, New York, and for the Company by Ballard Spahr Andrews &
Ingersoll, LLP, Denver, Colorado.
S-24
<PAGE>
PROSPECTUS
UNION FINANCIAL SERVICES-1, INC.
$
STUDENT LOAN ASSET-BACKED NOTES
We will periodically issue our Student Loan Asset-Backed Notes in one
or more series. The specific terms of the Notes included in each series will be
described in a supplement to this Prospectus.
We will use proceeds from the sale of the Notes to acquire portfolios
of student loans originated by eligible lenders under the Federal Family
Education Loan Program. Those student loans will be pledged to a trust estate
established to secure repayment of the Notes. The Notes will be limited
obligations of our company payable solely from that trust estate.
You should read this Prospectus and any Prospectus Supplement
carefully before you invest. This Prospectus may be used to offer and sell the
Notes only if it is accompanied by a Prospectus Supplement.
Offers of the Notes may be made by different methods, including
offerings through underwriters, as more fully described under "Plan of
Distribution" below and in the related Prospectus Supplement. Unless otherwise
indicated for a series of the Notes, the Notes will not be listed on a national
securities exchange.
The date of this Prospectus is ___________________, _____.
<PAGE>
ABOUT THIS PROSPECTUS
This Prospectus is part of a registration statement that we filed with
the Securities and Exchange Commission utilizing a "shelf registration"
procedure. We may sell our Student Loan Asset-Backed Notes in one or more
offerings pursuant to the "shelf registration" procedure up to a total dollar
amount of
$----------.
This Prospectus provides you with a general description of the Notes
we may offer. Each time we sell Notes, we will provide a Prospectus Supplement
relating to the series of Notes being offered that will include
o a description of the aggregate principal amount, authorized
denominations and interest rate or rates (or the manner of
determining such rate or rates) of each class of the Notes to be
sold
o information concerning the student loans that will be purchased
with the proceeds of the Notes
o information with respect to any Notes that we have previously
issued that are secured by a common pool of assets that secure
payment of the Notes described in the Prospectus Supplement
o information concerning the Guarantee Agencies providing guarantees
for the student loans that will be acquired with Note proceeds
o information with respect to any credit enhancement
o any updates or changes to the information presented in this
Prospectus.
WHERE TO FIND MORE INFORMATION
We are subject to the reporting requirements of the Securities
Exchange Act of 1934 and to comply with those requirements, we file annual,
quarterly and special reports and other information with the SEC. You may read
and copy our registration statement and reports and other information that we
file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains a website at http://www.sec.gov from which our registration statement
and reports are available. Our parent company maintains a web site that provides
information concerning our company at http://www.ufscorp.com.
You should rely only on the information contained in or incorporated
by reference into this Prospectus and any Prospectus Supplement. We have not
authorized anyone else to provide you with different information. We are not
making an offer of the Notes in any state where the offer is not permitted. You
should not assume that the information in this Prospectus or any Prospectus
Supplement is accurate as of any date other than the date appearing on the front
cover of those documents.
REPORTS TO NOTEHOLDERS
Periodic monthly reports concerning the Notes and the security for the
Notes will be provided to the Noteholders. Those reports will not be reviewed by
a certified public accounting firm. If Notes are issued in book-entry form and
registered in the name of Cede & Co., the nominee of The Depository Trust
Company, or Cedelbank, S.A. or the Euroclear System, then all reports will be
provided to those entities which in turn will provide such reports to their
eligible participants. Those participants will then forward such reports to the
beneficial owners of Notes. See "Book Entry Registration" herein.
i
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" into this Prospectus
the information we file with them, which means that we can disclose important
information to you by referring you to the reports we file with the SEC. We
hereby incorporate by reference the following reports:
(i) Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
and
(ii) The Quarterly Report on Form 10-Q for the most recent calendar quarter.
The Annual Report on Form 10-K and the Quarterly Report on Form 10-Q are
available on our parent company's website at HTTP://WWW.UFSCORP.COM. All
periodic reporting documents we file with the SEC after the date of this
Prospectus and before all of the Notes have been issued shall be deemed to be
incorporated by reference in this Prospectus and to be a part of this Prospectus
from the date we file those documents. We will provide you, without charge, a
copy of any of the documents incorporated by reference upon written or oral
request directed to Union Financial Services-1, Inc., 1801 California Street,
Suite 3920, Denver, Colorado 80202, Attention: Ronald W. Page, Telephone: (303)
292-6930.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Prospectus and the Prospectus Supplement, including
those concerning our expectations as to our ability to purchase eligible student
loans, to structure and to issue competitive securities, and certain of the
information presented in this Prospectus and the Prospectus Supplement,
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. 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" in this Prospectus and in the Prospectus Supplement.
ii
<PAGE>
TABLE OF CONTENTS TO PROSPECTUS
Page
ABOUT THIS PROSPECTUS..........................................................i
WHERE TO FIND MORE INFORMATION.................................................i
REPORTS TO NOTEHOLDERS.........................................................i
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................ii
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS.............................ii
iii
<PAGE>
SUMMARY OF THE OFFERING.....................................................viii
Securities Offered................................................viii
Parties...........................................................viii
Interest Rates....................................................viii
Payments............................................................ix
Stated Maturity Date.................................................x
Redemption Provisions................................................x
The Student Loans We Purchase.......................................xi
Portfolio Characteristics...........................................xi
Student Loan Guarantees.............................................xi
Indenture..........................................................xii
Subordinated Notes.................................................xii
Funds .............................................................xii
Credit Enhancement................................................xiii
Registration of Notes.............................................xiii
Certain Federal IncomeTax Consequences............................xiii
ERISA Considerations..............................................xiii
Ratings............................................................xiv
RISK FACTORS...................................................................1
The Notes are Payable Solely From the Trust Estate...................1
Failure to Comply with Loan Origination and Servicing
Procedures for Student Loans May Result in
Loss of Guarantee and Other Benefits............................1
Risk of Loss from Use of Shared Lender Identification Number.........1
Perfection of Security Interest in Our Student Loans is
Dependent Upon Actions of Others................................2
Insolvency of our Parent Company or Sellers of Loans
Could Result in Delays in Payment...............................3
The Validity of Our Loan Purchases May be Challenged.................3
Changing Assets of the Trust Estate..................................4
Variability of Our Revenues .........................................4
Maturity and Prepayment Considerations...............................4
Unsecured Nature of Financed Eligible Loans; Financial
Status of Guarantee Agencies ................................... 5
Reliance Upon Sellers................................................5
Congressional Actions May AffectOur Student Loan Portfolio...........5
Competition Created by the Federal Direct Student Loan Program
May Impact Our Student Loan Program...............................6
Early Payment of the Notes...........................................6
Subordination of Class Band Class C Notes;
Limited Assets for Payments.......................................6
Issuance of Additional Notes.........................................6
Different Rates of Change in Interest Rate Indexes
May Affect Our Cash Flow.........................................7
Book-Entry Registration..............................................7
Ratings of the Notes.................................................7
DESCRIPTION OF THE NOTES.......................................................8
General..............................................................8
Fixed Rate Notes.....................................................8
ARC Notes............................................................8
LIBOR Rate Notes.....................................................9
Treasury Rate Notes..................................................9
Accrual Notes.......................................................10
Payments of the Notes...............................................10
Mandatory Redemption................................................10
Optional Redemption.................................................11
Extraordinary Optional Redemption...................................11
Optional Purchase...................................................12
Notice and Partial Redemption of Notes..............................12
Accelerated Maturity of Notes.......................................12
iv
<PAGE>
SECURITY AND SOURCES OF PAYMENT FOR THE NOTES.................................12
General.............................................................12
Funds and Flow of Revenues..........................................13
Acquisition Fund; Purchase and Sale of Financed Student Loans.......15
Revenue Fund........................................................16
Reserve Fund........................................................17
Operating Fund......................................................17
Investment of Funds Held by Trustee.................................18
Purchase of Notes...................................................18
DEFINITIONS AND PROVISIONS RELATEDTO ARC NOTES AND AUCTION PROCEDURES.........18
Auction-Related Definitions.........................................19
Summary of Auction Procedures.......................................25
Auction Procedures..................................................27
ARC Note Interest Rate..............................................30
ARC NOTE SETTLEMENT PROCEDURES................................................43
DEFINITIONS AND PROVISIONSRELATED TO LIBOR RATE NOTES.........................46
LIBOR-Related Definitions...........................................46
Interest on LIBOR Rate Notes........................................48
Payments............................................................48
Notice of Payment Defaults and Cures................................49
Calculation of Rates;Termination of Book-Entry System...............49
Computation of Interest.............................................49
Notification of Rates, Amounts and Payment Dates....................50
Calculation Agent...................................................50
Credit Ratings......................................................51
Notice..............................................................51
Notice of Payment Default...........................................51
BOOK-ENTRY REGISTRATION.......................................................51
ADDITIONAL NOTES..............................................................56
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE................................56
Parity and Priority of Lien.........................................57
Other Obligations of the Company....................................57
Derivative Products; Reciprocal Payments;
Issues Derivative Payments....................................57
Payment of Principal, Interest and Premium..........................58
Representations and Warranties of the Company.......................58
Further Covenants of the Company....................................58
Enforcement of Servicing Agreement..................................59
Additional Covenants with Respect to the Higher Education Act.......60
Student Loans; CollectionsThereof; Assignment Thereof...............61
Continued Existence; Successor to Company...........................61
Events of Default...................................................61
Remedies on Default.................................................62
The Trustee.........................................................65
Supplemental Indentures.............................................70
Trust Irrevocable...................................................73
Satisfaction of Indenture...........................................73
DESCRIPTION OF CREDIT ENHANCEMENT.............................................74
General.............................................................74
Subordinate Notes...................................................74
Letter of Credit....................................................74
Note Insurance and Surety Bonds.....................................75
Reserve Fund........................................................75
THE COMPANY...................................................................76
THE COMPANY'S STUDENT LOAN PROGRAM............................................78
Servicing of Financed Student Loans.................................78
The Servicing Agreements............................................79
UNIPAC..............................................................79
SELLERS REPRESENTATIONS AND WARRANTIES........................................80
Representations and Warranties-Portfolio Characteristics............80
Representations and Warranties-Eligible Loans.......................80
Repurchase Obligation of Seller.....................................83
DESCRIPTION OF THE FEDERAL FAMILY EDUCATION LOAN PROGRAM......................83
DESCRIPTION OF THE GUARANTEE AGENCIES.........................................96
WEIGHTED AVERAGE LIFE OF THE NOTES...........................................101
FEDERAL INCOME TAX CONSEQUENCES..............................................102
Characterization of the Trust Estate...............................102
Characterization of the Notes as Indebtedness......................103
Taxation of InterestIncome of Registered Owners....................103
Backup Withholding.................................................104
Limitation on the Deductibility of Certain Expenses................105
Tax-Exempt Investors...............................................105
Sale or Exchange of Notes..........................................105
ERISA CONSIDERATIONS.........................................................106
CERTAIN RELATIONSHIPS AMONG FINANCING PARTICIPANTS...........................107
PLAN OF DISTRIBUTION.........................................................107
LEGAL MATTERS................................................................108
FINANCIAL INFORMATION........................................................108
RATINGS......................................................................109
Index to Defined Terms.............................................110
Glossary of Terms..................................................115
v
<PAGE>
APPENDIX II- GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES..II-1
vi
<PAGE>
SUMMARY OF THE OFFERING
The following summary highlights selected information from this
Prospectus but does not contain all of the information you should consider
before making an investment decision. Before deciding to purchase the Notes, you
should read the more detailed information appearing in this Prospectus and in
the related Prospectus Supplement. Capitalized terms used in this Prospectus
that are not defined have the meanings assigned to them in "Index to and
Glossary of Certain Terms."
Overview We will from time to time offer various classes of our
Notes. We will purchase pools of student loans with the
proceeds we receive from these sales. We will pledge these
student loans as collateral for our Notes. Unlike other
issuers that create separate trusts each time they sell
securities, all of the Notes we sell pursuant to this
Prospectus and a Prospectus Supplement will be secured by
all student loans that we purchase and pledge as collateral,
unless we state otherwise for a particular series of the
Notes in a Prospectus Supplement. The priority of payments
among the various classes of Notes we sell will be described
in the related Prospectus Supplement. These payments will
come principally from amounts received on the student loans.
Securities Offered Our Student Loan Asset-Backed Notes will be issued in one or
more series, and there will be one or more classes of Notes
within each series. The Notes will be secured by a revolving
pool of student loans, referred to as the financed student
loans, and other property held in trust for the benefit of
the owners of the Notes. The Notes will be designated as
Class A Notes, Class B Notes or Class C Notes. The Class A
Notes will be Senior Notes having certain preferences with
respect to funds available for payment of principal and
interest. Class B Notes are subordinated in certain respects
to the Class A Notes, and the Class C Notes are subordinated
in certain respects to Class A Notes and Class B Notes. The
Notes will be issued pursuant to the terms of the Indenture
described below.
Parties Union Financial Services-1, Inc., a Nevada corporation, is
the issuer of the Notes and is sometimes referred to as the
"Company." You may contact us at 1801 California Street,
Suite 3920, Denver, Colorado 80202, or by phone at
(303)292-6930.
We expect to use the proceeds of the Notes to acquire
student loan portfolios from Union Bank and Trust Company, a
Nebraska state bank, or other eligible lenders as defined
under the Higher Education Act and described in the
Prospectus Supplement.
Union Bank and Trust Company will act as the "servicer," and
UNIPAC Service Corporation, a Nebraska corporation, will act
as "subservicer" of our financed student loans. We may
appoint other entities to act as a servicer or subservicer
of our financed student loans if approved by the Rating
Agencies rating our Notes. All servicers and subservicers
will be identified in the related Prospectus Supplement. See
"Certain Relationships Among Financing Participants."
Zions First National Bank, or such other entity as may be
specified in a Prospectus Supplement, will serve as the
"Trustee" under the Indenture.
vii
<PAGE>
Interest Rates The Prospectus Supplement will specify the interest
that will be paid on our Notes. The interest rate may be
fixed for the full term of the Notes, or the interest rate
may be subject to periodic adjustment as described below.
ARC Notes. We may issue classes of Notes that bear interest
at a rate determined by auction. The initial interest rate
for these ARC Notes will be specified in the Prospectus
Supplement. The interest rates for the ARC Notes will be
reset at the end of the initial interest period and each
subsequent interest period pursuant to the Auction
Procedures. For each auction, the holders of ARC Notes may
submit orders through a Broker-Dealer that specify the
principal amount of ARC Notes they wish to hold, purchase or
sell at various interest rates. A holder of ARC Notes that
fails to submit an order for some or all of its ARC Notes
will be deemed to have submitted a hold order at the new
Auction Rate for the ARC Notes owned by that holder for
which no order is submitted. As part of the Auction
Procedures, Broker-Dealers also solicit bids from
non-holders interested in acquiring ARC Notes as to the
principal amount of ARC 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 specified in any Supplemental
Indenture. In connection with each Auction, the ARC Notes
will be bought, sold or held at par plus accrued interest,
if any.
The Auction Procedures are further summarized and an example
of an Auction is included under "Definitions and Provisions
Related to ARC Notes and Auction Procedures-Summary of
Auction Procedures."
Index Rate Notes. The interest rate for some of our Notes
may be determined by reference to the London Interbank
Offered Rate ("LIBOR") or by reference to United States
Treasury securities. These "Index Rate Notes" will bear
interest at an initial rate specified in the Prospectus
Supplement. Thereafter, the interest rate for LIBOR Rate
Notes will be determined from time to time as described
under "Definitions and Provisions Related to LIBOR Rate
Notes" by reference to the rate of interest described as the
LIBOR-Based Rate, and the interest rate for Treasury Rate
Notes will be determined as described under "Description of
the Notes-Treasury Rate Notes" by reference to the rate of
interest paid on designated U.S. Treasury Securities. See
"Description of the Notes-LIBOR Rate Notes" and "-Treasury
Rate Notes."
Accrual Notes. We may issue one or more classes of Accrual
Notes. Accrual Notes will not be entitled to receive
payments of interest during the designated accrual period.
Instead, interest accrued on such Accrual Notes will be
capitalized and added to their principal balance. 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."
viii
<PAGE>
Payments We will make payment of principal and interest due on the
Notes solely from the assets held by the Trustee in a trust
estate created by the Indenture described below. That trust
estate will consist of a revolving pool of student loans and
moneys payable thereon and funds in accounts held by the
Trustee under the Indenture. Interest on the Notes will be
paid on the dates specified in the Prospectus Supplement,
which are referred to as "Interest Payment Dates." The
principal balance of the Notes of each series will be
payable in full on the stated maturity date, unless earlier
redeemed or repaid as described in this Prospectus or in the
related Prospectus Supplement.
Stated Maturity
Date The Stated Maturity for each class of Notes will be
specified in the related Prospectus Supplement.
Redemption Provisions
Each series of the Notes will be subject to redemption as
described in the Prospectus Supplement. Redemption
provisions that may apply to a series of the Notes are
described below.
Mandatory Redemption. We intend to use principal payments
that we receive on the financed student loans to purchase
additional student loans for a period of time specified in
the Prospectus Supplement. During this period, we will pay
interest on the Notes as it becomes due. However, we will
not make principal payments on the Notes or redeem Notes
during the recycling period, unless the terms of a series of
the Notes described in the Prospectus Supplement provide for
such payments or redemptions.
The period during which we may purchase additional student
loans may be extended with the consent of the Rating
Agencies or the provider of any credit enhancement for the
Notes. Once the period during which we may purchase loans
has ended, we will be required to use the principal payments
that we receive on the financed student loans to redeem
Notes. The redemptions will be made at a price equal to the
principal amount of the Notes to be redeemed plus accrued
and unpaid interest.
Generally, all of the Class A Notes will be redeemed before
any of the Class B or Class C Notes are redeemed, and all of
the Class B Notes will be redeemed before any of the Class C
Notes are redeemed. However, we have the option of redeeming
some or all of the Class B Notes before all of the Class A
Notes are redeemed if the ratio of our assets to our
liabilities exceeds levels specified in the Prospectus
Supplement.
The Prospectus Supplement for a series of the Notes may
provide for the deposit of the proceeds from those Notes
into the Acquisition Fund to be used to purchase student
loans on or before a specified date. If we do not use those
proceeds to purchase student loans by the specified date, we
will be obligated to redeem Notes.
Optional Redemption. We may redeem Notes in our sole
discretion from interest payments received on financed
student loans that are not needed to pay interest on the
Notes and our expenses.
Extraordinary Optional Redemption. We may redeem Notes in
our sole discretion if we determine that we cannot acquire
student loans, that the rate of return on financed student
loans has materially decreased, or that the costs of
administering the trust estate have placed unreasonable
burdens upon our ability to perform our obligations under
the Indenture.
Optional Purchase. We may purchase all of the Notes in our
sole discretion when the aggregate current principal balance
of the Notes is less than or equal to 10% of the initial
aggregate principal balance of the Notes on their respective
date of original issuance. See "Description of the
Notes-Optional Purchase" herein.
ix
<PAGE>
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, we will determine the
classes of Notes that we will redeem. Generally, Class A
Notes will be redeemed before Class B Notes and Class B
Notes will be redeemed before Class C Notes. See
"Description of the Notes-Notice and Partial Redemption of
Notes" herein.
The Student
Loans We Purchase The student loans that we purchase will have been originated
under the Federal Family Education Loan Program, referred to
as the FFELP, to students enrolled in qualified accredited
institutions of higher education. Each seller of loans will
make representations and warranties to us concerning the
validity and enforceability of each student loan and the
guarantee of payment of each student loan by a Guarantee
Agency. If those representations and warranties prove to
have been materially incorrect for a loan, or if a Guarantee
Agency refuses to make payments on a defaulted student loan
because of events that occurred before we purchased it, then
the seller will be obligated under the loan sale agreement
to repurchase the loan from us.
The borrowers on most student loans are not required to make
payments during the period in which the borrowers are in
school and for certain authorized periods thereafter as
described in the Higher Education Act (the "Deferral
Phase"). The Department of Education will make all interest
payments during the Deferral Phase on certain of the student
loans. For all other student loans, interest generally will
be capitalized and added to the principal balance of the
loan. The trust estate will consist of student loans that
are in the Deferral Phase as well as student loans for which
the borrower is required to make payments of principal and
interest (the "Repayment Phase"). The proportions of the
loans in our portfolio that are in the Deferral Phase and
the Repayment Phase will vary through the period that the
Notes are outstanding.
Portfolio Characteristics
The characteristics of the portfolio of student loans we
expect to acquire with the proceeds of the Notes of any
series, and the characteristics of the existing portfolio
held by the Trustee for us, will be described in the
Prospectus Supplement. See "Seller Representations and
Warranties."
Student Loan
Guarantees The payment of principal and interest on all of our financed
student loans will be guaranteed by designated guarantee
agencies and will be reinsured by the United States
Department of Education pursuant to the Higher Education
Act. The guarantee of our loans, however, is contingent upon
our complying with a variety of regulations concerning
origination and servicing of the loans. Failure to follow
these regulations may result in the guarantee claim for a
loan being denied. See "Risk Factors-Failure to Comply with
Loan Origination and Servicing Procedures for Student Loans
May Result in Loss of Guarantee and other Benefits" and
"Description of the Guarantee Agencies-Federal Insurance and
Reimbursement of Guarantee Agencies" herein.
Student loans originated prior to October 1, 1993 are fully
guaranteed as to principal and accrued interest. Student
loans originated after October 1, 1993 are guaranteed as to
98% of principal and accrued interest and loans.
x
<PAGE>
The Higher Education Act provides that the full faith and
credit of the United States is pledged to the reinsurance
payments due from the Department of Education to the
Guarantee Agencies. In addition, the Higher Education Act
provides that if the Secretary of Education determines that
a Guarantee Agency is unable to meet its obligations to
holders of loans, such as the Trustee, then the holders may
submit guarantee claims directly to the Department of
Education and the Department of Education is required to pay
to the holders the full insurance obligation of such
Guarantee Agency until such time as the obligations are
transferred to a new Guarantee Agency capable of meeting
such obligations, or until a qualified successor Guarantee
Agency assumes such obligations. Delays in receiving
reimbursement could occur if a Guarantee Agency fails to
meet its obligations.
Indenture We will issue the Notes pursuant to an Indenture of Trust
between us and the Trustee. Each series of Notes will be
issued pursuant to a Supplemental Indenture of Trust
applicable to such series, which may create a separate trust
estate to secure the repayment of a particular series of
Notes.
Subordinated Notes The rights of the owners of Class B Notes to receive
payments of principal and interest will be subordinated to
such rights of the owners of the Class A Notes. The rights
of the owners of Class C Notes to receive payments of
principal and interest will be subordinated to such rights
of the owners of the Class B Notes and the Class A Notes.
This subordination is intended to enhance the likelihood of
regular receipt by the owners of the more senior Notes of
the full amount of scheduled payments of principal and
interest due them and to protect such owners against losses.
A failure to pay principal or interest to the owners of the
Subordinate Notes as due while any Senior Notes remain
outstanding will not constitute an event of default. See
"Security and Sources of Payment for the Notes" and "Summary
of Certain Provisions of the Indenture" herein.
Funds The Trustee will establish an Acquisition Fund, Revenue
Fund, Operating Fund and Reserve Fund under the terms of the
Indenture. In addition, there are certain other funds and
accounts that may be established under the Indenture as
described herein under "Security and Sources of Payment for
the Notes."
All funds that we receive with respect to the financed
student loans will be allocated between principal and
interest. We will deposit the interest portion into the
Revenue Fund and the principal portion will be deposited
into the Acquisition Fund.
Revenue Fund. Generally, the funds on deposit in the Revenue
Fund will be used by us to pay the fees and expenses of the
trust estate and interest and principal on the Notes. Extra
amounts in the Revenue Fund will be transferred to the
Reserve Fund, to the extent of any deficiency, or to the
Acquisition Fund for use in acquiring additional student
loans. See "Security and Sources of Payment for the
Notes-Revenue Fund" herein.
xi
<PAGE>
Acquisition Fund. When we issue a series of Notes, we will
deposit into the Acquisition Fund most of the proceeds we
receive. These funds will be used to acquire the student
loans identified in the related Prospectus Supplement and
pay certain costs related to the issuance of such Notes.
Principal received on the financed student loans generally
will be deposited in the Acquisition Fund and will be used
to acquire additional student loans until the date that will
be specified in a Prospectus Supplement. That date may be
extended with the approval of the rating agencies that
provide ratings for our Notes, the provider of any surety
bond or any note insurer for the Notes. After the date
specified in the Prospectus Supplement, we will use all
moneys remaining in the Acquisition Fund with respect to a
series to redeem Notes.
If moneys in the Revenue Fund are insufficient to make
certain distributions therefrom (relating generally to
interest payments, redemption amounts and certain losses),
we may fund the remaining insufficiency from transfers from
the Acquisition Fund.
Operating Fund. Amounts will be deposited into the Operating
Fund on the date of issuance with respect to any series of
the Notes as specified in the related Prospectus Supplement.
Moneys will also be transferred to the Operating Fund from
the Revenue Fund from time to time. Such amounts will be
applied to pay the Company's administrative costs.
Reserve Fund. An amount will be deposited into the Reserve
Fund on the date of issuance with respect to any series of
the Notes as specified in the related Prospectus Supplement.
At any time thereafter, the amount required to be deposited
in the Reserve Fund with respect to the Notes shall be an
amount specified in a Prospectus Supplement.
We will use moneys in the Reserve Fund to pay interest and
principal on the Notes if there are no funds left in the
other funds and accounts created under the Indenture. See
"Security and Sources of Payment for the Notes" herein.
Credit Enhancement We may establish credit enhancement for a series of Notes 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 Notes to provide
for coverage of certain risks of defaults or losses, as
described in the related Prospectus Supplement. See
"Description of Credit Enhancement" herein.
Registration
of Notes The Notes of each class of any series initially will be
represented by a single certificate registered in the name
of Cede & Co. ("Cede"), as a nominee of The Deposit Trust
Corporation ("DTC") or Cedelbank, S.A. or the Euroclear
System, unless otherwise specified in the Prospectus
Supplement. You will not be entitled to a definitive
certificate representing your interest, except in the event
that definitive securities are issued under the limited
circumstances described below. See "Book Entry Registration"
herein.
Certain Federal Income
xii
<PAGE>
Tax Consequences The Notes will be treated as debt of the Company, rather
than as an interest in our financed student loans, for
federal income tax purposes, unless otherwise specified in
the related Prospectus Supplement. You will be required to
include in income interest on the Notes as paid or, in the
case of Notes issued with original issue discount, as
accrued, in accordance with your accounting methods and the
provisions of the Internal Revenue Code, including, if
applicable, provisions regulating original issue discount.
See "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 CFRss. 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 Notes that we have
each class being publicly offered rated no less than
investment grade by at least one nationally recognized
statistical rating organization at the time of issuance. See
"Ratings" herein.
xiii
<PAGE>
RISK FACTORS
You should consider the following factors regarding your purchase of the
Notes.
The Notes are Payable Solely
From the Trust Estate
We will pay interest and principal on the Notes solely from the funds
and assets held in the trust estate created under the Indenture. No insurance or
guarantee of the Notes will be provided by any government agency or
instrumentality, by any affiliate of the Company, 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.
Therefore, your receipt of payments on the Notes will depend solely on the
amount and timing of payments and collections on the financed student loans held
in the trust estate, interest paid or earnings on the funds held in the accounts
established pursuant to the Indenture, amounts on deposit in the Reserve Fund
and other funds held in the trust estate and any form of credit enhancement
described in the Prospectus Supplement. You will have no additional recourse
against us or any of our other assets if those sources of funds for repayment of
the Notes are insufficient.
Failure to Comply with Loan Origination
and Servicing Procedures for Student Loans
May Result in Loss of Guarantee and Other Benefits
The Higher Education Act and its implementing regulations require
holders of student loans and Guarantee Agencies guaranteeing student loans to
follow specified procedures in making and collecting student loans. Generally,
those procedures require that
o A completed loan application be submitted
o The applicant be an eligible borrower attending an eligible institution
o The borrower's responsibilities under the loan be explained to him or her
o The promissory note evidencing the loan be executed by the borrower
o The loan proceeds be disbursed in a specified manner by the lender
o The lender establish repayment terms with the borrower
If a borrower becomes delinquent in repaying a loan, specified collection
procedures must be followed, which vary depending upon the length of time a loan
is delinquent. See "The Company's Student Loan Program" and "Description of the
Federal Family Education Loan Program" herein.
If we fail to follow these procedures, or if any seller or any other
originator of our financed student loans failed to follow the procedures, the
Department of Education and the Guarantee Agencies may refuse to pay claims
submitted by the Trustee. Any such refusal would reduce the revenues of the
trust estate and impair our ability to pay principal and interest on the Notes.
See "Description of the Federal Family Education Loan Program" herein.
Risk of Loss from Use of Shared
Lender Identification Number
Every holder of loans originated under the FFELP is required to obtain a
lender identification number from the Department of Education. The Trustee will
use the same the Department of Education lender identification number for the
trust estate that is being used by the Trustee for another trust that was
created to secure repayment of other notes that we have issued. We may create
additional trusts in the future for which the same lender identification number
will be used.
1
<PAGE>
The billings submitted by the Trustee to the Department of Education for
interest subsidy and special allowance payments on financed student loans held
in the trust estate will be consolidated with the billings of such payments for
student loans in other trusts using the same lender identification number.
Payments on such billings will be made by the Department of Education in lump
sum form. The Trustee will allocate such payments among the various trusts using
the same lender identification number.
The sharing of the lender identification number with other trusts may
result in the receipt of claim payments being made by the Guaranty Agencies in
lump sum form. In that event, payments would be allocated among the trusts in a
manner similar to the allocation process for interest subsidy and special
allowance payments.
The Department of Education regards the Trustee as the party primarily
responsible to the Department of Education for any liabilities owed to the
Department or the Guaranty Agencies resulting from the Trustee's activities in
the FFELP. As a result, if the Department or a Guaranty Agency were to determine
that the Trustee owes a liability to the Department or such Guaranty Agency on
any student loan included in a trust using the shared lender identification
number, the Department or such Guaranty Agency could attempt to collect that
liability by offset against amounts due the Trustee under the shared lender
identification number, including amounts owed in connection with the trust
securing repayment of the Notes. Any such offset could impair our ability to pay
principal and interest on the Notes when due.
In addition, other trusts using the shared lender identification number
may in a given calendar quarter incur consolidation loan origination fees that
exceed the interest subsidy payments and special allowance payments payable by
the Department of Education on the loans in such other trusts, resulting in the
aggregate payment from the Department received by the Trustee under such lender
identification number for that quarter equaling an amount that is less than the
amount owed by the Department on the student loans in the trust securing
repayment of the Notes for that quarter. If we do not receive payments from the
Department when due it may impair our ability to pay principal and interest on
the Notes when due.
Allocation of Student Loans Among Trust Estates
We have previously established a trust to secure repayment of other debt
obligations of the Company that is separate from the trust estate that will
secure the Notes described herein, and we may create additional trusts in the
future. In the event that we are not able to purchase student loans of
acceptable quality to fully utilize the funds available in all of these trusts,
we may elect to allocate available student loans to one trust rather than
another. If that were to occur so that funds in the Acquisition Fund were not
used to purchase student loans, we would be required to use those funds to
redeem Notes. See "Description of the Notes-Mandatory Redemption."
Perfection of Security Interest
in Our Student Loans is
Dependent Upon Actions of Others
The perfection of the Trustee's security interest in the financed
student loans held in the trust estate is to be accomplished by the Trustee
taking possession of the promissory notes evidencing the loans and by the filing
of financing statements. We expect that possession by the Trustee will be
accomplished by delivery of the promissory notes to a servicer or subservicer,
acting as custodial agent for the Trustee. In the event the custodial agent acts
contrary to its obligations under its custodian agreement, and relinquishes
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 student loans so
released may become unperfected. In addition, we expect that the Trustee will
use UNIPAC as its custodial agent. While we have 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 student loans,
because of the affiliation between UNIPAC and Union Bank, the perfection of the
Trustee's security interest in the financed student loans by UNIPAC taking
possession is not entirely free from doubt. 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.
2
<PAGE>
Insolvency of our Parent Company
or Sellers of Loans Could Result in
Delays in Payment
We have taken steps in structuring our student loan purchase
transactions so that the voluntary or involuntary application for relief by a
seller or by our parent company, Union Financial Services, Inc., under the
United States Bankruptcy Code or other insolvency laws, will not result in
consolidation of our assets and liabilities with those of any seller or
affiliate. These steps include the creation of the Company as a separate,
limited-purpose subsidiary of Union Financial Services, Inc. pursuant to a
certificate of incorporation that limits our business operations to the issuance
of the Notes, the purchase of student loans and related activities. However, a
court could still conclude that our assets and liabilities should be
consolidated with those of any seller or Union Financial Services, Inc. in a
proceeding under any insolvency law. If a court were to reach such a conclusion,
or if we were to make a filing under any insolvency law, or if an attempt were
made to litigate any of the foregoing issues, then delays in payments on the
Notes could occur or reductions in the amounts of such payments could result.
We have structured our student loan purchases so that the transfer of
the loans by any seller constitutes a "true sale." If the transfer constitutes
such a true sale, the loans and the proceeds thereof would not be the property
of the seller should it become the subject of any insolvency law subsequent to
the sale. Each seller will warrant to us that the sale of loans is a valid sale.
Nevertheless, if a seller were to become subject to an insolvency law, a
creditor or trustee-in-bankruptcy could take the position that the sale of loans
by the seller should instead be treated as a pledge of the loans to secure a
borrowing of the seller. In that event, we could experience delays in receiving
payments on our student loans, which could result in delays or reductions in the
amounts available to pay to the holder of our Notes. If a sale of loans is
treated as a pledge instead of a sale, a tax or government lien on the property
of the seller arising before the sale of student loans to us may have priority
over the Trustee's security interest in those student loans.
The Validity of Our Loan Purchases May be Challenged
Each seller will intend that the transfers of student loans to us under
a student loan purchase agreement constitute valid sales and assignments of the
loans. In the event of insolvency of such seller, however, its affairs, if a
bank, might become subject to Federal Deposit Insurance Corporation
receivership. The FDIC, as a receiver, or a court could treat the transfer of
the loans as an assignment of collateral as security for our benefit as a
creditor of the seller. If the transfer of the loans is deemed to create a
security interest therein, a tax or government lien on property of the seller
arising before the loans were transferred may have priority over our interest in
the loans. If a seller becomes subject to receivership, and the transfer of the
loans is deemed to create a security interest, the security interest should not
be subject to avoidance and payments we receive with respect to the loans should
not be subject to recovery by such seller's creditors, to the extent that such
interest was validly perfected before such seller's insolvency and was not taken
in contemplation of insolvency or with the intent to hinder, delay or defraud
such seller or its creditors. We have received an opinion of counsel, subject to
the assumptions and limitations set forth therein, that the provisions of the
Indenture and related agreements and the actions required thereunder in
connection with our purchase of student loans are sufficient to create both a
perfected security interest in favor of the Trustee in any such loans, if the
transfer by such seller 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 in the
financed student loans, which interest is prior to that of any other creditor of
our company. Nevertheless, we may experience delays in receipt of funds with
respect to the loans in such circumstances. Moreover, the FDIC may seek to
effect the release of the loans to it, as receiver, by accelerating a seller's
"debt" and repaying the outstanding amount thereof. See "Risk Factors-Reliance
Upon Sellers" and "Perfection of Security Interest in our Student Loans Is
Dependent upon Actions of Others" herein.
3
<PAGE>
With respect to a seller that is not a bank or an insurance company, we
will structure the purchase of loans from such seller 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, so that upon the occurrence of any insolvency proceeding, such loans
would not be consolidated into the bankruptcy estate of the seller. A court
might, however, treat the sale as an assignment of the loans as collateral
security for the benefit of the Noteholders. If a sale is deemed to create a
security interest in the loans, a tax or governmental lien on property of such
seller arising before the 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 loans is deemed to create a
security interest, and such security interest should not be subject to
avoidance, and payments to the Trustee with respect to the loans should not be
subject to recovery by such seller's creditors to the extent 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. Nevertheless, we may experience
delays in receipt of funds with respect to the loans purchased from a seller in
such circumstances. See "Risk Factors-Reliance Upon Seller" and "-Perfection of
Security Interest in our Student Loans Is Dependent upon Actions of Others"
herein.
Changing Assets of the Trust Estate
We intend to use the principal payments that we receive on our financed
student loans to purchase additional student loans from sellers. The Prospectus
Supplement for a series of the Notes will specify a date after which no such
additional purchases will occur. Each student loan that we purchase and the
related guarantee must be valid and enforceable and we will attempt to maintain
for our portfolio of loans the aggregate characteristics described in the
Prospectus Supplement for a series of our Notes. However, the actual
characteristics of the loans in our portfolio will change from time to time due
to factors such as repayment of the loans in the normal course of business, sale
or purchase of loans or the occurrence of delinquencies or defaults.
Variability of Our Revenues
The payments we receive on our financed student loans may be different
from the payments that are actually due, for a variety of economic, social and
other reasons. Failures by borrowers to make timely payments of the principal
and interest due on the loans will affect the revenues of the trust estate,
which may reduce the amounts available to pay principal and interest due on the
Notes.
Maturity and Prepayment Considerations
Our financed student loans may be prepaid at any time without penalty.
Factors affecting prepayment of loans include general economic conditions,
prevailing interest rates and changes in the borrower's job, such as transfers
and unemployment. Prepayment rates are also affected by refinancing
opportunities which may provide more favorable repayment terms, such as those
offered under consolidation loan programs like the federal direct consolidation
loan program. We do not have sufficient information to be able to estimate the
rate of prepayment with respect to the student loans in the trust estate. If we
are not able to use those principal receipts to purchase new loans, we will use
those funds to redeem the Notes.
Scheduled payments with respect to, and the maturities of, our financed
student loans may be extended as authorized by the Higher Education Act. Also,
periods of forbearance or refinancings through consolidation loans having longer
maturities may lengthen the remaining term of the loans and the average life of
each class of Notes. Any reinvestment risks resulting from a faster or slower
incidence of prepayment of loans will be borne entirely by you.
The rate of principal payments to you on the Notes and the yield to
maturity of the Notes will be directly related to the rate of payments of
principal on our financed student loans. Changes in the rate of prepayments may
significantly affect your actual yield to maturity, even if the average rate of
principal prepayments is consistent with your expectations. In general, the
earlier a prepayment of principal of a loan, the greater the effect on your
yield to maturity. The effect on your yield as a result of principal payments
occurring at a rate higher or lower than the rate anticipated by you during the
period immediately following the issuance of the 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.
4
<PAGE>
Unsecured Nature of Financed Eligible Loans;
Financial Status of Guarantee Agencies
The Higher Education Act requires that all student loans be unsecured.
As a result, the only security for payment of our financed student loans are the
guarantees provided by the Guarantee Agencies. A deterioration in the financial
status of a Guarantee Agency and its ability to honor guarantee claims on
defaulted student loans could delay or impair the Guarantee Agency's ability to
make claims payments to the Trustee. The financial condition of a Guarantee
Agency can be adversely affected if it submits a large number of reimbursement
claims to the Department of Education, which results in a reduction of the
amount of reimbursement that the Department is obligated to pay the Guarantee
Agency. The Department may also require a Guarantee Agency to return its reserve
funds to the Department upon a finding that the reserves are unnecessary for the
Guarantee Agency to pay its program expenses or to serve the best interests of
the federal student loan program. The inability of any Guarantee Agency to meet
its guarantee obligations could reduce the amount of principal and interest paid
to you as the owner of the Notes.
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 of Education and the Department is required to pay the full
guaranty claim amount due with respect thereto. See "Description of the
Guarantee Agencies" herein. However, the Department's obligation to pay
guarantee claims directly in this fashion is contingent upon the Department
making the determination referred to above. The Department may not ever make
such a determination with respect to a Guarantee Agency and , even if such a
determination were made, payment of such guarantee claims may not be made in a
timely manner.
Reliance Upon Sellers
We expect to acquire additional student loans from sellers from time to
time. We also expect that each seller will be able to make certain
representations and warranties with respect to each loan student and that we
will be able to maintain certain overall portfolio characteristics in connection
with such acquisitions. If we are not able to use principal payments that we
receive on our financed student loans to purchase additional loans that meet our
requirements, we will use those amounts to redeem your Notes.
Each student loan purchase agreement requires the seller to repurchase
its loans if the representations and warranties made by the seller prove not to
be true or if a claim for a loan is denied because of events occurring before
the sale. We cannot be certain, however, that a seller will be financially able
to repurchase loans if called upon to do so. See "Risk Factors," "-Failure to
Comply with Loan Origination and Servicing Procedures for Eligible Loans" and
"Seller Representations and Warranties" herein.
Congressional Actions May Affect
Our Student Loan Portfolio
The Department of Education'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 1998 extended the principal provisions of the Federal Family
Education Loan Program to loans made on or before September 30, 2004. While
Congress has consistently extended the effective date of the Higher Education
Act and the FFELP, it may elect not to reauthorize the Department's ability to
provide interest subsidies and Federal insurance for loans. Such a failure of
reauthorization would not affect the financed student loans we then owned, but
would reduce the number of loans available for us to purchase in the future.
Funds for payment of interest subsidies and other payments under the
FFELP are subject to annual budgetary appropriation by Congress. In recent
years, federal budget legislation has contained provisions that restricted
payments made under the FFELP to achieve reductions in federal spending. Future
federal budget legislation may adversely affect expenditures by the Department
of Education, and the financial condition of the Guarantee Agencies.
5
<PAGE>
Congress may elect to amend the Higher Education Act or other relevant
federal laws, and the Secretary of Education may promulgate rules and
regulations, that will adversely impact holders of student loans. For example,
changes might be made to the rate of interest paid on student loans, to the
level of insurance provided by Guarantee Agencies or to the servicing
requirements for student loans. See "Description of the Federal Family Education
Loan Program" and "Description of the Guarantee Agencies" herein.
Competition Created by the Federal
Direct Student Loan Program May
Impact Our Student Loan Program
In 1992, Congress created the Federal Direct Student Loan Program. Under
this program, the Department of Education makes loans directly to student
borrowers through the educational institutions that they attend. If 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 loans serviced by
the servicer is reduced. Those cost increases could affect the ability of the
servicer to satisfy its obligations to service our financed student loans. Loan
volume reductions could further reduce revenues received by the Guarantee
Agencies available to pay claims on defaulted student loans. The level of
competition currently in existence in the secondary market for loans made under
the FFELP could be reduced, resulting in fewer potential buyers of student loans
and lower prices available in the secondary market for those loans. The
Department of Education is implementing a direct consolidation loan program,
which may further reduce the volume of loans made under the FFELP and may
increase the rate of repayment of our student loans. See "Description of the
Federal Family Education Loan Program" herein.
Early Payment of the Notes
In the event that the proceeds we receive from a series of the Notes
have not been fully applied to the acquisition of student loans by the date
specified in the related Prospectus Supplement, the owners of the Notes will
receive as a prepayment of principal, in the priorities described herein or in
the related Prospectus Supplement, the amount remaining in the Acquisition Fund.
Notes are also subject to mandatory redemption in the event that we are unable
to use principal payments received on our financed student loans to purchase
additional student loans.
Subordination of Class B
and Class C Notes; Limited
Assets for Payments
Payments of interest and principal on the Class B and Class C Notes are
subordinated in priority of payment to payments of interest and principal due on
the Class A Notes and payments of interest and principal on the Class C Notes
are subordinated in priority of payments of interest and principal due on the
Class B Notes. Under certain redemption situations, principal on Class B Notes
may be redeemed while Class A Notes remain outstanding and the principal on the
Class C Notes may be redeemed while the Class A Notes and certain of the Class B
Notes remain outstanding. See "Description of the Notes-Notice and Partial
Redemption of Notes." Class B Notes are also subordinated to the Class A Notes
and the Class C Notes are also subordinate to the Class B 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 student loans, the Reserve
Fund and other funds created therein.
Issuance of Additional Notes
6
<PAGE>
We may issue additional Notes that are secured by the trust estate.
Those additional Notes may be issued on a parity with or subordinate to any of
the Class A Notes and senior to, on a parity with or subordinate to the Class B
or Class C Notes. We may issue additional Notes pursuant to a supplemental
indenture, without the consent or approval of the owners of any Notes then
outstanding. However, before issuing additional Notes, we must receive 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.
Different Rates of Change in Interest Rate Indexes May Affect Our Cash Flow
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 or as a result of the auction procedures described in
this Prospectus. Our student loans bear interest at the rates described herein
under "Description of the Federal Family Education Loan Program" which are
generally based upon the bond equivalent yield of the 91 day Treasury Bill rate.
If there is a decline in the rates payable on our financed student loans, the
amount of funds representing interest deposited into the Revenue Fund may be
reduced. If the interest rates payable on our Notes do not decline in a similar
manner and time, we may not have sufficient funds to pay interest on the Notes
when it becomes due. Even if there is a similar reduction in the rates
applicable to any series of the Notes, there may not necessarily be a similar
reduction in the other amounts required to be paid out of such funds, such as
certain administrative expenses, causing payment of such amounts to be deferred
to future periods. Sufficient funds may not be available in future periods to
make up for any shortfalls in the current payments of interest on the Notes or
expenses of the trust estate.
Book-Entry Registration
Unless otherwise specified with respect to a series of the Notes in the
related Prospectus Supplement, 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, Cedelbank, S.A., or the Euroclear System, 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 that
term is used in the Indenture. Until definitive securities are issued, holders
of the Notes will only be able to exercise the rights of registered owners
indirectly through DTC and its participating organizations, Cedelbank, S.A., or
the Euroclear System. See "Book-Entry Registration" herein.
Ratings of the Notes
It is a condition to our 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
student 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 you as an investor. An
additional rating agency may rate the Notes, and that rating may not be
equivalent to the initial rating described in the related Prospectus Supplement.
Ratings may be lowered or withdrawn by any Rating Agency if in such Rating
Agency's judgment circumstances so warrant. See "Ratings."
7
<PAGE>
DESCRIPTION OF THE NOTES
The Notes of each series will be issued pursuant to the Indenture and
related Supplemental Indenture of Trust between the Company and the Trustee. The
Indenture has been filed as an exhibit to the Company's Registration Statement.
The following description of the Notes is only a summary of their
principal terms. It does do not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the provisions of the Indenture, and
related Supplemental Indenture.
General
The Class A Notes, whenever issued, are designated as "Senior Notes" and
the Class B Notes, whenever issued, are designated as "Subordinate Notes". Class
C Notes designated as "Junior-Subordinate Notes" may be issued under the
Indenture which would be subordinate to the Class A Notes and the Class B Notes.
Fixed Rate Notes
The Fixed Rate Notes will have a stated maturity set forth in the
applicable Prospectus Supplement. The Notes will bear interest from the date and
at the rate per annum specified in the applicable Prospectus Supplement. The
dates on which the holders of Fixed Rate Notes will receive payments of
principal and interest will be specified in the applicable Prospectus
Supplement.
ARC Notes
The ARC Notes will have a stated maturity set forth in the applicable
Prospectus Supplement. ARC Notes will bear interest from the date of their
issuance 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 ARC Notes, the Interest Period will initially consist
of a number of days (each, an "Auction Period"), as set forth in the applicable
Prospectus Supplement. The interest rate for the ARC Notes will be reset at the
interest rate determined pursuant to the Auction (the "Auction Rate") pursuant
to the Auction Procedures, but in no event will the rate exceed the maximum
interest rate relating to an Auction (the "Maximum Auction Rate") per annum
specified in the applicable Prospectus Supplement. Except as may otherwise be
specified in the related Prospectus Supplement, for each Auction, the holders of
the ARC Notes may submit orders through a Broker-Dealer as to the principal
amount of ARC Notes they wish to hold, purchase or sell at various interest
rates. If no order is received from the holder of an ARC Note, such holder will
be deemed to have submitted a hold order at the new Auction Rate for the ARC
Notes owned by such holder for which no order is submitted. As part of the
Auction Procedures, the Broker-Dealers also solicit bids from non-holders
interested in acquiring ARC Notes as to the principal amount of ARC 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 ARC Notes will be bought, sold or held at par plus
accrued interest. See "Definitions and Provisions Related to ARC 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 ARC Notes for Auction. Interest on the ARC 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 ARC 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
ARC Notes as of the date (the "Record Date") which is the Business Day next
preceding the respective Auction Date.
The Company 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.
8
<PAGE>
For more information on the Auction procedures see "Definitions and
Provisions Related to the ARC Notes and Auction Procedures," and "ARC
Note-Settlement Procedures" herein.
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. See
"Definitions and Provisions Related to the LIBOR Rate Notes" for the definitions
of capitalized terms used in describing 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 that pay interest monthly 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. An "Interest Period" for LIBOR Rate Notes that pay interest
quarterly 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 a month and
ending on the last day of the specified following month thereafter. Except as
otherwise specified with respect to a series of Notes in the related Prospectus
Supplement, an "Interest Payment Date" for the LIBOR Rate Notes means the first
Business Day of each calendar month, commencing on the date specified in the
related Prospectus Supplement or, with respect to a LIBOR Rate Note payable
quarterly, on the quarterly dates set forth in the related Prospectus
Supplement. If any such date is not a business day, payments of interest will be
made on the next succeeding business day.
Unless otherwise specified in the related Prospectus Supplement, the
amount of interest payable to Registered Owners of LIBOR Rate Notes for any
Interest Period or part thereof shall be calculated by the Trustee on the basis
of a 360-day year for the number of days actually elapsed.
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 interest
rate for 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 cannot at any time
exceed the maximum interest rate specified in the related Prospectus Supplement
with respect to such LIBOR Rate Notes. If the LIBOR Rate determined by the
calculation agent is greater than the maximum interest rate specified in the
Prospectus Supplement, the difference will be carried forward and paid when
moneys are available in the Revenue Fund. See "Definitions and Provisions
Related to the LIBOR Rate Notes" herein.
Treasury Rate Notes
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 that pay interest monthly 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. An "Interest Period" for Treasury Rate
Notes that pay interest quarterly 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 a month and ending on the last day of the specified following month
thereafter. Except as otherwise specified with respect to a series of the Notes
in the related Prospectus Supplement, an "Interest Payment Date" for the
Treasury Rate Notes means the first Business Day of each calendar month,
commencing on the date specified in the related Prospectus Supplement or, with
respect to a Treasury Rate Note payable quarterly, on the quarterly dates set
forth in the related Prospectus Supplement. If any such date is not a business
day, payments of interest will be made on the next succeeding business day.
9
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, the
amount of interest payable to Registered Owners of Treasury Rate Notes 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 (ii) 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.
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 calculation agent in the manner described above. If a payment
default occurs, the interest rate for the Treasury 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 cannot at any time exceed the maximum interest rate specified in the
related Prospectus Supplement with respect to such Treasury Rate Notes. If the
Treasury Rate determined by the calculation agent is greater than the maximum
interest rate specified in the Prospectus Supplement, the difference will be
carried forward and paid when moneys are available in the Revenue Fund.
Accrual Notes
Accrual Notes 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. Prior to the time interest is
payable on any class of Accrual Notes, the amount of accrued interest will be
added to the Note principal balance thereof on each Interest Payment Date. The
principal balance of the Accrual Notes will begin to be paid from available
funds received with respect to the financed student loans after the date that
accrued interest is no longer being added to the principal balance of such
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.
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 principal on any Notes and in connection with
a partial redemption of the Notes of any class or series and all interest
payments 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. Any such
interest not timely paid 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. Payment of principal
and interest to the Securities Depository or its nominee, and to any other
Registered Owner owning at least $1,000,000 principal amount of the Notes upon
written request delivered to the Trustee, will 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
10
<PAGE>
Unless otherwise specified with respect to a series in the related
Prospectus Supplement, the Notes of a series are subject to mandatory redemption
not at the discretion of the Company, 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
end of the period during which the Company may purchase additional student
loans, in an amount equal to moneys representing principal payments received
with respect to the financed student loans and other excess revenues previously
transferred to and then on deposit in the Acquisition 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 student loans that are held in the Acquisition Fund, such
anticipated excesses to be determined by estimate as of 30 days prior to said
Interest Payment Dates. If (a) 30 days prior to said Interest Payment Dates, the
Company 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 Company for federal income tax purposes (primarily, as a result of any
change in the amount of residual interest owned by the Company for failure to so
redeem), then such call for redemption need not be made. Mandatory redemptions
will be made solely from moneys available therefor in the Acquisition Fund and
only as provided above in this paragraph. No Company direction needs to be given
with respect to a mandatory redemption.
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 Company, from funds received by the
Trustee constituting interest on financed student loans remaining in the Revenue
Fund after all other prior required payments have been made from the Revenue
Fund. The Notes may be optionally redeemed 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. Any limitations on optional redemptions of the Notes of
any series will be described in the Prospectus Supplement related to such
series. Company 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.
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 sole discretion of the Company, from
any unallocated and available moneys remaining in the trust estate, on any
Interest Payment Date, if the Company reasonably determines that it is unable to
acquire additional student loans, that the rate of return on the financed
student loans has materially decreased, or that the costs of administering the
trust estate have placed unreasonable burdens upon the ability of the Company to
perform its obligations under the Indenture. An extraordinary optional
redemption of the Notes may be made in whole or in part, and any such redemption
will be made at a redemption price equal to the principal amount of the Notes to
be redeemed plus accrued interest to the date of redemption. See "Notice and
Partial Redemption of Notes" below for a discussion of the order in which such
Notes will be redeemed. The Company 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 Company 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.
11
<PAGE>
In determining whether to exercise the extraordinary optional redemption
provision, the Company 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 Company'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 student loans from moneys on deposit
in the Acquisition Fund.
Optional Purchase
Unless otherwise specified with respect to a series in the related
Prospectus Supplement, the Company 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. The purchase will be made 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 purchase shall occur on the related Interest Payment Date
following the date on which funds sufficient to pay the purchase price are
deposited with the Trustee. All Notes which are purchased shall be canceled by
the Trustee and be disposed of in a manner satisfactory to the Trustee and the
Company.
Notice and Partial Redemption of Notes
The Trustee shall give notice of any redemption or purchase by mailing a
copy of the redemption or purchase notice to the Registered Owner of any Note
being redeemed or purchased, and to the Auction Agent with respect to the ARC
Notes designated for redemption or purchase, at their address as the same shall
last appear upon the registration books, not less than 15 days prior to the
redemption or purchase date.
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 Company will
direct the Trustee as to the Notes of each class of such series to be redeemed
or purchased. All of the Class A Notes will generally be redeemed by the Company
prior to redemption of any Class B Notes, and all of the Class B Notes will be
redeemed before any of the Class C Notes are redeemed. However, the Company may
direct to the Trustee to use moneys in the Acquisition Fund to redeem Class B
Notes while Class A Notes remain outstanding if after such redemption of Class B
Notes the aggregate market value of the assets held in the trust estate will
equal a percentage of all Class A Notes then outstanding that is specified in a
Prospectus Supplement. Similarly, the Company may direct the Trustee to use
moneys in the Acquisition Fund to redeem Class C Notes while Class A Notes and
Class B Notes remain outstanding if after such redemption of the Class C Notes,
the aggregate market value of the assets held in the trust estate will equal a
percentage of all Class A Notes and Class B Notes then outstanding that is
specified in a Prospectus Supplement.
Accelerated Maturity of Notes
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 Highest
Priority Notes then outstanding shall declare, the principal of all Notes then
outstanding, and the interest thereon, immediately due and payable, anything in
the Notes or in the Indenture to the contrary notwithstanding.
12
<PAGE>
SECURITY AND SOURCES OF PAYMENT FOR THE NOTES
General
The Notes are limited obligations of the Company secured by and payable
solely from a trust estate consisting of payments received on the financed
student loans and other assets pledged under the Indenture for the payment of
the principal of and interest on the Notes. The following assets serve as
security for the Notes:
o The Revenues, defined in the Indenture as all principal payments,
proceeds, charges and other income received by the Trustee or the
Company on account of any financed student 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 student loans and any
Special Allowance Payments received by the Company or the Trustee
with respect to any Financed Eligible Loan) and investment income
from all Funds and any proceeds from the sale of other
disposition of such financed student loans;
o All moneys and investments held in the Funds, excluding the
Operating Fund; and
o Financed student loans purchased with money from the Acquisition
Fund or otherwise acquired or originated and pledged or credited
to the Acquisition Fund.
In addition, the trust estate with respect to any series of Notes 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 Flow of Revenues
The Indenture directs that the following Funds be created by the Trustee
for the benefit of the Registered Owners:
o Acquisition Fund
o Revenue Fund
o Reserve Fund
The Operating Fund was established by the Company and does not
constitute a Fund within the meaning of the Indenture. It is held by a
depository bank of the Company for the benefit of the Company and neither the
Trustee nor the Registered Owners have any right, title or interest therein.
All funds received with respect to the financed student loans are
allocated between principal and interest. The interest portion is deposited into
the Revenue Fund and the principal portion is deposited into the Acquisition
Fund.
Set forth on the following page is a diagram of the flow of Revenues
received on the financed student loans. Proceeds received from initial sales of
the Notes will be deposited into the funds of the trust estate as set forth in
the related Prospectus Supplement.
13
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Revenue received by Trustee subsequent to Date of Issuance (Principal and
Interest received on financed student loans)
Student Loan
Holding Fund-------------------------
- - Principal received on Financed
- - Eligible Loans (allocated by Series)
- -
- -- Student Loan Fund----------------------
Revenue Fund - - -
- - Financed - Original Note - Principal received
- TRANSFERS - Eligible - proceeds used to - on Financed
- - Loan Notes - purchase identified - Eligible loans used
Pay Program Expenses - - Eligible Loans on Date- to purchase
(as due) - - of Issuance for each - additional Eligible
- - - Series or as specified - Loans prior to end
- - - in the Prospectus - of Recycling period
- - - Supplement - for each Series
- - - -
Interest Fund Note Account Loan Account Recycling Account
(non-transfer dates)
- ON TRANSFER DATES
-
Estimated Amount to Operating Principal received on
Fund (to pay Maintenance and financed student loans
Operating Expenses) after end of Recycling
- period for each Series
-
Note Redemption Fund ------Note Redemption Fund-------
(if deficiency exists in - - -
amounts to pay - - - -
Noteholders/Principal when due)- - - -
- - - - -
- - - - -
Net Losses - Senior Note Redemption - -
(to Recycling Account or after - Account (to pay principal on - -
Recycling period, to the Note - Senior Notes when due) - -
Redemption Fund) - - - -
- - - - -
Reserve Fund - - Subordinate Note Redemption -
(to fund any shortfall) - - Account (to pay principal on -
- - - Subordinate Notes when due) -
- - - -
Senior Note Redemption - - -
Account ------------ -
(until parity reached) - Junior-Subordinate Note
- - Redemption Account (to pay
- - principal on Junior-Subordinate
Recycling Account (prior to end - Notes when due)
of Recycling at option of the -
Company) -
- -
Note Redemption Fund -
(after end of Recycling at-------
option of the Company)
-
General Fund
(for account of the Company)
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>
14
<PAGE>
Acquisition Fund; Purchase and Sale of Financed Student Loans
Moneys from proceeds of any Notes will be deposited in the Acquisition
Fund as described in the related Prospectus Supplement. Moneys may also be
transferred to the Acquisition Fund from the Revenue Fund pursuant to the
Indenture. Financed student loans pledged to the trust estate will be held by
the Trustee or its agent or bailee and accounted for as a part of the
Acquisition Fund.
Moneys on deposit in the Acquisition Fund shall be used to pay costs of
issuance of the Notes, to redeem Notes in accordance with the provisions of any
Supplemental Indenture, and, upon receipt by the Trustee of an Eligible Loan
Acquisition Certificate, to acquire student loans. If the Company determines
that all or any portion of the moneys held in the Acquisition Fund cannot be
used to purchase additional student loans, then the Company may direct the
Trustee to redeem Notes in accordance with any Supplemental Indenture. The
period of time during which moneys are permitted to remain in the Acquisition
Fund before they must be used to redeem Notes will be set forth in a
supplemental Indenture and in the related Prospectus Supplement and may be
extended with the approval of the Rating Agencies or the provider of credit
enhancement for the Notes, if any.
If on any Note Payment Date there are not sufficient moneys on deposit
in the Revenue Fund to make payments of principal and interest due on the Notes,
then an amount equal to any such deficiency shall be transferred directly from
the Acquisition Fund.
While the Company will be the beneficial owner of the financed student
loans and the Registered Owners will have a security interest therein, the
Trustee will be the legal owner thereof and will have a security interest in the
financed student loans for and on behalf of the Registered Owners. The notes
representing the financed student loans will be held in the name of the Trustee
for the account of the Company, for the benefit of the Registered Owners.
Financed student loans may be sold, transferred or otherwise disposed of
by the Trustee free from the lien of the Indenture at any time if the Trustee is
provided with the following:
o a Company Order stating the sale price and directing that
financed student loans be sold, transferred or otherwise
disposed of and delivered.
o a certificate signed by an authorized representative of the
Company to the effect that:
(i) the disposition price is equal to or in excess
of the principal amount thereof (plus accrued interest) or
equal to or in excess of the purchase price paid by the
Company for such financed student loan (less principal
amounts received with respect to such financed student
loan); or
15
<PAGE>
(ii) the disposition price is lower than the
principal amount thereof (plus accrued interest), and (A)
the Company reasonably believes that the Revenues expected
to be received (after giving effect to such disposition)
would be at least equal to the Revenues expected to be
received assuming no such sale, transfer or other
disposition occurred, or (B) the Company shall remain able
to pay debt service on the Notes and make payment on any
other Obligations on a timely basis (after giving effect
to such sale, transfer or other disposition) whereas it
would not have been able to do so on a timely basis if it
had not sold, transferred or disposed of the financed
student loans at such discounted amount, or (C) the
Aggregate Market Value of the trust estate (after giving
effect to such sale, transfer or other disposition) will
be at least equal to 100% of the aggregate principal
amount of the Notes and other Obligations plus accrued
interest, or (D) the amount for which the financed student
loans are being sold, assigned, transferred or disposed of
is equal to the purchase price paid by the Company for
such financed student loans (less principal amounts
received with respect to such financed student loans).
The Trustee, following receipt of the Company Order and of a certificate
of the Company, if applicable, shall deliver such financed student loans free
from the lien of the Indenture upon the receipt of the purchase price or
consideration specified in the Company Order.
Revenue Fund
The Trustee will deposit into the Revenue Fund all Revenues derived from
financed student loans, and all other Revenue derived from moneys or assets on
deposit in the Acquisition Fund, the Reserve Fund, all Reciprocal Payments and
any other amounts as directed by the Company.
Upon receipt of an Company Order directing the same, moneys in the
Revenue Fund shall be used to make a transfer to the Operating Fund, subject to
the limitation described under "Operating Fund" below.
On each Note Payment Date and Derivative Payment Date, money in the
Revenue Fund will be used and transferred to other funds or persons in the
following order of precedence:
(i) on a parity basis, to pay interest due on any Senior
Notes on such Note Payment Date and any Company Derivative Payment
secured on a parity with the Senior Notes due on such Derivative Payment
Date;
(ii) on a parity basis, to pay the principal of or
premium, if any, on any Senior Notes due on such Note Payment Date (if
such Note Payment Date is a Stated Maturity or mandatory sinking fund
redemption date with respect to such Senior Notes);
(iii) on a parity basis, to pay interest due on any
Subordinate Notes on such Note Payment Date and any Company Derivative
Payment secured on a parity with the Subordinate Notes due on such
Derivative Payment Date;
(iv) on a parity basis, to pay the principal of or
premium, if any, on any Subordinate Notes due on such Note Payment Date
(if such Note Payment Date is a Stated Maturity or mandatory sinking
fund redemption date with respect to such Subordinate Notes);
(v) on a parity basis, to pay interest on
Junior-Subordinate Notes on such Note Payment Date and to make any
Company Derivative Payment secured on a parity with such
Junior-Subordinate Notes due on such Derivative Payment Date;
16
<PAGE>
(vi) on a parity basis, to pay the principal of or
premium, if any, on any Junior-Subordinate Notes due on such Note
Payment Date (if such Note Payment Date is a Stated Maturity or
mandatory sinking fund redemption date with respect to such
Junior-Subordinate Notes);
(vii) to the Reserve Fund the amount, if any, required by
clause (b) of "Reserve Fund" below;
(viii) at the option of the Company and upon Company
Order, to the Acquisition Fund; and
(ix) at the option of the Company and upon Company Order,
to the Company to the extent permitted under "Transfers to Company"
below.
Reserve Fund
The Trustee will deposit to the Reserve Fund the amount, if any,
specified in each Supplemental Indenture, called the Reserve Fund Requirement.
On each Note Payment Date, to the extent there are insufficient moneys in the
Revenue Fund to make payment of the principal and interest then due on the
Notes, then the amount of such deficiency shall be paid directly from the
Reserve Fund after any transfers from the Acquisition Fund.
If the Reserve Fund is used for the purposes described in the paragraph
above, the Trustee will restore the Reserve Fund to the Reserve Fund Requirement
by transfers from the Revenue Fund on the next Note Payment Date. If the full
amount required to restore the Reserve Fund to the Reserve Fund Requirement is
not available in the Revenue Fund on the next succeeding Note Payment Date, the
Trustee shall continue to transfer funds from the Revenue Fund as they become
available until the deficiency in the Reserve Fund has been eliminated.
On any day that the amount in the Reserve Fund exceeds the Reserve Fund
Requirement for any reason, the Trustee, at the direction of the Company, shall
transfer the excess to the Acquisition Fund.
Operating Fund
The Trustee will deposit to the Operating Fund or transfer to the
Company's depository bank if not the Trustee, the amount, if any, specified in
each Supplemental Indenture. The Operating Fund is a special fund created with a
depository bank of the Company and shall be used to pay Program Expenses.
The amount deposited in the Operating Fund by transfer from the Revenue
Fund and, if necessary, from the Acquisition Fund, and the schedule of deposits
will be determined by the Company, but the amount so transferred in any one
Fiscal Year may not exceed the amount budgeted by the Company as Program
Expenses for such Fiscal Year, and shall not exceed the amount designated in the
cash flows provided to each Rating Agency. The Company will provide the Trustee
with an Company Order from time to time as to the amount to be transferred.
Upon the receipt of an order, the Trustee shall withdraw the amount
requisitioned from the Revenue Fund, and if necessary, from the Acquisition
Fund, and transfer the same into the Operating Fund. In the event there is not
sufficient money on hand in the Revenue Fund and the Acquisition Fund to
transfer the full amount requisitioned, the Trustee shall notify the Company and
the Company shall then determine the amount to be transferred.
17
<PAGE>
Transfers to Company
Transfers from the Revenue Fund may be made to the Company. However, no
transfer of assets to the Company, other than pursuant to the Operating Fund,
may be made if there is not on deposit in the Reserve Fund an amount equal to at
least the Reserve Fund Requirement. Additionally, no transfer may be made to the
Company unless immediately after taking into account any such transfer, the
Aggregate Market Value of the assets in the trust estate will be equal to such
percentage of the unpaid principal amount of the Senior Notes outstanding and
such percentage of all Senior and Subordinate Notes outstanding, as are
acceptable to each Rating Agency then rating the Notes, as evidenced by a
confirmation of their ratings.
Investment of Funds Held by Trustee
The Trustee will invest money held for the credit of any Fund by an
authorized representative of the Company, 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 will be required for the purposes intended. In the absence
of any such direction and to the extent practicable, the Trustee will invest
amounts held under the Indenture in direct obligations of, or in obligations
fully guaranteed by, the United States.
The Investment Securities purchased will be held by the Trustee and will
be deemed at all times to be part of the applicable Fund and the Trustee will
inform the Company of the details of all such investments. Upon direction from
an authorized representative of the Company, the Trustee will 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 not be responsible or liable for any losses on
investments made by it 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 Company or its designee in a non-negligent manner.
Purchase of Notes
Any amounts held under the Indenture which are available to redeem Notes
may instead be used to purchase Notes outstanding under the Indenture at the
same times and subject to the same conditions (except as to price) as apply to
the redemption of Notes, except that such purchases made with amounts held under
the Indenture shall be made only if the purchase price shall be less than the
required redemption price.
DEFINITIONS AND PROVISIONS RELATED
TO ARC NOTES AND AUCTION PROCEDURES
The definitions relating to ARC 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.
18
<PAGE>
Auction-Related Definitions
"'AA' Composite Commercial Paper Rate" means, as of any date of
determination, (A) the interest equivalent of the 30-day rate on commercial
paper placed on behalf of issuers whose corporate bonds are rated "AA" by S&P,
or the equivalent of such rating by S&P, as such 30-day rate is made available
on a discount basis or otherwise by the Federal Reserve Bank of New York for the
Business Day immediately preceding such date of determination, or (B) if the
Federal Reserve Bank of New York does not make available any such rate, then the
arithmetic average of the interest equivalent of the 30-day rate on commercial
paper placed on behalf of such issuers, as quoted to the Auction Agent on a
discount basis or otherwise, by the Commercial Paper Dealers, as of the close of
business on the Business Day immediately preceding such date of determination.
If at the time quotations are required any Commercial Paper Dealer does not
quote a commercial paper rate required to determine the "AA" Composite
Commercial Paper Rate, or if less than three Commercial Paper Dealers are then
serving as such for any reason, the "AA" Composite Commercial Paper Rate shall
be determined on the basis of such quotation or quotations furnished by the
Commercial Paper Dealer or Commercial Paper Dealers then serving as such and
providing a quotation. For purposes of this definition, the "interest
equivalent" of a rate stated on a discount basis (a "discount rate") for
commercial paper of a given day's maturity shall be equal to the product of (a)
100 times (b) the quotient (rounded upward to the next higher one thousandth
(.001 of 1%) of (x) the discount rate (expressed in decimals) divided by (y) the
difference between (i) 1.00 and (ii) a fraction, the numerator of which shall be
the product of the discount rate (expressed in decimals) times the number of
days from (and including) the date of determination to (but excluding) the date
on which such commercial paper matures and the denominator of which shall be
360.
"All Hold Rate" means the Applicable LIBOR-Based Rate less 0.20%;
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.
"Applicable Number of Business Days" means the greater of two Business
Days or one Business Day plus the number of Business Days by which the Auction
Date precedes the first day of the next succeeding Interest Period.
"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.
19
<PAGE>
"Auction Date" means, with respect to any Offered Notes, the date
specified in the related Prospectus Supplement, and thereafter, the Business Day
immediately preceding the first day of each Auction Period for each respective
Class, other than:
(a) each Auction Period commencing after the ownership of the
applicable ARC 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 the Applicable
Number of 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.
"ARC Note Interest Rate" means each variable rate of interest per annum
borne by an ARC Note for each Auction Period and determined in accordance with
the provisions of the Indenture. However, in the event of a Payment Default, the
ARC Note Interest Rate shall equal the applicable Non-Payment Rate, provided
that such ARC Note Interest Rate shall in no event exceed the applicable Maximum
Auction Rate.
"Auction Period" means the Interest Period applicable to the ARC 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 of
the Notes in the related Prospectus Supplement, as the same may be adjusted
pursuant to the Indenture.
"Auction Period Adjustment" means an adjustment to the Auction Period as
provided in the Indenture.
"Auction Procedures" means the procedures set forth in the Indenture by
which the Auction Rate is determined.
"Auction Rate" means the rate of interest per annum that results from
implementation of the Auction Procedures and is determined as described in the
Indenture.
"Authorized Denominations" means $50,000 and any integral multiple
thereof.
"Available ARC 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."
20
<PAGE>
"Bond Equivalent Yield" means, 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-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.
"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 PaineWebber Incorporated 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 Company pursuant to the Indenture and by PaineWebber Incorporated, 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 Company, 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________ __, ____ among the Company, Bankers Trust Company, as
Auction Agent, and PaineWebber Incorporated, as Broker-Dealer.
"Business Day" shall mean any day other than April 14, April 15,
December 30, December 31, such other dates as may be agreed to in writing by the
Market Agent, the Auction Agent, the Broker-Dealer and the Authority, or a
Saturday, Sunday, holiday or day on which banks located in the city of New York,
New York, or the New York Stock Exchange, the Trustee or the Auction Agent, are
authorized or permitted by law or executive order to close.
"Carry-over Amount" means the excess, if any, of (a) the amount of
interest on an ARC 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 ARC Note actually accrued with respect to such ARC Note with respect to
such Interest Period based on the applicable Maximum Auction Rate without regard
to the last two clauses of the definition thereof together with the unreduced
portion of any such excess from prior Interest Periods; provided that any
reference to "principal" or "interest" in the Indenture and the ARC 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.
21
<PAGE>
"Commercial Paper Dealer" means PaineWebber Incorporated, 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 ARC 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 ARC 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 ARC Notes.
"Existing Owner Registry" means the registry of Persons who are owners
of the ARC 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 Auction Agent Agreement
dated as of __________, ____, by and among the Company, the Trustee and the
Initial Auction Agent, including any amendment thereof or supplement thereto.
"Initial Period" means, as to ARC Notes, the period commencing on the
Closing Date and continuing through the day immediately preceding the Initial
Rate Adjustment Date for such ARC Notes.
"Initial Rate" means, with respect to a class of any series, the rate
per annum specified in the related Prospectus Supplement.
"Initial Rate Adjustment Date" means, with respect to the class of any
series, the date specified in the related Prospectus Supplement.
"Interest Payment Date" means (a) so long as the ARC Notes bear interest
at an ARC Note Interest Rate for an Interest Period of not greater than one
year, 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 ARC Notes bear interest at an ARC Note Interest Rate for an
Interest Period of greater than one year, the dates specified in the Prospectus
Supplement.
"Interest Period" means, with respect to the ARC 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.
22
<PAGE>
"Interest Rate Adjustment Date" means the date on which an ARC Note
Interest Rate is effective, and means, with respect to the ARC Notes, the date
of commencement of each Auction Period.
"Interest Rate Determination Date" means, with respect to the ARC 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 PaineWebber Incorporated, in such capacity
hereunder, or any successor to it in such capacity hereunder.
"Maximum Auction Rate" means, for any Auction, a per annum interest rate
on the ARCs which, when taken together with the interest rate on the ARCs for
the one-year period ending on the final day of the proposed Auction Period,
would result in the average interest rate on the ARCs for such period either (a)
not being in excess (on a per annum basis) of the average of the Ninety-One Day
United States Treasury Bill Rate plus 1.20% for such one-year period (if all of
the ratings assigned by the Rating Agencies to the ARCs are "Aa3" or "AA-" or
better), (b) not being in excess (on a per annum basis) of the average of the
Ninety-One Day United States Treasury Bill Rate plus 1.50% for such one-year
period (if any one of the ratings assigned by the Rating Agencies to the ARCs is
less than "Aa3" or "AA-" but both are at least any category of "A", or (c) not
being in excess (on a per annum basis) of the average of the Ninety-One Day
United States Treasury Bill Rate plus 1.75% for such one-year period (if any one
of the ratings assigned by the Rating Agencies to the ARCs is less than the
lowest category of "A"); provided, however, that if the ARCs have not been
outstanding for at least such one-year period then for any portion of such
period during which such ARCs were not Outstanding, the interest rates on the
ARCs for purposes of this definition, shall be deemed to be equal to such rates
as the Market Agent shall determine were the rates of interest on equivalently
rated auction securities with comparable lengths of auction periods during such
period. 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 notice pursuant to the Auction Agent Agreement. The
percentage amount to be added to the Ninety-One Day United States Treasury Bill
Rate in any one or more of (a), (b) and (c) above may be increased with a Rating
Confirmation.
"Ninety-One Day United States Treasury Bill Rate" shall mean the Bond
Equivalent Yield on the 91-day United States Treasury Bills sold at the last
auction thereof that immediately precedes the Auction Date, as determined by the
Market Agent on the Auction Date.
"Non-Payment Rate" means One-Month LIBOR plus 1.50%.
23
<PAGE>
"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."
"PaineWebber" means PaineWebber Incorporated, New York, New York in such
capacity hereunder, or any successor to it in such capacity hereunder.
"Payment Default" means, with respect to a class of the ARC Notes, (a) a
default in the due and punctual payment of any installment of interest on such
class, or (b) a default in the due and punctual payment of any interest on and
principal of such class at their maturity.
"Potential Owner" means any Person (including an Existing Owner that is
(a) a Broker-Dealer when dealing with the Auction Agent and (b) a potential
beneficial owner when dealing with a Broker-Dealer) who may be interested in
acquiring ARC Notes (or, in the case of an Existing Owner thereof, an additional
principal amount of ARC Notes).
"Program Expenses Percentage" means, the percentage that Program
Expenses estimated for the next 12 months represent of the principal amount of
the Notes, which the Company shall calculate at least annually. Any adjustment
in the Program Expense Percentage shall be effective beginning on the first
Interest Rate Determination Date following each such calculation.
"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.
24
<PAGE>
"Sell Order" has the meaning set forth under "-Auction Procedures."
"Submission Deadline" means [1:00] 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 Company and
the Trustee enter into a Substitute Auction Agent Agreement.
"Substitute Auction Agent Agreement" means an auction agent agreement
containing terms substantially similar to the terms of the Initial Auction Agent
Agreement, whereby a Person having the qualifications required by the Indenture
agrees with the Trustee and the Company to perform the duties of the Auction
Agent under the Indenture.
"Sufficient Bids" has the meaning set forth under "-Auction Procedures."
"Variable Rate" means the variable rate of interest per annum, including
the Initial Rate, borne by each Class of ARC 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 the procedures that will be used in determining
the interest rates on the ARC Notes. Immediately following this summary is a
more detailed description of these procedures. Prospective investors in the ARC
Notes should read carefully the following summary, along with the more detailed
description.
The interest rate on each class of ARC 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
ARC 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 ARC
Notes.
In the auction procedures, the following types of orders may be
submitted:
25
<PAGE>
(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 ARC Notes for the upcoming
interest period;
(ii) "Sell Orders" - an order by a current investor to sell a
specified principal amount of ARC Notes, regardless of the
upcoming interest rate; and
(iii) "Potential Bid Orders" - the minimum interest rate that a
potential investor (or a current investor wishing to
purchase additional ARC Notes) is willing to accept in
order to buy a specified principal amount of ARC Notes.
If an existing investor does not submit orders with respect to all its
ARC 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 ARC Notes for
which no order was received.
In connection with each Auction, ARC 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 ARC Notes.
(a) Assumptions:
1. Denominations (Units) = $50,000
2. Interest Period = 28 days
3. Principal Amount Outstanding = $50 Million (1000 Units)
(b) Summary of All Orders Received for the Auction
Bid/Hold Orders Sell Orders Potential Bid Orders
- ---------------------------- ------------------- ------------------------------
20 Units at 2.90% 100 Units Sell 40 Units at 2.95%
60 Units at 3.02% 100 Units Sell 60 Units at 3.00%
120 Units at 3.05% 200 Units Sell 100 Units at 3.05%
==============
200 Units at 3.10% 400 Units 100 Units at 3.10%
200 Units at 3.12% 100 Units at 3.11%
==================
600 Units 100 Units at 3.14%
200 Units at 3.15%
==================
700 Units
Total units under existing Bid/Hold Orders and Sell Orders always equal
issue size (in this case 1000 units).
(c) Auction Agent organizes Orders in Ascending Order
Order Number Cumulative Order Number of Cumulative
Number of Units Total Percent Number Units Total Percent
(Units) (Units)
- ------ ---------- ------------ -------- -------- ---------- ----------- --------
1. 20(W) 20 2.90% 7. 200(W) 600 3.10%
2. 40(W) 60 2.95% 8. 100(W) 700 3.10%
3. 60(W) 120 3.00% 9. 100(W) 800 3.11%
4. 60(W) 180 3.02% 10. 200(W) 1000 3.12%
5. 100(W) 280 3.05% 11. 100(L) 3.14%
6. 120(W) 400 3.05% 12. 200(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
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 ARC Notes offered for sale. In such circumstances,
the interest rate for the upcoming Interest Period will equal the Maximum
Auction Rate. Also, if all the ARC Notes are subject to Hold Orders (i.e., each
holder of ARC Notes wishes to continue holding its ARC Notes, regardless of the
interest rate), the interest rate for the upcoming Interest Period will equal
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 ARC Notes shall bear
interest at the Initial Rate for such class. Thereafter, and except with respect
to an Auction Period Adjustment, the ARC Notes of any class shall bear interest
at an ARC Note Interest Rate based on the Auction Period for such class, as
determined below.
For each class of the ARC Notes during the Initial Period for such class
and each Auction Period thereafter, interest at the applicable ARC 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 or 365 days, as
specified in the Prospectus Supplement.
26
<PAGE>
The ARC Notes Interest Rate to be borne by each class of the ARC 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. In the case of the Auction Period that immediately
follows the Initial Period for a class of the ARC Notes, such Auction Period
shall commence on the Initial Rate Adjustment Date for such class. The ARC Note
Interest Rate on each class of the ARC Notes for each Auction Period shall be
the Auction Rate in effect for such Auction Period as determined in accordance
with "-ARC Note Interest-Determining the ARC Note Interest Rate" below; provided
that if, on any Interest Rate Determination Date, an Auction is not held for any
reason, then the ARC Note Interest Rate on such ARC Notes for the next
succeeding Auction Period shall be the applicable Maximum Auction Rate.
Notwithstanding the foregoing:
(i) if the ownership of an ARC Note is no longer maintained in
Book-entry Form, the ARC Note Interest Rate on the ARC Notes of such
class for any Interest Period commencing after the delivery of
certificates representing ARC 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 ARC Note
Interest Rate on a class of the ARC Notes for the Interest Period for
such class commencing on or immediately after such Payment Default, and
for each Interest Period thereafter, to and including the Interest
Period, if any, during which, or commencing less than two Business Days
after, such Payment Default is cured, shall equal the applicable
Non-Payment Rate on the first day of each such Interest Period.
The Auction Agent shall promptly give written notice to the Trustee and
the Company of each ARC Note Interest Rate (unless the ARC Note Interest Rate is
the applicable Non-Payment Rate) and the Maximum Auction Rate when such rate is
not the ARC Note Interest Rate, applicable to each class of the ARC Notes. The
Trustee shall notify the Registered Owners of ARC Notes of the applicable ARC
Note Interest Rate applicable to each such class of ARC Notes for each Auction
Period not later than the third Business Day of such Auction Period.
Notwithstanding any other provision of the ARC Notes or the Indenture
and except for the occurrence of a Payment Default, interest payable on each
class of the ARC 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.
27
<PAGE>
If the Auction Rate for a class of ARC Notes is greater than the
applicable Maximum Auction Rate, then the Variable Rate applicable to such ARC
Notes for that Interest Period will be the applicable Maximum Auction Rate. If
the Variable Rate applicable to such ARC 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 ARC Notes for such Interest Period. Such determination of
the Carry-over Amount shall be made separately for each class of the ARC 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 ARC 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 ARC 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 Trustee. Such notice shall state, in
addition to such Carry-over Amount, that, unless and until an ARC 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 ARC 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 ARC Note of such class on the earliest
of (i) the date of defeasance of any of the ARC 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 "Definitions and
Provisions Related to ARC 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 canceled.
The Carry-over Amount (and interest accrued thereon) for a class of ARC
Notes shall be paid by the Trustee on Outstanding ARC Notes of such class on the
earliest of (a) the date of defeasance of any of the ARC 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 Revenue Fund to pay all interest due on the ARC Notes on such
Interest Payment Date. Any Carry-over Amount (and any interest accrued thereon)
on any ARC Note which is due and payable on an Interest Payment Date, which ARC
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 "Definitions and Provisions Related to ARC 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 canceled with respect to said ARC 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 ARC 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 ARC 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 ARC Note receiving such
partial payment of the Carry-over Amount remaining unpaid on such ARC Note.
28
<PAGE>
The Interest Payment Date or other date on which such Carry-over Amount
(or any interest accrued thereon) for a class of ARC 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 Fund from which, it pays interest on the ARC 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 ARC Note Interest Rate with respect to a class of
ARC Notes, or, if for any reason such manner of determination shall be held to
be invalid or unenforceable, the ARC Note Interest Rate for the next succeeding
Interest Period, which Interest Period shall be an Auction Period, for such
class of ARC 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
Company 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.
ARC Note Interest Rate
Determining the ARC Note Interest Rate. By purchasing ARC Notes,
whether in an Auction or otherwise, each purchaser of the ARC 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 ARC 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 ARC Notes is maintained in
Book-entry Form by the Securities Depository, an Existing Owner may
sell, transfer or otherwise dispose of ARC Notes of such class only
pursuant to a Bid or Sell Order placed in an Auction or otherwise sell,
transfer or dispose of ARC 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 ARC Notes):
(i) (A) Prior to the Submission Deadline on each
Auction Date;
(1) each Existing Owner of ARC Notes may
submit to a Broker-Dealer by telephone or otherwise
any information as to:
a. the principal amount of
Outstanding ARC Notes, if any, owned by such
Existing Owner which such Existing Owner
desires to continue to own without regard to
the ARC Note Interest Rate for the next
succeeding Auction Period;
b. the principal amount of
Outstanding ARC Notes, if any, which such
Existing Owner offers to sell if the ARC
Note Interest Rate for the next succeeding
Auction Period shall be less than the rate
per annum specified by such Existing Owner;
and/or
29
<PAGE>
c. the principal amount of
Outstanding ARC Notes, if any, owned by such
Existing Owner which such Existing Owner
offers to sell without regard to the ARC
Note Interest Rate for the next succeeding
Auction Period;
and
(2) one or more Broker-Dealers may contact
Potential Owners to determine the principal amount
of ARC Notes which each Potential Owner offers to
purchase, if the ARC Note Interest Rate for the
next succeeding Auction Period shall not be less
than the rate per annum specified by such Potential
Owner.
The statement of an Existing Owner or a Potential Owner referred
to in (1) or (2) of this paragraph (A) is herein referred to as an
"Order," and each Existing Owner and each Potential Owner placing an
Order is herein referred to as a "Bidder"; an Order described in clause
(1)a is herein referred to as a "Hold Order"; an Order described in
clauses (1)b and (2) is herein referred to as a "Bid"; and an Order
described in clause (1)c is herein referred to as a "Sell Order."
(B) (1) Subject to the provisions of (a)(ii)
hereof, a Bid by an Existing Owner shall constitute
an irrevocable offer to sell:
a. the principal amount of
Outstanding ARC Notes specified in such Bid
if the ARC 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 ARC
Notes to be determined as set forth in
(a)(iv)(A)(4) hereof, if the ARC 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 ARC
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
Outstanding ARC Notes specified in such
Sell Order; or
b. such principal amount, or a
lesser principal amount of Outstanding ARC
Notes set forth in (a)(iv)(B)(3) hereof, if
Sufficient Bids have not been made.
30
<PAGE>
(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 ARC Notes specified in such Bid
if the ARC 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 ARC
Notes set forth in (a)(iv)(A)(5) hereof, if
the ARC 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 ARC
Notes that are the subject of such Order;
(3) to the extent that such Bidder is an
Existing Owner:
a. the principal amount of ARC
Notes, if any, subject to any
Hold Order placed by such Existing Owner;
b. the principal amount of ARC
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 ARC
Notes, if any, subject to any Sell Order
placed by such Existing Owner;
and
(4) to the extent such Bidder is a Potential
Owner, the rate specified in such Potential Owner's
Bid.
(B) If any rate specified in any Bid contains more
than three figures to the right of the decimal point, the
Auction Agent shall round such rate up to the next higher
one thousandth of 1%.
31
<PAGE>
(C) If an Order or Orders covering all Outstanding
ARC 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 ARC Notes owned by such
Existing Owner and not subject to an Order submitted to
the Auction Agent.
(D) Neither the Company, 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 ARC 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 ARC Notes owned by such
Existing Owner, and if the aggregate principal
amount of ARC Notes subject to such Hold Orders
exceeds the aggregate principal amount of ARC Notes
owned by such Existing Owner, the aggregate
principal amount of ARC Notes subject to each such
Hold Order shall be reduced pro rata so that the
aggregate principal amount of ARC Notes subject to
such Hold Order equals the aggregate principal
amount of Outstanding ARC 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 ARC Notes
owned by such Existing Owner over the
aggregate principal amount of ARC Notes
subject to any Hold Order referred to in
clause (A) of this paragraph (v);
b. subject to subclause (1) of this
clause (B), if more than one Bid with the
same rate is submitted on behalf of such
Existing Owner and the aggregate principal
amount of Outstanding ARC 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 ARC 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
32
<PAGE>
(3) All Sell Orders shall be considered
valid up to an amount equal to the excess of the
principal amount of Outstanding ARC Notes owned by
such Existing Owner over the aggregate principal
amount of ARC 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 ARC 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 ARC 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 ARC 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
ARC Notes not equal to an Authorized Denomination shall be
rejected.
(I) Any Bid specifying a rate higher than the
applicable Maximum Auction Rate will (1) be treated as a
Sell Order if submitted by an Existing Owner and (2) not
be accepted if submitted by a Potential Owner.
(J) Any Order submitted in an Auction by a
Broker-Dealer to the Auction Agent prior to the Submission
Deadline on any Auction Date shall be irrevocable.
(iii) (A) Not earlier than the Submission Deadline on each
Auction Date, the Auction Agent shall assemble all valid
Orders submitted or deemed submitted to it by the
Broker-Dealers (each such Order as submitted or deemed
submitted by a Broker-Dealer being herein referred to
individually as a "Submitted Hold Order," a "Submitted
Bid" or a "Submitted Sell Order," as the case may be, or
as a "Submitted Order," and collectively as "Submitted
Hold Orders," "Submitted Bids" or "Submitted Sell Orders,"
as the case may be, or as "Submitted Orders") and shall
determine:
(1) the excess of the total principal amount
of Outstanding ARC Notes over the sum of the
aggregate principal amount of Outstanding ARC Notes
subject to Submitted Hold Orders (such excess being
herein referred to as the "Available ARC Notes"),
and
(2) from the Submitted Orders whether:
a. the aggregate principal amount of
Outstanding ARC Notes subject to Submitted
Bids by Potential Owners specifying one or
more rates equal to or lower than the
applicable Maximum Auction Rate;
33
<PAGE>
exceeds or is equal to the sum of:
b. the aggregate principal amount of
Outstanding ARC 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 ARC Notes subject to
Submitted Sell Orders;
(in the event such excess or such equality exists,
other than because all of the Outstanding ARC 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 ARC 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 ARC Notes which, when
added to the aggregate principal amount of Outstanding ARC
Notes to be purchased by such Potential Owners described
in subclause b. above, would equal not less than the
Available ARC 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
Company 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;
34
<PAGE>
(2) if Sufficient Bids do not exist (other
than because all of the Outstanding ARC Notes are
subject to Submitted Hold Orders), that the Auction
Rate for the next succeeding Interest Period shall
be equal to the applicable Maximum Auction Rate; or
(3) if all Outstanding ARC 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 ARC Note Interest Rate, which
rate shall be the Auction Rate; provided, however, that in
no event shall the ARC Note Interest Rate exceed the
applicable Maximum Auction Rate.
(iv) Existing Owners shall continue to own the principal
amount of ARC 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 ARC 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 ARC 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 ARC Notes are subject to Submitted Hold Orders), the
ARC 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 ARC 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 ARC
Note Interest Rate shall be accepted, thus
requiring each such Existing Owner to sell the
aggregate principal amount of ARC Notes subject to
such Submitted Bids;
(2) Existing Owners' Submitted Bids
specifying any rate that is lower than the ARC Note
Interest Rate shall be rejected, thus entitling
each such Existing Owner to continue to own the
aggregate principal amount of ARC Notes subject to
such Submitted Bids;
(3) Potential Owners' Submitted Bids
specifying any rate that is lower than the ARC Note
Interest Rate shall be accepted;
35
<PAGE>
(4) Each Existing Owners' Submitted Bid
specifying a rate that is equal to the ARC Note
Interest Rate shall be rejected, thus entitling
such Existing Owner to continue to own the
aggregate principal amount of ARC Notes subject to
such Submitted Bid, unless the aggregate principal
amount of Outstanding ARC Notes subject to all such
Submitted Bids shall be greater than the principal
amount of ARC Notes (the "remaining principal
amount") equal to the excess of the Available ARC
Notes over the aggregate principal amount of ARC
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 ARC Notes subject to such Submitted Bid,
but only in an amount equal to the aggregate
principal amount of ARC Notes obtained by
multiplying the remaining principal amount by a
fraction, the numerator of which shall be the
principal amount of Outstanding ARC 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 ARC Notes
subject to such Submitted Bids made by all such
Existing Owners that specified a rate equal to the
ARC 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 ARC Note
Interest Rate shall be accepted, but only in an
amount equal to the principal amount of ARC Notes
obtained by multiplying the excess of the aggregate
principal amount of Available ARC Notes over the
aggregate principal amount of ARC 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 ARC Notes subject to such
Submitted Bid and the denominator of which shall be
the sum of the principal amount of Outstanding ARC
Notes subject to Submitted Bids made by all such
Potential Owners that specified a rate equal to the
ARC 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 ARC 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 ARC Note Interest Rate shall be rejected, thus
entitling such Existing Owners to continue to own
the aggregate principal amount of ARC Notes subject
to such Submitted Bids;
36
<PAGE>
(2) Potential Owners' Submitted Bids
specifying (x) any rate that is equal to or lower
than the ARC Note Interest Rate shall be accepted
and (y) any rate that is higher than the ARC Note
Interest Rate shall be rejected; and
(3) each Existing Owner's Submitted Bid
specifying any rate that is higher than the ARC
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 ARC 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
ARC Notes obtained by multiplying the aggregate
principal amount of ARC 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 ARC 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 ARC Notes subject
to all such Submitted Bids and Submitted Sell
Orders.
(C) If all ARC Notes are subject to Submitted Hold
Orders, all Submitted Bids shall be rejected.
(D) If, as a result of the procedures described in
paragraph (A) or (B) of this Section (a)(iv), any Existing
Owner would be entitled or required to sell, or any
Potential Owner would be entitled or required to purchase,
a principal amount of ARC 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 ARC Notes to be
purchased or sold by any Existing Owner or Potential Owner
so that the principal amount of ARC 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 ARC Notes, the Auction Agent
shall, in such manner as in its sole discretion it shall
determine, allocate ARC Notes for purchase among Potential
Owners so that only ARC 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 ARC Notes.
37
<PAGE>
(v) Based on the result of each Auction, the Auction Agent
shall determine the aggregate principal amount of ARC Notes to be
purchased and the aggregate principal amount of ARC 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 ARC Notes to be sold differs from such aggregate
principal amount of ARC 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, ARC Notes.
(vi) Any calculation by the Auction Agent or the Trustee,
as applicable, of the ARC 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 ARC 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 Revenue Fund to pay, or otherwise
held by the Trustee under the Indenture and available to pay, the
principal of and interest due on the ARC Notes on the Interest
Payment Date immediately following such Auction Date, and (B) no
Auction will be held on any Auction Date hereunder during the
continuance of a Payment Default. The Trustee shall promptly
notify the Auction Agent of any such occurrence.
Application of Interest Payments for the ARC 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.
38
<PAGE>
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 ARC 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. If the ownership of the ARC 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 ARC Notes pursuant to the Indenture. If a Payment Default shall
have occurred, the Trustee shall calculate the Non-Payment Rate on the Interest
Rate Determination Date for (i) each Interest Period commencing after the
occurrence and during the continuance of such Payment Default and (ii) any
Interest Period commencing less than two Business Days after the cure of any
Payment Default. 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.
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 PaineWebber) to
provide commercial paper quotes for purposes of determining the "AA" Composite
Commercial Paper Rate. Pending appointment of both such additional Commercial
Paper Dealers, PaineWebber 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. PaineWebber has been appointed as a
Commercial Paper Dealer to provide commercial paper quotes for purposes of
determining the "AA" Composite Commercial Paper Rate as provided above.
Notification of Rates, Amounts and Payment Dates. By 12:00 noon, eastern
time, on the Business Day following each Regular Record Date, the Trustee shall
determine the aggregate amounts of interest distributable on the next succeeding
Interest Payment Date to the beneficial owners of ARC 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 ARC 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 ARC Notes" above.
(b) advise the Registered Owners of a Class of ARC Notes of any
Carry-over Amount accruing on such ARC Notes; and
(c) advise the Securities Depository, so long as the ownership of
the ARC 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 ARC 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 ARC Notes is maintained in Book-entry Form by the
Securities Depository.
39
<PAGE>
Auction Agent. Bankers Trust Company has been appointed as Initial
Auction Agent to serve as agent for the Company in connection with Auctions. The
Trustee and the Company 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 Company. 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 ARC 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 Company 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 Company, 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 Company 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 Company 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 PaineWebber, 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 PaineWebber is serving as a Broker-Dealer,
PaineWebber shall have the right to consent to the approval of any additional
Broker-Dealers, which consent will not be unreasonably withheld. Any
Broker-Dealer may be removed at any time, at the request of an Authorized
Officer, but there shall, at all times, be at least one Broker-Dealer appointed
and acting as such.
40
<PAGE>
Changes in Auction Period or Periods and Certain Percentages. While any
of the ARC Notes are Outstanding, the Company 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 ARC
Notes. The Company 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 Company shall initiate the Auction Period
Adjustment by giving written notice by Company 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, a Company 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 ARC 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 ARC 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 ARC Notes.
The Market Agent shall deliver a written request for consent to such change in
the length of the Auction Date to the Company at least 14 days prior to the
effective date of such change. If the Company shall have delivered such written
consent to the Market Agent, the Market Agent shall provide notice of its
determination to specify an earlier Auction Date for one or more Auction Periods
by means of a written notice delivered at least 10 days prior to the proposed
changed Auction Date to the Trustee, the Auction Agent, the Company, 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 ARC 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 ARC Notes to
which such Variable Rate applies, and the Company and the Trustee may rely
thereon for all purposes.
41
<PAGE>
In no event shall the cumulative amount of interest paid or payable on a
class of ARC Notes (including interest calculated as provided herein, plus any
other amounts that constitute interest on the ARC Notes of such class under
applicable law, which are contracted for, charged, reserved, taken or received
pursuant to the ARC Notes of such class or related documents) calculated from
the date of issuance of the ARC Notes of such class through any subsequent day
during the term of the ARC Notes of such class or otherwise prior to payment in
full of the ARC 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 ARC Notes of such class or related
documents or otherwise contracted for, charged, reserved, taken or received in
connection with the ARC Notes of such class, or if the redemption or
acceleration of the maturity of the ARC Notes of such class results in payment
to or receipt by the Registered Owner or any former Registered Owner of the ARC
Notes of such class of any interest in excess of that permitted by applicable
law, then, notwithstanding any provision of the ARC Notes of such class or
related documents to the contrary, all excess amounts theretofore paid or
received with respect to the ARC Notes of such class shall be credited on the
principal balance of the ARC Notes of such class (or, if the ARC Notes of such
class have been paid or would thereby be paid in full, refunded by the recipient
thereof), and the provisions of the ARC 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 ARC 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 Company and the Trustee, provided that such resignation shall not
be effective until the appointment of a successor market agent by the Company
and the acceptance of such appointment by such successor market agent. The
Market Agent may be replaced at the direction of the Company, by an instrument
signed by an Authorized Officer, filed with the Market Agent and the Trustee at
least 30 days before the effective date of such replacement, provided that such
replacement shall not be effective until the appointment of a successor market
agent by the Company 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
Company 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
Company 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.
ARC NOTE SETTLEMENT PROCEDURES
Capitalized terms used herein shall have the respective meanings
specified herein under "Definitions and Provisions Related to ARC Notes and
Auction Procedures." These settlement procedures apply to all ARC 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;
42
<PAGE>
(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 ARC 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 ARC Notes, if any, to be purchased by such Potential
Owner;
(v) if the aggregate principal amount of ARC 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 ARC Notes to be purchased by all Potential
Owners on whose behalf such Broker-Dealer submitted a Bid, the
name or names of one or more other Buyer's Broker-Dealers (and
the Participant, if any, of each such other Buyer's
Broker-Dealer) acting for one or more purchasers of such excess
principal amount of ARC Notes and the principal amount of ARC
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 ARC Notes to be purchased
by all Potential Owners on whose behalf such Broker-Dealer
submitted a Bid exceeds the amount of ARC 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 ARC Notes and the principal
amount of ARC 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
ARC 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;
43
<PAGE>
(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 ARC Notes to be purchased pursuant to such Bid against receipt
of such principal amount of ARC Notes;
(iii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Existing Owner on whose behalf such
Broker-Dealer submitted a Sell Order that was accepted, in whole
or in part, or a Bid that was accepted, in whole or in part, to
instruct such Existing Owner's Participant to deliver to such
Broker-Dealer (or its Participant) through the Securities
Depository the principal amount of ARC 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 ARC 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 ARC Notes to such Broker-Dealer
following such Auction pursuant to (b)(iii) above the amount
necessary, including accrued interest, if any, to purchase such
ARC Notes against receipt of such ARC Notes, and (B) deliver such
ARC 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
44
<PAGE>
(iii) each Buyer's Broker-Dealer that is not a Participant
in the Securities Depository shall instruct its Participant to
(A) pay through the Securities Depository to a Seller's
Broker-Dealer (or its Participant) identified following such
Auction pursuant to (a)(vi) above the amount necessary, including
accrued interest, if any, to purchase the ARC Notes to be
purchased pursuant to (b)(ii) above against receipt of such ARC
Notes, and (B) deliver such ARC 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 ARC Notes in an Auction fails to
deliver such ARC 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 ARC Notes that is less than the
principal amount of ARC Notes that otherwise was to be purchased by such
Potential Owner. In such event, the principal amount of ARC Notes to be
so delivered shall be determined solely by such Broker-Dealer. Delivery
of such lesser principal amount of ARC Notes shall constitute good
delivery. Notwithstanding the foregoing terms of this paragraph (f), any
delivery or nondelivery of ARC 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.
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
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 $1,000 and any multiple thereof,
or any other amount as may be specified with respect to a Series in the related
Prospectus Supplement.
45
<PAGE>
"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
Company.
"Holder" as used in this Section shall mean the beneficial owner of any
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.
"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.
46
<PAGE>
"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 , Three Month LIBOR, Six
Month LIBOR or One Year 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 Company.
"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.
"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 Company.
"Person" means and includes, unless otherwise specified, an individual,
corporation, company, trust, estate partnership or association.
47
<PAGE>
"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.
"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.
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.
48
<PAGE>
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 Company 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 any tax or other
government charge, incurred by the Trustee or the Company with respect to each
such transfer or exchange will be paid by the Company.
The Trustee will not be required to transfer any LIBOR Rate 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 Rate Note, which
LIBOR Rate 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:
49
<PAGE>
(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
form by the Depository, of the Applicable Rate and the
Interest Amount in respect of the next succeeding Interest
Period.
Calculation Agent
(a) PaineWebber Incorporated 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 Company 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 Company 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 Company 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 Company 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 Company 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 Company 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 Commission under the Securities
Exchange Act) to provide credit ratings for the LIBOR Rate Notes of any Class.
50
<PAGE>
Notice
The Company 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 Company determines that a Payment Default has occurred
the Company 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
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.
51
<PAGE>
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 Company 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
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 Company,
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 Company 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 Company 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.
52
<PAGE>
Cedelbank, societe anonyme ("CEDEL") is incorporated under the laws of
Luxembourg as a professional depository. CEDEL holds securities for its
participating organizations ("CEDEL Participants") and facilitates the clearance
and settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. CEDEL interfaces with domestic
markets in several countries. As a professional depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to CEDEL is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a CEDEL Participant, either directly
or indirectly.
The Euroclear System ("Euroclear") was created in 1968 to hold
securities for participants of Euroclear ("Euroclear Participants") and to clear
and settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may be settled in any of 27
currencies, including United States dollars. Euroclear includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator", under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear, withdrawals of securities
and cash from the Euroclear, and receipts of payments with respect to securities
in Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons holding
through Euroclear Participants.
53
<PAGE>
Distributions with respect to Notes held through CEDEL or Euroclear will
be credited to the cash accounts of CEDEL Participants or Euroclear Participants
in accordance with the relevant system's rules and procedures, to the extent
received by its Depositary (as defined below). Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Noteholder under the Indenture on behalf
of a CEDEL Participant or Euroclear Participant only in accordance with the
relevant rules and procedures and subject to the relevant Depositary's ability
to effect such actions on its behalf through DTC.
Noteholders may hold their Notes through DTC (in the United States) or
CEDEL or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems.
The Notes will initially be registered in the name of Cede & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A. ("Citibank") will act as depositary
for CEDEL and Morgan Guaranty Trust Company of New York ("Morgan") will act as
depositary for Euroclear (in such capacities, individually, the "Depositary"
and, collectively, the "Depositaries").
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Because of time-zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
or Euroclear Participant to a Participant will be received with value on the DTC
settlement date but will be available in the relevant CEDEL or Euroclear cash
account only as of the business day following settlement in DTC. For information
with respect to tax documentation procedures for the Notes, see "Certain Federal
Income Tax Consequences--Trusts for Which a Partnership Election Is Made--Tax
Consequences to Holders of the Notes--Foreign Holders" in the Prospectus.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC Rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions to the Depositaries.
54
<PAGE>
DTC has advised the Administrator that it will take any action permitted
to be taken by a Noteholder under the Indenture, only at the direction of one or
more Participants to whose accounts with DTC the Notes are credited.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of interests in the Notes among
participants of DTC, CEDEL and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
DTC management is aware that some computer applications, systems, and
the like for processing dates ("Systems") that are dependent upon calendar
dates, including dates before, on, and after January 1, 2000, may encounter
"Year 2000 problems." DTC has informed its Participants and other members of the
financial community (the "Industry") that it has developed and is implementing a
program so that its Systems, as the same relate to the timely payment of
distributions (including principal and income payments) to securityholders,
book-entry deliveries, and settlement of trades within DTC ("DTC Services"),
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally, DTC's plan
includes a testing phase, which is expected to be completed within appropriate
time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as third party vendors on whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information or the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed the Industry that it is
contacting (and will continue to contact) third party vendors from whom DTC
acquires services to: (i) impress upon them the importance of such services
being Year 2000 compliant; and (ii) determine the extent of their efforts for
Year 2000 remediation (and, as appropriate, testing) of their services. In
addition, DTC is in the process of developing such contingency plans as it deems
appropriate.
According to DTC, the information set forth in the preceding two
paragraphs about DTC has been provided to the Industry by DTC for informational
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
None of the trust, the seller, the servicer, the administrator, the
eligible lender trustee, the indenture trustee or the underwriters will have any
responsibility or obligation to any participants, Cedel participants or
Euroclear participants or the persons for whom they act as nominees with respect
to (1) the accuracy of any records maintained by DTC, Cedel or Euroclear or any
participant, (2) the payment by DTC, Cedel or Euroclear or any participant of
any amount due to any beneficial owner in respect of the principal amount or
interest on the senior notes, (3) the delivery by any participant, Cedel
participant or Euroclear participant of any notice to any beneficial owner which
is required or permitted under the terms of the indenture or the trust agreement
to be given to senior noteholders or (4) any other action taken by DTC as the
senior noteholder.
The Company 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.
55
<PAGE>
ADDITIONAL NOTES
The Company 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 either the Senior Notes, the
Subordinate Notes or the Junior-Subordinate Notes, if any. In addition the
Company may enter into any Derivative Product it deems necessary or desirable
with respect to any or all of the Notes. These actions may be taken by the
Company without the approval of the holders of any outstanding Notes.
No Additional Notes shall be authenticated and delivered pursuant to the
Indenture until the following conditions have been satisfied:
o The Company and the Trustee have entered into a
Supplemental Indenture providing the terms and forms of
the additional Notes.
o The Trustee shall have received a rating confirmation from
each Rating Agency which has assigned a rating to any
outstanding Notes that such rating will not be reduced or
withdrawn as a result of the issuance of the proposed
additional Notes.
o The Trustee shall have received an opinion of counsel to
the effect that all of the foregoing conditions to the
issuance of the proposed additional Notes have been
satisfied.
The Trustee is authorized pursuant to the provisions of the
Indenture to establish any additional Funds under the Indenture which it deems
necessary or convenient in connection with the issuance and delivery of any
additional Notes.
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 and Priority of Lien
The provisions, covenants and agreements set forth in the Indenture are
generally 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. However, the
Supplemental Indenture for a series of the Notes will give the Senior Notes
priority over the Subordinate Notes with respect to payments of principal and
interest and the Subordinate Notes priority over the Junior-Subordinate Notes
with respect to payments of principal and interest.
Other Obligations of the Company
56
<PAGE>
The Company 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 issued by the Company, except to the extent such commingling
is required by the Trustee for ease in administration of its duties and
responsibilities. 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 revenues and other moneys, financed student loans, securities,
evidences of indebtedness, interests, rights and properties pledged under the
Indenture are and will be owned by the Company free and clear of any pledge,
lien, charge or encumbrance thereon or with respect thereto prior to, of equal
rank with or subordinate to the respective pledges created by the Indenture,
except as otherwise expressly provided therein. Except as otherwise provided in
the Indenture, the Company shall not create or voluntarily permit to be created
any debt, lien, or charge on the financed student loans which would be on a
parity with, subordinate 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 Obligations thereby secured might or could be lost or impaired; and will pay
or cause to be paid or will 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 student loans. The Company will not be required to pay, discharge, or
make provision for any such lien, charge, claim, or demand so long as the
validity thereof shall be contested in good faith, unless in the opinion of the
Trustee, the same will endanger the security for the Notes.
Derivative Products; Reciprocal Payments; Issues Derivative Payments
The Company is authorized under the Indenture to enter into a Derivative
Product, defined to mean a written contract under which the Company is obligated
to pay to a counterparty (a "Reciprocal Payor") on specified payments dates
certain amounts in exchange for the Reciprocal Payor's obligation to make
payments to the Company on specified payment dates in specified amounts. The
Company's obligation to make payments in connection with a Derivative Product
may be secured by a pledge of and lien on the trust estate. No Derivative
Product may be entered into unless the Trustee shall have received a
confirmation from each Rating Agency that such Derivative Product will not
adversely affect the rating on any of the Notes. All payments in connection with
a Derivative Product must be made on the third business day immediately
preceding a Note payment date.
If any payment to a Reciprocal Payor under a Derivative Product would
result in a deficiency in the amounts required to make payments to the
Registered Owners of the Notes on a Note Payment Date, then the Trustee will
delay the making of such payment to the Reciprocal Payor until the first date on
which no deficiency would result from such payment or until such next Note
Payment Date and as described in the paragraph above, whichever is earlier.
Payment of Principal, Interest and Premium
57
<PAGE>
The Company will promptly pay, but solely from the trust estate, the
principal of and interest, if any, on each and every Note issued under the
provisions of the Indenture at the places, on the dates and in the manner
specified therein and any premium required for the retirement of the Notes by
purchase or redemption according to the true intent and meaning thereof. The
Notes are payable from and equally secured 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 or any Reciprocal Payor have any right to possession of any
financed student loans, which shall be held only by the Trustee or its agent or
bailee.
Representations and Warranties of the Company
The Company represents and warrants in the Indenture that:
o it is duly authorized under the laws of Nevada to create and
issue the Notes and to execute and deliver the Indenture and any
Derivative Product and to make the pledge to the payment of Notes
and any Company Derivative Payments thereunder,
o all necessary action on the part of the Company for the creation
and issuance of the Notes and the execution and delivery of the
Indenture and any Derivative Product has been duly and
effectively taken,
o the Notes in the hands of the Registered Owners thereof and the
Company Derivative Payments are and will be valid and enforceable
special limited obligations of the Company secured by and payable
solely from the trust estate.
Further Covenants of the Company
The Company will cause financing statements and continuation statements
with respect thereto to be filed in the office of the Secretary of State of any
jurisdiction necessary to perfect and maintain the security interest granted by
the Company under the Indenture.
The Company 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
Company is a party pursuant to the transactions contemplated by the Indenture,
and will punctually perform all duties required by the Bylaws of the Company and
laws of the State.
The Company 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 Company which relate to the Notes.
The Company, 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 student loans, and will furnish the Trustee such
other information as it may reasonably request. The Trustee shall be under no
duty to make any such examination unless requested in writing to do so by the
Registered Owners of 51% in collective aggregate principal amount of the Notes
at the time Outstanding, and unless such Registered Owners shall have offered
the Trustee security and indemnity satisfactory to it against any costs,
expenses and liabilities which might be incurred thereby.
The Company shall cause an annual audit to be made by an independent
auditing firm of national reputation and file one copy thereof with the Trustee
and each Rating Agency within 150 days of the close of each Fiscal Year. The
Trustee shall be under no obligation to review or otherwise analyze such audit.
58
<PAGE>
Enforcement of Servicing Agreement
The Company will:
o cause to be diligently enforced all terms, covenants and
conditions of all Servicing Agreements, including the prompt
payment of all amounts due the Company thereunder;
o not permit the release of the obligations of any servicer under
any Servicing Agreement except in conjunction with a permitted
amendments or modifications;
o at all times, to the extent permitted by law, cause to be
defended, enforced, preserved and protected the rights and
privileges of the Company and of the Registered Owners under or
with respect to each Servicing Agreement;
o at its own expense, duly and punctually perform and observe each
of its obligations to the servicer under the Servicing Agreement
in accordance with the terms thereof;
o give the Trustee prompt written notice of each default on the
part of the servicer of its obligations under the Servicing
Agreement coming to the Company's attention;
o not waive any default by the servicer under the Servicing
Agreement without the written consent of the Trustee; and
o not consent or agree to or permit any amendment or modification
of any Servicing Agreement which will in any manner materially
adversely affect the rights or security of the Registered
Owners. The Company shall be entitled to receive and rely upon
an opinion of its counsel that any such amendment or
modification will not materially adversely affect the rights or
security of the Registered Owners.
Additional Covenants with
Respect to the Higher Education Act
The Company it will cause the Trustee to be, or replace the Trustee
with, an eligible lender under the Higher Education Act, will acquire or cause
to be acquired student loans only from an eligible lender; will not dispose of
or deliver any financed student loans or any security interest in any such
financed student 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.
The Company, or its designated agent, will be responsible for each of
the following actions with respect to the Higher Education Act:
o The Company will 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
Company, 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 student loans;
59
<PAGE>
o The Company, or its designated agent, will cause to be diligently
enforced, and will 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 student loans and agreements in connection therewith,
including the prompt payment of all principal and interest
payments and all other amounts due thereunder;
o The Company, or its designated agent, will cause the financed
student 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 student loans;
o The Company, or its designated agent, will 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
student loans; and
o The Company, or its designated agent, will cause the benefits of
the Guarantee Agreements, the Interest Subsidy Payments and the
Special Allowance Payments to flow to the Trustee.
The Trustee will have no liability for actions taken at the direction of
the Company, except for negligence or willful misconduct in the performance of
its express duties under the Indenture. The Trustee will 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 Company, through the servicer, shall diligently collect all
principal and interest payments on all financed student loans, and all Interest
Benefit Payments, insurance and default claims and Special Allowance Payments
which relate to such financed student loans. The Company shall cause the
servicer to file claims to the Guarantee Agency in respect of any defaulted
financed student loan prior to the timely-filing deadline for such claims.
Continued Existence; Successor to Company
The Company will do or cause to be done all things necessary to preserve
and keep in full force and effect its existence, rights and franchises as a
Nevada corporation. The Company will not sell, transfer or otherwise dispose of
all or substantially all, of its assets, consolidate with or merge into another
corporation or entity, or permit one or more other corporations or entities to
consolidate with or merge into it. The preceding restrictions do not apply to a
transfer of financed student loans is made in connection with a discharge of the
Indenture or to a transaction if the transferee or the surviving or resulting
corporation or entity, if other than the Company, by proper written instrument
for the benefit of the Trustee, irrevocably and unconditionally assumes the
obligation to perform and observe the agreements and obligations of the Company
under the Indenture.
60
<PAGE>
Events of Default
For purposes of the Indenture, each of the following events are defined
as, and are declared to be, "Events of Default":
o default in the due and punctual payment of any interest on any of
the Senior Notes when due or failure to make any payment due
under any other Senior Obligations when due;
o if no Senior Obligations are outstanding under the Indenture,
default in the due and punctual payment of the principal of or
interest on any of the Subordinate Notes when due or failure to
make any payment due under any other Subordinate Obligations when
due;
o if no Senior Obligations or Subordinate Obligations are
Outstanding under the Indenture, default in the due and punctual
payment of the principal of or interest on any Junior-Subordinate
Notes when due or failure to make any payment due under any other
Junior-Subordinate Obligations when due;
o default in the performance or observance of any other of the
covenants, agreements, or conditions on the part of the Company
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 Company; and
o the occurrence of an Event of Bankruptcy.
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 exclude the Company and its agents, servants and employees
wholly therefrom, and have, hold, use, operate, manage, and control the same.
The Trustee may also, in the name of the Company or otherwise, conduct the
business of the Company and exercise the privileges pertaining thereto and all
the rights and powers of the Company and use all of the trust estate for that
purpose, and collect and receive all charges, income and Revenues of the same
and of every part thereof, and after deducting therefrom all expenses incurred
thereunder and all other proper outlays in the Indenture authorized, and all
payments which may be made as just and reasonable compensation for its own
services, and for the services of its attorneys, agents, and assistants, the
Trustee shall apply the rest and residue of the money received by the Trustee as
follows:
61
<PAGE>
(a) if the principal of none of the Obligations shall have become
due, first, to the payment of the interest in default on the Senior
Notes and to the payment of all Company Derivative Payments secured on a
parity with the Senior Notes then due, in order of the maturity of the
installments thereof, 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 and any such Company Derivative
Payments as provided in the ISDA Master Agreement then due, 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 and to the payment of all Company
Derivative Payments secured on a parity with the Subordinate Notes then
due, in order of the maturity of the installments of such interest and
any such Company Derivative Payments, 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 and any
such Company Derivative payments then due, 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 and to the payment of all Company Derivative
payments secured on a parity with such Junior-Subordinate Notes, if any,
then due, in order of the maturity of the installments of such interest
and any such Company Derivative Payments, 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
and any such Company Derivative payments 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; and
(b) if the principal of any of the Obligations shall have become
due by declaration of acceleration or otherwise, first to the payment of
the interest in default on the Senior Notes and all Company Derivative
payments secured on a parity with the Senior Notes then due, in the
order of the maturity of the installments thereof, with interest on
overdue installments thereof at the same rates, respectively, as were
borne by the Senior Notes on which such interest shall be in default and
such Company Derivative Payments as provided in the ISDA Master
Agreement then due, as the case may be, second, to the payment of the
principal of all Senior Notes then due and any amount owed to a
Reciprocal Payor secured on a parity with Senior Obligations under the
ISDA master Agreement, such payments to be made ratably to the parties
entitled thereto without discrimination or preference, third, to the
payment of the interest in default on the Subordinate Notes and all
Company Derivative Payments secured on a parity with the Subordinate
Notes then due, in the order of the maturity of the installments thereof
with interest on overdue installments thereof at the same rates,
respectively, as were borne by the Subordinate Notes on which such
interest shall be in default and such Company Derivative payments as
provided in the ISDA Master Agreement then due, as the case may be,
fourth, to the payment of the principal of all Subordinate notes then
due and any amount owed to a Reciprocal Payor secured on a parity with
Subordinate Obligations under the ISDA Master Agreement, such payments
to be made ratably to the parties entitled thereto without
discrimination or preference, fifth, to the payment of the interest in
default on the Junior-Subordinate Notes and all Company Derivative
Payments secured on a parity with such Junior-Subordinate Notes then
due, in the order of the maturity of the installments thereof, with
interest on overdue installments thereof at the same rates,
respectively, as were borne by the Junior-Subordinate Notes on which
such interest shall be in default and such Company Derivative Payments
as provided in the ISDA Master Agreement then due, as the case may be,
and sixth, to the payment of the principal of all Junior-Subordinate
Notes then due and any amount owed to a Reciprocal Payor secured on a
parity with Junior-Subordinate Obligations under the ISDA Master
Agreement, such payments to be made ratably to the parties entitled
thereto without discrimination or preference, except as may be provided
in a Supplemental Indenture.
62
<PAGE>
Advice of Counsel. Upon the happening of any event of default, the
Trustee may proceed to protect and enforce the rights of the Trustee and the
Registered Owners in such manner as counsel for the Trustee may advise, whether
for the specific performance of any covenant, condition, agreement or
undertaking in the Indenture contained, or in aid of the execution of any power
therein granted, or for the enforcement of such other appropriate legal or
equitable remedies as, in the opinion of such counsel, may be more effectual to
protect and enforce the rights aforesaid.
Sale of Trust Estate. Upon the happening of any event of default and if
the principal of all of the Outstanding Notes shall have been declared due and
payable, then and in every such case, and irrespective of whether other remedies
authorized by the Indenture shall have been pursued in whole or in part, the
Trustee may sell, with or without entry, to the highest bidder the trust estate,
and all right, title, interest, claim and demand thereto and the right of
redemption thereof, at any such place or places, and at such time or times and
upon such notice and terms as may be required by law. Upon such sale the Trustee
may make and deliver to the purchaser or purchasers a good and sufficient
assignment or conveyance for the same, which sale shall be a perpetual bar both
at law and in equity against the Company 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 Company, 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 Company, 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 Obligations 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 Highest Priority Obligations at the time
outstanding.
Appointment of Receiver. In case an event of default occurs, and if all
of the outstanding Obligations shall have been declared due and payable and in
case any judicial proceedings are commenced to enforce any right of the Trustee
or of the Registered Owners under the Indenture or otherwise, then as a matter
of right, the Trustee shall be entitled to the appointment of a receiver of the
trust estate and of the earnings, income or Revenue, rents, issues and profits
thereof with such powers as the court making such appointments may confer.
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 Company, the Trustee and the
Registered Owners 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.
63
<PAGE>
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 Highest Priority Obligations then Outstanding shall declare, the
principal of all Obligations 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 Obligations or in the Indenture to
the contrary notwithstanding; provided, however, that a declaration of
acceleration upon a default pursuant to clause (d) under "-Events of Default"
above, shall require the consent of 100% of the Registered Owners of the
collective aggregate principal amount of the Highest Priority Obligations then
Outstanding.
Direction of Trustee. Upon the happening of any event of default, the
Registered Owners of at least 51% of the collective aggregate principal amount
of the Highest Priority Obligations 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 Obligations, 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 Highest
Priority Obligations then Outstanding will not be prejudicial to any
non-assenting Registered Owners unless the Registered Owners of more than 50% of
the collective aggregate principal amount of the non-assenting Registered Owners
of such Highest Priority Obligations in writing, show the Trustee how they will
be prejudiced 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 Highest Priority Obligations then Outstanding together
with the Registered Owners of a majority of the collective aggregate principal
amount of all other Obligations then outstanding shall 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 Obligation 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 Obligations then outstanding shall have
made written request upon the Trustee and the Trustee shall have been afforded
reasonable opportunity to institute such action, suit or proceeding in its own
name, and unless the Trustee shall have been offered reasonable indemnity and
security satisfactory to it against the costs, expenses, and liabilities to be
incurred therein or thereby and the Trustee for 30 days after receipt of such
notification, request, or offer of indemnity, shall have failed to institute any
such action, suit or proceeding. It is understood and intended that no one or
more Registered Owners of the Obligations 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 Obligations then
Outstanding.
64
<PAGE>
Waivers of Events of Default. The Trustee may in its discretion waive
any event of default under the Indenture and its consequences and rescind any
declaration of acceleration of Obligations, and shall do so upon the written
request of the Registered Owners of at least a majority of the collective
aggregate principal amount of the Highest Priority Obligations then Outstanding;
provided, however, that there shall not be waived any event of default in the
payment of the principal of or premium on any Outstanding Obligations at the
date of maturity or redemption thereof, or any default in the payment when due
of the interest on any such Obligations, unless prior to such waiver or
rescission, all arrears of interest or all arrears of payments of principal and
premium, if any, and all expenses of the Trustee, in connection with such
default shall have been paid or provided for or any default in the payment of
amounts set forth in the Indenture. In case of any such waiver or rescission, or
in case any proceedings taken by the Trustee on account of any such default
shall have been discontinued or abandoned or determined adversely to the Trustee
on account of any such default shall have been discontinued or abandoned or
determined adversely to the Trustee, then and in every such case the Company,
the Trustee and the Registered Owners of Obligations shall be restored to their
former positions and rights under the Indenture respectively, but no such waiver
or rescission shall extend to or affect any subsequent or other default, or
impair any rights or remedies consequent thereon.
The Trustee
Acceptance of Trust. The Trustee will accept the trusts imposed upon it
by the Indenture, and will agree to perform said trusts, but only upon and
subject to the following terms and conditions:
o 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
o 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.
o 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 their
exercise as a prudent person would exercise or use under the
circumstances in the conduct of his or her own affairs.
o Before taking any action under the Indenture requested by
Registered Owners, the Trustee may require that it be furnished
an indemnity bond 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 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.
65
<PAGE>
Trustee May Act Through Agents. The Trustee may execute any of the
trusts or powers under the Indenture and perform any duty thereunder, either
itself or by or through its attorneys, agents, or employees, and it shall not be
answerable or accountable for any default, neglect or misconduct of any such
attorneys, agents or employees, if reasonable care has been exercised in the
appointment, supervision, and monitoring of the work performed. All reasonable
costs incurred by the Trustee and all reasonable compensation to all such
persons as may reasonably be employed in connection with the trusts shall be
paid by the Company.
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, Company 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 Company, 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 an Authorized Representative of the Company or an
authorized officer of the servicer.
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.
66
<PAGE>
Indemnification of Trustee. Other than with respect to its duties to
make payment on the Obligations when due, and its duty to pursue the remedy of
acceleration as provided in the Indenture, for each of which no additional
security or indemnity may be required, the Trustee shall be under no obligation
or duty to perform any act at the request of Registered Owners or to institute
or defend any suit in respect thereof unless properly indemnified and provided
with security to its satisfaction as provided in the Indenture. The Trustee
shall not be required to take notice, or be deemed to have knowledge, of any
default or event of default of the Company under the Indenture and may
conclusively assume that there has been no such default or event of default
unless and until it shall have been specifically notified in writing of such
default or event of default by the Registered Owners of the required percentages
in principal amount of the Obligations then outstanding hereinabove specified or
an authorized representative of the Company. However, the Trustee may begin
suit, or appear in and defend suit, execute any of the trusts, enforce any of
its rights or powers, or do anything else in its judgment proper to be done by
it as Trustee, without assurance of reimbursement or indemnity, and in such case
the Trustee shall be reimbursed or indemnified by the Registered Owners
requesting such action, if any, or the Company in all other cases, for all fees,
costs and expenses, liabilities, outlays and counsel fees and other reasonable
disbursements properly incurred in connection therewith, unless such costs and
expenses, liabilities, outlays and attorneys' fees and other reasonable
disbursements properly incurred in connection therewith are adjudicated to have
resulted from the negligence or willful misconduct of the Trustee. If the
Company or the Registered Owners, as appropriate, shall fail to make such
reimbursement or indemnification, the Trustee may reimburse itself from any
money in its possession under the provisions of the Indenture, subject only to
the prior lien of the Notes for the payment of the principal thereof, premium,
if any, and interest thereon from the Revenue Fund. None of the provisions
contained in the Indenture or any other Agreement to which it is a party shall
require the Trustee to act or to expend or risk its own funds or otherwise incur
individual financial liability in the performance of any of its duties or in the
exercise of any of its rights or powers if the Registered Owners shall not have
offered security and indemnity acceptable to it or if it shall have reasonable
grounds for believing that prompt repayment of such funds or adequate indemnity
against such risk or liability is not reasonably assured to it.
The Company agrees to indemnify and hold harmless the Trustee against
any and all claims, demands, suits, actions or other proceedings and all
liabilities, costs and expenses whatsoever caused by any untrue statement or
misleading statement or alleged untrue statement or alleged misleading statement
of a material fact contained n any offering document distributed in connection
with the issuance of the Notes or caused by any omission or alleged omission
from such offering document of any material fact required to be stated therein
or necessary in order to make the statements made therein in the light of the
circumstances under which they were made, not misleading.
Compensation of Trustee. The Company 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
Company 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 Company, 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 Company, 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 Obligations.
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 Company notice in writing which notice shall specify the date on which such
resignation is to take effect. Such resignation shall only take effect 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 Company, 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 Company to appoint a successor, as provided in the Indenture,
within three days of the receipt of citation or notice by the court, or (ii)
appoint a Trustee having the qualifications provided in the Indenture. In no
event may the resignation of the Trustee be effective until a qualified
successor Trustee shall have been selected and appointed. In the event a
temporary successor Trustee is appointed pursuant to (a) above, the Board may
remove such temporary successor Trustee and appoint a successor thereto pursuant
to the provisions of the Indenture.
67
<PAGE>
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 Highest Priority Obligations then Outstanding,
(b) by the Company for cause or upon the sale or other disposition of the
Trustee or its trust functions or (c) by the Company without cause so long as no
Event of Default exists or has existed within the last 30 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 Company and acceptance thereof by said
successor. One copy of any such instrument shall be filed with the President of
the Company 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 Company 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 will 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 under the Higher Education Act so long as such designation is
necessary to maintain guarantees and federal benefits under the Act with respect
to the financed student loans originated under the Act.
68
<PAGE>
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 Company, 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
representative of the Company, 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 Company 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 Company.
Additional Covenants by the Trustee to Conform to the Act. The Trustee
will at all times be an eligible lender under the Higher Education Act so long
as such designation is necessary, as determined by the Company, to maintain the
guarantees and federal benefits under the Act with respect to the financed
student loans, will acquire student loans originated under the Act and will not
dispose of or deliver any financed student loans originated under the Act or any
security interest in any such financed student loans to any party who is not an
eligible lender so long as the Act or regulations adopted thereunder require an
eligible lender to be the owner or holder of such financed student loans.
Nothing shall prevent the Trustee from delivering the Eligible Loans to the
servicer or the Guaranty Agency.
Right of Inspection. A Registered Owner 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
Company.
Merger of the Trustee. Any corporation into which the Trustee may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee under the
Indenture, provided such corporation shall be otherwise qualified and eligible
under the Indenture, without the execution or filing of any paper of any further
act on the part of any other parties thereto.
Corporate Trustee Required; Eligibility; Conflicting Interests. There
shall at all times be a Trustee under the Indenture which shall be eligible to
act as Trustee under TIA Section 310(a)(I) and shall have a combined capital and
surplus of at least $50,000,000. If such corporation publishes reports of
condition at least annually, pursuant to law or the requirements of federal,
state, territorial or District of Columbia supervising or examining authority,
then for the purposes of this paragraph, the combined capital and surplus of
such corporation shall be deemed to be its combined capital and surplus as set
forth in its most recent report of condition so published. If at any time the
Trustee shall cease to be eligible, it shall resign immediately in the manner
and with the effect specified in the Indenture. Neither the Company nor any
Person directly or indirectly controlling or controlled by, or under common
control with, the Company shall serve as Trustee.
Trustee May File Proofs of Claim. In case of the pendency of any
receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement,
adjustment, composition or other judicial proceeding relative to the Company or
any other obligor upon the Notes or the property of the Company or of such other
obligor or their creditors, the Trustee (irrespective of whether the principal
of the Notes of any series shall then be due and payable as therein expressed or
by declaration or otherwise and irrespective of whether the Trustee shall have
made any demand on the Company for the payment of overdue principal, premium, if
any, or interest) shall be entitled and empowered, by intervention in such
proceeding or otherwise:
69
<PAGE>
(a) to file and prove a claim for the whole amount, or such
lesser amount as may be provided for in the Notes, of principal (and
premium, if any) and interest, if any, owing and unpaid in respect of
the Notes and to file such other papers or documents as may be necessary
or advisable in order to have the claims of the Trustee (including any
claim for the reasonable compensation, expenses, disbursements and
advances of the Trustee and its agents and counsel) and of the
Registered Owners allowed in such judicial proceeding; and
(b) to collect and receive any money or other property payable or
deliverable on any such claims and to distribute the same; and any
custodian, receiver, assignee, trustee, liquidator, sequestrator (or
other similar official) in any such judicial proceeding is hereby
authorized by each Registered Owner of Notes to make such payments to
the Trustee, and if the Trustee shall consent to the making of such
payments directly to the Registered Owners, to pay to the Trustee any
amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee and any predecessor Trustee,
their agents and counsel, and any other amounts due the Trustee or any
predecessor Trustee.
Nothing contained in the Indenture shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any
Registered Owner of a Note any plan of reorganization, arrangement, adjustment
or composition affecting the Notes or the rights of any Registered Owner
thereof, or to authorize the Trustee to vote in respect of the claim of any
Registered Owner of a Note in any such proceeding.
In any proceedings brought by the Trustee (and also any proceedings
involving the interpretation of any provision of the Indenture to which the
Trustee shall be a party), the Trustee shall be held to represent all the
Registered Owners of the Notes, and it shall not be necessary to make any
Registered Owners of the Notes parties to any such proceedings.
Supplemental Indentures
Supplemental Indentures Not Requiring Consent of Registered Owners. The
Company and the Trustee may, without the consent of or notice to any of the
Registered Owners of any Obligations 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 may lawfully be granted to or conferred upon the
Registered Owners or the Trustee;
(c) to subject to the Indenture additional revenues, properties
or collateral;
70
<PAGE>
(d) to modify, amend or supplement the Indenture or any indenture
supplemental thereto in such manner as to permit the qualification
thereof 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
hereunder, or any additional or substitute Guaranty Agency or servicer;
(f) to add such provisions to or to amend such provisions of the
Indenture as may, in Note Counsel's opinion, be necessary or desirable
to assure implementation of the Program in conformance with the 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 Obligations;
(g) to make any change as shall be necessary in order to obtain
and maintain for any of the Notes an investment grade Rating from a
nationally recognized rating service, which changes, in the opinion of
the Trustee are not to the prejudice of the Registered Owner of any of
the Obligations;
(h) to make any changes necessary to comply with the Act and the
regulations thereunder or the Code and the regulations promulgated
thereunder;
(i) to provide for the issuance of Notes pursuant to the
provisions of the Indenture, including the creation of appropriate Funds
and accounts, with respect to such Notes;
(j) to make the terms and provisions of the Indenture, including
the lien and security interest granted therein, applicable to a
Derivative Product;
(k) to create any additional Funds or accounts under the
Indenture deemed by the Trustee to be necessary or desirable;
(l) to amend the Indenture to allow for any Notes to be supported
by a letter of credit or insurance policy or a liquidity agreement,
including amendment with respect to repayment to such a provider on a
parity with any Notes or Derivative Product and providing rights to such
provider under the Indenture, including with respect to defaults and
remedies;
(m) to amend the Indenture to provide for use of a surety bond or
other financial guaranty instrument in lieu of cash and/or Investment
Securities in all or any portion of the Reserve Fund, so long as such
action shall not adversely affect the Ratings on any of the Notes;
(n) to make any other change with a confirmation by the Rating
Agencies of their ratings of the Notes; or
(o) to make any other change which, in the judgment of the
Trustee is not to the material prejudice of the Registered Owners of any
Obligations.
71
<PAGE>
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 a majority of the collective
aggregate principal amount of the Obligations then outstanding 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 Company 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 Obligations, (i) an extension of the maturity date of the principal
of or the interest on any Obligation, or (ii) a reduction in the principal
amount of any Obligations or the rate of interest thereon, or (iii) a privilege
or priority of any Obligation or Obligations over any other Obligation or
Obligations, or (iv) a reduction in the aggregate principal amount of the
Obligations required for consent to such Supplemental Indenture, or (v) the
creation of any lien other than a lien ratably securing all of the Obligations
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 Company 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 an Obligation at the
address shown on the registration books or listed in any Derivative Product.
Such notice (which shall be prepared by the Company) 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 Company, following the mailing of such notice, the
Registered Owners of not less than a majority of the collective aggregate
principal amount of the Obligations outstanding 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
Obligation 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
Company 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.
Notice of Defaults. Within 90 days after the occurrence of any default
under the provisions of the Indenture with respect to the Obligations, the
Trustee shall transmit in the manner and to the extent provided in TIA Section
313(c), notice of such default known to the Trustee, unless such default shall
have been cured or waived; provided, however, that, except in the case of a
default in the payment of the principal of (or premium, if any) or interest with
respect to any Obligation, or in the payment of any sinking fund installment
with respect to the Obligations, the Trustee shall be protected in withholding
such notice if and so long as an authorized officer of the Trustee in good faith
determine that the withholding of such notice is in the interest of the
Registered Owners of the Obligations.
Trust Irrevocable
72
<PAGE>
The trust created by the terms and provisions of the Indenture is
irrevocable until the indebtedness secured thereby (the Notes and interest
thereon) and all Company Derivative Payments are fully paid or provision made
for its payment as provided in the Indenture.
Satisfaction of Indenture
If the Company shall pay, or cause to be paid, or there shall otherwise
be paid (i) to the Registered Owners of the Notes, the principal of and interest
on the Notes, at the times and in the manner stipulated in the Indenture and
(ii) to each Reciprocal Payor, all Company Derivative Payments then due, then
the pledge of the trust estate which is not pledged under the Indenture, and all
covenants, agreements, and other obligations of the Company to the Registered
Owners of Notes shall thereupon cease, terminate, and become void and be
discharged and satisfied. In such event, the Trustee shall execute and deliver
to the Company 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 Indenture. If the Company 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 and to each Reciprocal Payor all
Reciprocal Payments then due, at the times and in the manner stipulated in the
Indenture and in the Derivative Product, such Notes and each Reciprocal Payor
shall cease to be entitled to any lien, benefit, or security under the
Indenture, and all covenants, agreements, and obligations of the Company to the
Registered Owners thereof and each Reciprocal Payor shall thereupon cease,
terminate, and become void and be discharged and satisfied.
Notes or interest installments shall be deemed to have been paid within
the meaning of the foregoing paragraph 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. Any outstanding Note 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 subsection (a)
above if (i) such Note is to be redeemed on any date prior to its stated
maturity and (ii) the Company 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 Company 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 Note on and prior to the redemption date
or stated maturity thereof, as the case may be. No such deposit shall have the
effect specified herein if made during the existence of an Event of Default,
unless made with respect to all of the Notes then outstanding.
Any Company Derivative Payments are deemed to have been paid and the
applicable Derivative Product terminated when payment of all Company Derivative
Payments due and payable to each Reciprocal Payor under its respective
Derivative Product have been made or duly provided for to the satisfaction of
each Reciprocal Payor and the respective Derivative Product has been terminated.
73
<PAGE>
DESCRIPTION OF CREDIT ENHANCEMENT
General
Credit enhancement may be provided with respect to one or more classes
of the Notes of any series. The amounts and types of credit enhancement
arrangements and the provider thereof, if applicable, with respect to each class
of securities of a given series, if any, will be set forth in the related
Prospectus Supplement. Credit enhancement may be in the form of a letter of
credit, the subordination of one or more classes of Notes, the use of an
insurance policy or surety bonds, the establishment of one or more reserve funds
(as described under "Security and Sources of Payment for the Notes-Reserve Fund"
herein) interest rate swaps, 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.
The presence of a Reserve Fund and other forms of credit enhancement for
the benefits of any class or series of Notes is intended to enhance the
likelihood of receipt by the Noteholders of such class or series of the full
amount of principal and interest due thereon and to decrease the likelihood that
such Noteholders will experience losses. 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.
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 Note Payment
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
74
<PAGE>
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 student loans on
the related Cut-off Date or of the initial aggregate principal balance of the
Notes of one or more classes of Notes. If so specified in the related Prospectus
Supplement, the letter of credit may permit draws only in the event of certain
types of losses and shortfalls. The amount available under the letter of credit
will, in all cases, be reduced to the extent of the unreimbursed payments
thereunder and may otherwise be reduced as described in the related Prospectus
Supplement. The obligations of the L/C Bank under the letter of credit for each
Series of Notes will expire at the earlier of the date specified in the related
Prospectus Supplement or the termination of the trust estate. A copy of any such
letter of credit will accompany the Current Report on Form 8-K to be filed with
the Commission within 15 days of issuance of the Notes of the related Series.
Note Insurance and Surety Bonds
If so specified in the Prospectus Supplement with respect to a series of
the Notes, 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.
75
<PAGE>
THE COMPANY
The Company 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 Company 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 Company 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
Company with those of UFS or an affiliate including Union Bank. These steps
include the creation of the Company as a separate, limited purpose entity
pursuant to Articles of Incorporation that impose limitations on the nature of
the Company's business and a restriction on the Company's ability to commence a
voluntary case or proceeding under any Insolvency Laws without the prior
unanimous affirmative vote of all of its directors. The Company's Articles of
Incorporation also require the Company to have a director who qualifies as an
"independent director."
The Company is governed by a Board of Directors, which is
required by the Company's Articles of Incorporation to include at least three
directors. Directors must be elected at each annual meeting of the shareholders.
The present directors and their addresses and principal occupations or
affiliations are as follows:
<TABLE>
<CAPTION>
Principal Officers and
Name of Other Occupation Directors Term
Director Offices Held Age Address or Affiliation From To*
-------- ------------ --- ------- -------------- -------
<S> <C> <C> <C> <C> <C>
Michael S. Chairman 35 4732 Calvert Street Executive February Present
Dunlap Lincoln, Nebraska Vice 1996
68506 President of
Union Bank
and Trust
Company;
President,
Farmers &
Merchants
Investment,
Inc.
Stephen F. President 46 6991 East Camelback President of February Present
Butterfield Road, Suite B290 Union 1996
Scottsdale, Arizona Financial
85251 Services, Inc.
Ronald W. Page Vice 50 1801 California Senior Vice February Present
President, Street President of 1996
Treasurer and Suite 3920 Union
Secretary Denver, CO 80202 Financial
Services,
Inc.;
Investment
Banker, A.G.
Edwards &
Sons, Inc.
1990-1995
Ross Wilcox -- 56 4732 Calvert Street Chief February Present
Lincoln, Nebraska Executive 1996
68506 Officer of
Union Bank
and Trust
Company
Dr. Paul R. - 64 Hernia Hill, Rural Retired February Present
Hoff Route 1 Physician 1996
Seward, Nebraska
68434
- -------------
(*) 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 Company's next annual meeting is
scheduled for March, 2000.
</TABLE>
Executive Management
The Board of Directors and executive officers described below are
responsible for overall management of the Company. The Company'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
Company. 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 15 years. Mr. Dunlap
is also a director of Stratus Fund, Inc., NHELP-II, Inc., Union Bank and Trust
Company and other affiliated banks, Union Financial Services, Inc., UNIPAC,
InTuition Holdings, Inc. and Farmers and Merchants Investment, Inc. 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
Company. Included in his responsibilities are loan purchasing, marketing of
corporate services and coordination of the Company'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.
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. and NHELP-II, Inc. 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 Company. 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, Inc., NHELP-II, Inc. and
Ref-Chem Corporation. 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.
76
<PAGE>
Ross Wilcox, Director. Mr. Wilcox is the Chief Executive Officer and a
Director of Union Bank and Trust Company and has been employed or affiliated
with Union Bank and Trust Company for over 30 years. Mr. Wilcox is the Chairman
of the Board for Mills County State Bank and is on the Board of Directors for
UNIPAC, Union Financial Services, Inc. and Union Insurance Agency.
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 three 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 Company's executive officers are elected annually by the Board of
Directors and serve at the discretion of the Board. The Company'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 Company in
connection with the operation of the Company's student loan program. UFS
receives compensation for those services, but the amount of such payments is
subject to approval by each Rating Agency and payments are made only when funds
are available in the Operating Fund. The approved compensation currently is
0.18% of the Company's outstanding assets per annum, or such other amount as may
be specified in the related Prospectus Supplement. UFS also receives
compensation from the Company for services provided in connection with
structuring, negotiating and implementing the Company's financing programs. The
amount of such fees paid to UFS, if any, in connection with issuance of a series
of the Notes will be described in the applicable Prospectus Supplement.
THE COMPANY'S STUDENT LOAN PROGRAM
The Company established its student loan program in order to effectuate
its general corporate purposes.
In order to participate in the student loan program, each lender must be
an "eligible lender" under the Higher Education Act and be otherwise approved by
the Company. An "eligible lender" under the Higher Education Act includes
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 Company, providing for the
manner and terms of sale of student loans in the standard form prescribed by the
Company from time to time for all lenders. The student loan purchase agreement
contains representations and warranties as to the student loans to be sold and
provides for the repurchase of student loans by the eligible lender from the
Company upon the failure of any of the representations or warranties made by the
eligible lender. The student loan purchase agreement may be terminated by the
Company on the terms and conditions stated therein.
Servicing of Financed Student Loans
The Company 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 student 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.
77
<PAGE>
The Trustee is acting as "eligible lender" with respect to the financed
student loans as an accommodation to the Company 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 Higher Education Act,
the Trustee shall not have any responsibility for any action or inaction of the
Trustee, the Company or any other party in connection with the financed student
loans and the documents, agreements, understandings and arrangements relating
thereto.
The Servicing Agreements
The Company has entered into a servicing agreement with Union Bank dated
as of _____________ which continues until the earlier of (i) termination of the
Indenture, (ii) early termination after material default by the servicer as
provided for in the servicing agreement, or (iii) the financed student loans
serviced under the servicing agreement are paid in full. Union Bank has entered
into an amendment to its servicing 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 Company's portfolio of
financed student loans acquired in connection with its student loan program as
required by the Higher Education Act and the Guarantee Agencies. The Company
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
agreements, 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 student loan portfolio, UNIPAC has agreed to service
the financed student 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 Company an amount equal to the outstanding principal
balance plus all accrued interest and other fees due to the date of purchase of
a financed student loan if the servicer causes the 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, the loan shall be subrogated to the servicer. In the
event the servicer cures any financed student loan which has been subrogated to
the servicer, the servicing agreement provides that the Company shall pay an
amount equal to the then outstanding principal balance plus all accrued interest
due on such financed student loan, less the amount subject to certain risk
sharing provisions in the Higher Education Act, whereupon the subrogation rights
of the servicer shall terminate.
Another servicer may be designated by the Company with respect to
certain financed student loans financed from the proceeds of any such Series. If
so designated, the other servicer and the servicing agreement with respect
thereto will be described in such Prospectus Supplement. Any servicer, other
than Union Bank, shall be confirmed in writing by each Rating Agency. In
addition, any servicing agreement with Union Bank other than the servicing
agreement will be described in the related Prospectus Supplement.
UNIPAC
78
<PAGE>
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. In December 1989, UNIPAC
opened a second servicing center in Lincoln, Nebraska and in November, 1997,
UNIPAC opened a third servicing center in St. Paul, Minnesota.
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."
SELLERS REPRESENTATIONS AND WARRANTIES
Representations and Warranties-
Portfolio Characteristics
A description of the outstanding portfolio of financed student loans and
the portfolio expected to be acquired by the Company with the proceeds of the
Notes of any series and pledged to the Trustee will be described in the
Prospectus Supplement of such series.
Representations and Warranties-Eligible Loans
Each seller will make representations, warranties and covenants in
substantially the following form with respect to the student loans sold pursuant
to its respective student loan purchase agreement:
(a) Accuracy of Information. Any information furnished by such
seller to the Company or its agents with respect to any loan is true,
complete and correct.
(b) Validity of Loans. Each 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 loan is true and owing, and no
counterclaim, offset, defense or right to rescission exists with respect
to any 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. No such loan carries a rate of interest in
excess of that permitted by the provisions of the Act.
79
<PAGE>
(d) Ownership and Location of Loans: Existence of Liens. Such
seller is the sole owner and holder of each 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 loan to the Company pursuant to the
respective student loan purchase agreement, the Company will acquire
full right, title and interest in the loan free and clear of all liens,
pledges or encumbrances whatsoever. All documentation relating to the
loans, including the original promissory note for each loan, is in the
possession of UNIPAC or other designated custodian.
(e) Guarantee and Insurance on Loans. Each 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 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 loans to be sold
to the Company has at any time been tendered to either the Secretary or
the Guarantee Agency for payment.
(f) Compliance with Higher Education Act. Each 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 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 loan to be purchased by the
Company 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 loans to be purchased pursuant to the
respective Student Loan Purchase Agreement include all loans of any one
borrower held by such seller.
(j) Due Diligence in Servicing Loans. Such seller and any
independent servicer have each exercised and shall continue until the
scheduled sale date to exercise due diligence and reasonable care in
making, administering, servicing and collecting the 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 loans,
and has no right of reimbursement therefor from the Company.
80
<PAGE>
(k) Origination Fees. Such seller, or the lender that originated
a loan, has reported the amount of origination fees (if any) authorized
to be collected with respect to such 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 or originating lender has made any
refund of an origination fee collected in connection with any 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 Company.
(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 Company have been
utilized in selecting the loans for inclusion therein.
(n) Title. It is the intention of such seller that the transfers
and assignments from such seller to the Company contemplated in the
respective student loan purchase agreement constitute a true sale of the
loans to the Company and that neither the interest in nor title to the
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 Company to perfect
the Company's ownership interest in the 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 loans rather than obtaining a
secured loan with the 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 Company without any intent to hinder,
delay or defraud any current or future creditor of such seller; (ii)
such seller was not or will not be insolvent or did not or will not
become insolvent as a result of any transfer; (iii) such seller was not
engaged and was not about to engage, and will not engage, in any
business or transaction for which any property remaining with such
seller was or will constitute unreasonably small capital in relation to
the business of such seller or the transaction; and (iv) such seller did
not intend or will not intend to incur, and did not believe or
reasonably should not have believed, or will not believe or reasonably
shall not have believed, that it would incur, debts beyond its ability
to pay as they become due.
(q) Sales Not Subject to Bulk Transfer. Each sale, transfer,
assignment and conveyance of the 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.
81
<PAGE>
(r) No Transfer Taxes Due. Each sale, transfer, assignment and
conveyance of the 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 Company 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 Company 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 Company, or upon such seller otherwise being given
notice thereof, it shall pay, and otherwise indemnify and hold the
Company and the Trustee harmless therefor. Such seller shall not be
responsible for the Company's or the Trustee's income taxes.
Repurchase Obligation of Seller
At the request of the Company or the Trustee, each seller shall
repurchase any loan purchased by the Company 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 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 a 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 loan to
the Company; 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 a
loan to the Company, a defense that makes the loan unenforceable is
asserted by a maker (or endorser, if any) of the loan with respect to
his or her obligation to pay all or any part of the loan.
Upon the occurrence of any of the conditions set forth above and upon
the request of the Company or the Trustee, the respective seller shall pay to
the Trustee, for deposit into the Acquisition Fund, an amount equal to the
then-outstanding principal balance of such loan, plus the percentage of premium
paid by the Company in connection with the purchase of the loan and interest and
Special Allowance Payments accrued and unpaid with respect to such 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 Company, the Trustee or the appropriate successors or assigns in connection
with such loans and arising out of the reasons for the repurchase.
DESCRIPTION OF THE FEDERAL FAMILY EDUCATION LOAN PROGRAM
The Federal Family Education Loan Program
The Higher Education Act provides for a program of direct federal
insurance for student loans as well as reinsurance of student loans guaranteed
or insured by state agencies or private non-profit corporations (collectively,
"Federal Family Education Loans" and the "Federal Family Education Loan
Program").
82
<PAGE>
The Higher Education Act currently authorizes certain student loans to
be covered under the Federal Family Education Loan Program (the "FFELP"). The
Higher Education Act Amendments of 1998 (the "1998 Amendments") extended the
principal provisions of the FFELP through September 30, 2004. Congress has
extended similar authorization dates in prior versions of the Higher Education
Act. However, the current authorization dates may not again be extended and the
other provisions of the Higher Education Act may not be continued in their
present form.
Generally, a student is eligible for loans made under the FFELP only if
he or she:
o has been accepted for enrollment or is enrolled in good standing
at an eligible institution of higher education;
o is carrying or planning to carry at least one-half the normal
full-time workload for the course of study the student is
pursuing as determined by the institution;
o has agreed to notify promptly the holder of the loan of any
address change; and
o 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.
The Higher Education Act also establishes maximum interest rates for
each of the various types of loans. These rates vary not only among loan types,
but also within loan types depending upon when the loan was made or when the
borrower first obtained a loan under the FFELP. The Higher Education Act allows
lesser rates of interest to be charged.
Types of Loans
Four types of loans are currently available under the Federal Family
Education Loan Program: Stafford Loans, Unsubsidized Stafford Loans, PLUS Loans
and Consolidation Loans. These loan types vary as to eligibility requirements,
interest rates, repayment periods, loan limits and eligibility for interest
subsidies and Special Allowance Payments. Some of these loan types have had
other names in the past. References herein to the various loan types include,
where appropriate, predecessors to such loan types.
The primary loan under the FFELP is the Subsidized Federal Stafford
Loan. Students who are not eligible for Subsidized Stafford Loans based on their
economic circumstances may be able to obtain Unsubsidized Federal Stafford
Loans. Parents of students may be able to obtain Federal PLUS Loans.
Consolidation Loans are available to borrowers with existing loans made under
the FFELP and certain other federal programs to consolidate repayment of such
existing loans. Prior to July 1, 1994, the FFELP also offered Federal
Supplemental Loans for Students ("Federal SLS Loans") to graduate and
professional students and independent undergraduate students and, under certain
circumstances, dependent undergraduate students, to supplement their Stafford
Loans.
Subsidized Federal Stafford Loans
83
<PAGE>
General. Subsidized 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 Subsidized
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.
Subsidized Stafford Loans are generally made only to student borrowers
who meet certain needs tests 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. Further amendment to such provisions may materially affect the
availability of Subsidized Stafford Loan funding to borrowers or the
availability of Subsidized Stafford Loans for secondary market acquisition.
Interest Rates for Subsidized Federal Stafford Loans. For a Stafford
Loan made prior to July 1, 1994, the applicable interest rate for a borrower
who, on the date the promissory note was signed, did not have an outstanding
balance on a previous loan which was made, insured or guaranteed under the FFELP
(a "New Borrower"):
(a) is 7% per annum for a loan covering a period of instruction
beginning before January 1,1981;
(b) is 9% per annum for a loan covering a period of instruction
beginning on or before January 1, 1981, but before September 13, 1983;
(c) is 8% per annum for a loan covering a period of instruction
beginning on or after September 13, 1983, but before July 1, 1988;
(d) is 8% per annum for the period from the disbursement of the
loan to the date which is four years after the loan enters repayment, for a loan
made prior to October 1, 1992, covering a period of instruction beginning on or
after July 1, 1988, and thereafter shall be adjusted annually, and for any
12-month period commencing on a July 1 shall be equal to the bond equivalent
rate of 91-day U.S. Treasury bills auctioned at the final auction prior to the
preceding June 1, plus 3.25% per annum (but not to exceed 10% per annum); or
(e) for a loan made on or after October 1, 1992 shall be adjusted
annually, and for any 12-month period commencing on a July 1 shall be equal to
the bond equivalent rate of 91-day U.S. Treasury bills auctioned at the final
auction prior to the preceding June 1, plus 3.1% per annum (but not to exceed 9%
per annum).
For a Stafford Loan made prior to July 1, 1994, the applicable interest
rate for a borrower who, on the date the promissory note evidencing the loan was
signed, had an outstanding balance on a previous loan made insured or guaranteed
under the FFELP (a "Repeat Borrower"):
(a) for a loan made prior to July 23, 1992 is the applicable
interest rate on the previous loan or, if such previous loan is not a Stafford
Loan 8% per annum or
84
<PAGE>
(b) for a loan made on or before July 23, 1992 shall be adjusted
annually, and for any twelve month period commencing on a July 1 shall be equal
to the bond equivalent rate of 91-day U.S. Treasury bills auctioned at the final
auction prior to the preceding June 1, plus 3.1% per annum but not to exceed:
(i) 7% per annum in the case of a Stafford Loan made to
a borrower who has a loan described in clause (a)
above;
(ii) 8% per annum in the case of (A) a Stafford Loan
made to a borrower who has a loan described in
clause (c) above, (B) a Stafford Loan which has not
been in repayment for four years and which was made
to a borrower who has a loan described in clause
(d) above (C) a Stafford Loan for which the first
disbursement was made prior to December 20, 1993 to
a borrower whose previous loans do not include a
Stafford Loan or an Unsubsidized Stafford Loan;
(iii) 9% per annum in the case of (A) a Stafford Loan
made to a borrower who has a loan described in
clauses (b) or (e) above or (B) a Stafford Loan for
which the first disbursement was made on or after
December 20, 1993 to a borrower whose previous
loans do not include a Stafford Loan or an
Unsubsidized Stafford Loan; and
(iv) 10% per annum in the case of a Stafford Loan which
has been in repayment for four years or more and
which was made to a borrower who has a loan
described in clause (d) above.
The interest rate on all Stafford Loans made on or after July 1, 1994
but prior to July 1, 1998, regardless of whether the borrower is a New Borrower
or a Repeat Borrower, is the rate described in clause (b) above, except that
such rate shall not exceed 8.25% per annum. For any Stafford Loan made on or
after July 1, 1995, the interest rate is further reduced prior to the time the
loan enters repayment and during any Deferment Periods. During such periods, the
formula described in clause (b) above is applied, except that 2.5% is
substituted for 3.1%, and the rate shall not exceed 8.25% per annum.
For Stafford Loans made on or after July 1, 1998 but before October 1,
1998, the applicable interest rate shall be adjusted annually, and for any
twelve month period commencing on a July 1 shall be equal to the bond equivalent
rate of 91-day U.S. Treasury bills auctioned at the final auction prior to the
proceeding June 1, plus 1.7% per annum prior to the time the loan enters
repayment and during any Deferment Periods, and 2.3% per annum during repayment,
but not to exceed 8.25% per annum.
For loans made on or after October 1, 1998, the applicable rate will
continue to be adjusted annually, but for any 12-month period commencing on a
July 1 will be equal to the bond equivalent rate of securities with a comparable
maturity (as established by the Secretary of Education), plus 1% per annum, but
not to exceed 8.25% per annum. There can be no assurance that the interest rate
provisions for such loans will not be further amended, either before or after
the rate described herein becomes effective.
Unsubsidized Federal Stafford Loans
85
<PAGE>
General. The Unsubsidized Federal Stafford Loan Program was created by
Congress in 1992 for students who do not qualify for Subsidized Stafford Loans
due to parental and/or student income and assets in excess of permitted amounts.
Such students are entitled to borrow the difference between the Stafford Loan
maximum and their Subsidized Stafford eligibility through the Unsubsidized
Stafford program. In other respects, the general requirements for Unsubsidized
Stafford Loans are essentially the same as those for Subsidized Stafford Loans.
The interest rate, the annual loan limits and the special allowance payment
provisions of the Unsubsidized Stafford Loans are the same as the Subsidized
Stafford Loans. However, the terms of the Unsubsidized Stafford Loans differ
materially from Subsidized 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. Unsubsidized Stafford Loans were not available
before October 1, 1992. A student meeting the general eligibility requirements
for a loan under the FFELP is eligible for an Unsubsidized Stafford Loan without
regard to need.
Interest Rates for Unsubsidized Federal Stafford Loans. Unsubsidized
Stafford Loans are subject to the same interest rate provisions as Subsidized
Stafford Loans.
Federal PLUS Loans
General. PLUS Loans are made only to borrowers who are parents and,
under certain circumstances, spouses of remarried parents, of dependent
undergraduate students. For PLUS Loans made on or after July 1, 1993, the parent
borrower must not have an adverse credit history as determined pursuant to
criteria established by the Department of Education. The basic provisions
applicable to PLUS Loans are similar to those of Subsidized Stafford Loans with
respect to the involvement of guarantee agencies and the Secretary of Education
in providing federal reinsurance on the loans. However, PLUS Loans differ
significantly from Subsidized Stafford Loans, particularly because federal
interest subsidy payments are not available under the PLUS Loan program and
special allowance payments are more restricted. Prior to the Higher Education
Amendments of 1986, the Higher Education Act did not distinguish between PLUS
Loans and SLS Loans. Student borrowers were eligible for PLUS Loans; however,
parents of graduate and professional students were ineligible.
Interest Rates for Federal PLUS Loans. 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. The applicable interest rate on a PLUS Loan:
(a) made on or after January 1, 1981, but before October 1, 1981, is 9%
per annum;
(b) made on or after October 1, 1981, but before November 1, 1982, is
14% per annum;
(c) made on or after November 1, 1982, but before July 1, 1987, is 12%
per annum;
(d) made on or after July 1, 1987, but before October 1, 1992 shall be
adjusted annually, and for any 12-month period beginning on July 1 shall be
equal to the bond equivalent rate of 52-week U.S. Treasury bills auctioned at
the final auction prior to the preceding June 1, plus 3.25% per annum (but not
to exceed 12% per annum);
86
<PAGE>
(e) made on or after October 1, 1992, but before July 1, 1994, shall be
adjusted annually, and for any 12-month period beginning on July 1 shall be
equal to the bond equivalent rate of 52-week U.S. Treasury bills auctioned at
the final auction prior to the preceding June 1, plus 3.1% per annum (but not to
exceed 10% per annum).
(f) made on or after July 1, 1994, but before July 1, 1998, is the same
as that described in clause (e) above, except that such rate shall not exceed 9%
per annum; or
(g) made on or after July 1, 1998, but before October 1, 1998, shall be
adjusted annually, and for any 12-month period beginning on July 1 shall be
equal to the bond equivalent rate of 91-day U.S. Treasury bills auctioned at the
final auction prior to the proceeding June 1, plus 3.1% per annum (but not to
exceed 9% per annum).
For PLUS Loans made on or after October 1, 1998, the applicable rate
will continue to be adjusted annually, but for any 12-month period commencing on
a July 1 will be equal to the bond equivalent rate of securities with a
comparable maturity (as established by the Secretary of Education), plus 2.1%
per annum, but not to exceed 9% per annum.
If requested by the borrower, an eligible lender may consolidate SLS or
PLUS Loans of the same borrower held by the lender under a single repayment
schedule. The repayment period for each included loan shall be based on the
commencement of repayment of the most recent loan. The consolidated loan shall
bear interest at a rate equal to the weighted average of the rates of the
included loans. Such a consolidation shall not be treated as the making of a new
loan. In addition, at the request of the borrower, a lender may refinance an
existing fixed rate SLS or PLUS Loan, including an SLS or PLUS Loan held by a
different lender who has refused to refinance such loan, at a variable interest
rate. In such a case, proceeds of the new loan are used to discharge the
original loan.
Federal SLS Loans
General. Eligible Borrowers for SLS Loans were limited to graduate or
professional students, independent undergraduate students, and under certain
circumstances, dependent undergraduate students, if such students' parents were
unable to obtain a PLUS Loan and were also unable to provide such students'
expected family contribution. Except for dependent undergraduate students,
eligibility for SLS Loans was determined without regard to need. The basic
provisions applicable to SLS Loans are similar to those of Subsidized Stafford
Loans with respect to the involvement of guarantee agencies and the Secretary of
Education in providing federal reinsurance on the loans. However, SLS Loans
differ significantly from Subsidized Stafford Loans, particularly because
federal interest subsidy payments are not available under the SLS Loan program
and special allowance payments are more restricted.
Interest Rates for Federal SLS Loans. The applicable interest rates on
SLS Loans made prior to October 1, 1992 are identical to the applicable interest
rates on PLUS Loans made at the same time. For SLS Loans made on or after
October 1, 1992, the applicable interest rate is the same as the applicable
interest rate on PLUS Loans, except that the ceiling is 11% per annum instead of
10% per annum.
Federal Consolidation Loans
87
<PAGE>
General. 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 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 FFELP, 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. To be eligible for a
Consolidation Loan, a borrower must have outstanding indebtedness on student
loans made under the FFELP and/or certain other federal student loan programs,
and be in repayment status or in a Grace Period, or be a defaulted borrower who
has made arrangements to repay any defaulted loan satisfactory to the holder of
the defaulted loan.
A married couple who agree to be jointly liable on a Consolidation Loan,
for which the application is received on or after January 1, 1993, may be
treated as an individual for purposes of obtaining a Consolidation Loan. For
Consolidation Loans disbursed prior to July 1, 1994 the borrower was required to
have outstanding student loan indebtedness of at least $7,500. Prior to the
adoption of the Higher Education Technical amendments Act of 1993, PLUS Loans
could not be included in the Consolidation Loan. For Consolidation Loans for
which the applications were received prior to January 1, 1993, the minimum
student loan indebtedness was $5,000 and the borrower could not be delinquent
more than 90 days in the payment of such indebtedness. 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 the origination of the
Federal Consolidation Loan.
Interest Rates for Federal Consolidation Loans. A Consolidation Loan
made prior to July 1, 1994 bears interest at a rate equal to the weighted
average of the interest rates on the loans retired, rounded to the nearest whole
percent, but not less than 9% per annum. Except as described in the next
sentence, a Consolidation Loan made on or after July 1, 1994 bears interest at a
rate equal to the weighted average of the interest rates on the loans retired,
rounded upward to the nearest whole percent, but with no minimum rate. For a
Consolidation Loan for which the application is received by an eligible lender
on or after November 13, 1997 and before October 1, 1998, the interest rate
shall be adjusted annually, and for any twelve-month period commencing on a July
1 shall be equal to the bond equivalent rate of 91-day U.S. Treasury bills
auctioned at the final auction prior to the preceding June 1, plus 3.1% per
annum, but not to exceed 8.25% per annum. Notwithstanding these general interest
rates, the portion, if any, of a Consolidation Loan that repaid a loan made
under title VII, Sections 700-721 of the Public Health Services Act, as amended,
has a different variable interest rate. Such portion is adjusted on July 1 of
each year, but is the sum of the average of the T-Bill Rates auctioned for the
quarter ending on the preceding June 30, plus 3.0%, without any cap on the
interest rate. (For a discussion of required payments that reduce the return on
Consolidation Loans, see "Fees - Rebate Fees on Consolidation Loans" below.)
Maximum Loan Amounts
Each type of loan is subject to limits as to the maximum principal
amount, both with respect to a given year and in the aggregate. Consolidation
Loans are limited only by the amount of eligible loans to be consolidated. All
of the loans are limited to the difference between the cost of attendance and
the other aid available to the student. Stafford Loans are also subject to
limits based upon the needs analysis as described above under "Eligibility
Stafford Loans" above. Additional limits are described below.
88
<PAGE>
Loan Limits for Stafford and Unsubsidized Stafford Loans. Except as
described in the next paragraph, Stafford and Unsubsidized Stafford Loans are
generally treated as one loan type for loan limit purposes. A student who has
not successfully completed the first year of a program of undergraduate
education may borrow up to $2,625 in an academic year. A student who has
successfully completed such first year, but who has not successfully completed
the second year may borrow up to $3,500 per academic year. An undergraduate
student who has successfully completed the first and second year, but who has
not successfully completed the remainder of a program of undergraduate
education, may borrow up to $5,500 per academic year. For students enrolled in
programs of less than an academic year in length, the limits are generally
reduced in proportion to the amount by which such programs are less than one
year in length. A graduate or professional student may borrow up to $8,500 in an
academic year. The maximum aggregate amount of Stafford and Unsubsidized
Stafford Loans (including that portion of a Consolidation Loan used to repay
such loans) which an undergraduate student may have outstanding is $23,000. The
maximum aggregate amount for a graduate and professional student, including
loans for undergraduate education, is $65,500. The Secretary is authorized to
increase the limits applicable to graduate and professional students who are
pursuing programs which the Secretary determines to be exceptionally expensive.
At the time that SLS Loans were eliminated, the loan limits for
Unsubsidized Stafford Loans were increased by amounts equal to the prior SLS
Loan limits (as described below under "SLS Loans"). Prior to the enactment of
the Higher Education Amendments of 1992, an undergraduate student who had not
successfully completed the first and second year of a program of undergraduate
education could borrow Stafford Loans in amounts up to $2,625 in an academic
year. An undergraduate student who had successfully completed such first and
second year, but who had not successfully completed the remainder of a program
of undergraduate education could borrow up to $4,000 per academic year. The
maximum for graduate and professional students was $7,500 per academic year. The
maximum aggregate amount of Stafford Loans which a borrower could have
outstanding (including that portion of a Consolidation Loan used to repay such
loans) was $17,250. The maximum aggregate amount for a graduate or professional
student, including loans for undergraduate education, was $54,750.
Prior to the 1986 changes, the annual limits were generally lower.
Loan Limits for Plus Loans. For Plus Loans made on or after July 1,
1993, the amounts of Plus Loans are limited only by the student's unmet need.
Prior to that time Plus Loans were subject to limits similar to those to which
SLS Loans were then subject (see "SLS Loans" below), applied with respect to
each student on behalf of whom the parent borrowed.
Loan Limits for SLS Loans. A student who had not successfully completed
the first and second year of a program of undergraduate education could borrow
an SLS Loan in an amount of up to $4,000. A student who had successfully
completed such first and second year, but who had not successfully completed the
remainder of a program of undergraduate education could borrow up to $5,000 per
year. Graduate and professional students could borrow up to $10,000 per year.
SLS Loans were subject to an aggregate maximum of $23,000 ($73,000 for graduate
and professional students). Prior to the 1992 changes, SLS Loans were available
in amounts of $4,000 per academic year, up to a $20,000 aggregate maximum. Prior
to the 1986 changes, a graduate or professional student could borrow $3,000 of
SLS Loans per academic year, up to a $15,000 maximum, and an independent
undergraduate student could borrow $2,500 of SLS Loans per academic year minus
the amount of all other FFEL Program loans to such student for such academic
year, up to the maximum amount of all FFEL Program loans to that student of
$12,500. In 1989, the amount of SLS Loans for students enrolled in programs of
less than an academic year in length were limited in a manner similar to the
limits described above under "Stafford Loans".
89
<PAGE>
Disbursement Requirements
The Higher Education Act now requires that virtually all Stafford Loans
and PLUS Loans be disbursed by eligible lenders in at least two separate
installments. The proceeds of a loan made to any undergraduate first-year
student borrowing for the first time under the program must be delivered to the
student no earlier than thirty days after the enrollment period begins.
Repayment
Grace Periods. Loans made under the FFELP, other than Consolidation
Loans, must provide for repayment of principal in periodic installments over a
period of not less than five nor more than ten years. Lenders are required to
offer extended repayment schedules to new borrowers after the enactment of the
1998 Amendments who accumulate outstanding loans of more than $30,000, in which
case the repayment period may extend up to 25 years subject to certain minimum
repayment amounts. A Consolidation Loan must be repaid during a period agreed to
by the borrower and lender, subject to maximum repayment periods which vary
depending upon the principal amount of the borrower's outstanding student loans,
but no longer than 30 years. For Consolidation Loans for which the application
was received prior to January 1, 1993, the repayment period could not exceed 25
years. Repayment of principal on a 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. For Stafford Loans for which the applicable rate of interest is 7%
per annum, the repayment period commences not more than twelve months after the
borrower ceases to pursue at least a half-time course of study. For other
Stafford Loans and Unsubsidized Stafford Loans, the repayment period commences
not more than six months after the borrower ceases to pursue at least a
half-time course of study. The six month or twelve month periods are the "Grace
Periods".
In the case of SLS, PLUS and Consolidated Loans, the repayment period
commences on the date of final disbursement of the loan, except that the
borrower of an SLS Loan who also has a Stafford Loan may defer repayment of the
SLS Loan to coincide with the commencement of repayment of the Stafford or
Unsubsidized Stafford Loan. During periods in which repayment of principal is
required, payments of principal and interest must in general be made at a rate
of not less than the greater of $600 per year or the interest that accrues
during the year, except that a borrower and lender may agree at any time before
or during the repayment period that repayment may be at a lesser rate. A
borrower may agree, with concurrence of the lender, to repay the loan in less
than five years with the right subsequently to extend his minimum repayment
period to five years. Borrowers may accelerate, without penalty, the repayment
of all or any part of the loan.
Income Sensitive Repayment Schedules. Since 1992, lenders of
Consolidation Loans have been required to establish graduated or
income-sensitive repayment schedules and lenders of Stafford and SLS Loans have
been required to offer borrowers the option of repaying in accordance with
graduated or income-sensitive repayment schedules. The Company may implement
graduated repayment schedules and income-sensitive repayment schedules. Use of
income-sensitive repayment schedules may extend the ten-year maximum term for up
to five years. In addition, if the repayment schedule on a loan that has been
converted to a variable interest rate does not provide for adjustments to the
amount of the monthly installment payments, the ten-year maximum term may be
extended for up to three years.
90
<PAGE>
Deferment Periods. No principal repayments need be made during certain
periods of deferment prescribed by the Higher Education Act ("Deferment
Periods"). For loans to a borrower who first obtained a loan which was disbursed
before July 1, 1993, deferments are available:
(i) during a period not exceeding three years while the borrower
is a member of the Armed Forces, an officer in the Commissioned Corps of the
Public Health Service or, with respect to a borrower who first obtained a
student loan disbursed on or after July 1, 1987, or a student loan to cover the
cost of instruction for a period of enrollment beginning on or after July 1,
1987, an active duty member of the National Oceanic and Atmospheric
Administration Corps;
(ii) during a period not in excess of three years while the
borrower is a volunteer under the Peace Corps Act;
(iii) during a period not in excess of three years while the
borrower is a full-time volunteer under the Domestic Volunteer Act of 1973;
(iv) during a period not exceeding three years while the borrower
is in service, comparable to the service referred to in clauses (ii) and (iii),
as a full-time volunteer for an organization which is exempt from taxation under
Section 501(c)(3) of the Code;
(v) during a period not exceeding two years while the borrower is
serving an internship, the successful completion of which is required to receive
professional recognition required to begin professional practice or service, or
a qualified internship or residency program;
(vi) during a period not exceeding three years while the borrower
is temporarily totally disabled, as established by sworn affidavit of a
qualified physician, or while the borrower is unable to secure employment by
reason of the care required by a dependent who is so disabled;
(vii) during a period not to exceed twenty-four months while the
borrower is seeking and unable to find full-time employment;
(viii) during any period that the borrower is pursuing a
full-time course of study at an eligible institution (or, with respect to a
borrower who first obtained a student loan disbursed on or after July 1, 1987,
or a student loan to cover the cost of instruction for a period of enrollment
beginning on or after July 1, 1987, is pursuing at least a half-time course of
study for which the borrower has obtained a loan under the FFELP), or is
pursuing a course of study pursuant to a graduate fellowship program or a
rehabilitation training program for disabled individuals approved by the
Secretary of Education;
(ix) during a period, not in excess of 6 months, while the
borrower is on parental leave; and
(x) only with respect to a borrower who first obtained a student
loan disbursed on or after July 1, 1987, or a student loan to cover the cost of
instruction for a period of enrollment beginning on or after July 1, 1987, (A)
during a period not in excess of three years while the borrower is a full-time
teacher in a public or nonprofit private elementary or secondary school in a
"teacher shortage area" (as prescribed by the Secretary of Education), and (B)
during a period not in excess of 12 months for mothers, with preschool age
children, who are entering or re-entering the work force and who are compensated
at a rate not exceeding $1 per hour in excess of the federal minimum wage.
91
<PAGE>
For loans to a borrower who first obtains a loan on or after July 1,
1993, deferments are available:
(a) during any period that the borrower is pursuing at least a
half-time course of study at an eligible institution or a course of study
pursuant to a graduate fellowship program or rehabilitation training program
approved by the Secretary;
(b) during a period not exceeding three years while the borrower
is seeking and unable to find full-time employment; and
(c) during a period not in excess of three years for any reason
which the lender determines, in accordance with regulations under the Higher
Education Act, has caused or will cause the borrower economic hardship. Economic
hardship includes working full time and earning an amount not in excess of the
greater of the minimum wage or the poverty line for a family of two. Additional
categories of economic hardship are based on the relationship between a
borrower's educational debt burden and his or her income.
Prior to the 1992 changes, only the Deferment Periods described above in
clauses (vi) and (vii) (with respect to the parent borrower) and the Deferment
Period described in clause (viii) (with respect to the parent borrower or a
student on whose behalf the parent borrowed) were available to PLUS Loan
borrowers, and only the Deferment Periods described above in clauses (vi), (vii)
and (viii) were available to Consolidation Loan borrowers. Prior to the 1986
changes, PLUS Loan borrowers were not entitled to Deferment Periods.
Deferment Periods extend the ten-year maximum term.
Forbearance Period. The Higher Education Act also provides for periods
of forbearance during which the borrower, in case of temporary financial
hardship, may defer any payments (a "Forbearance Period"). A borrower is
entitled to forbearance for a period not to exceed three years while the
borrower's debt burden under Title IV of the Higher Education Act (which
includes the FFELP) equals or exceeds 20% of the borrower's gross income, and
also is entitled to forbearance while he or she is serving in a qualifying
medical or dental internship program or in a "national service position" under
the National and Community Service Trust Act of 1993. In addition, mandatory
administrative forbearances are provided when exceptional circumstances such as
a local or national emergency or military mobilization exist, or when the
geographical area in which the borrower or endorser resides has been designated
a disaster area by the President of the United States or Mexico, the Prime
Minister of Canada, or by the governor of a state. In other circumstances,
forbearance is at the lender's option. Such forbearance also extends the ten
year maximum term.
Interest Payments During Grace, Deferment and Forbearance Periods. As
described under "Interest Subsidy Payments" below, the Secretary of Education
makes interest payments on behalf of the borrower of certain eligible loans
while the borrower is in school and during Grace and Deferment Periods. Interest
that accrues during Forbearance Periods and, if the loan is not eligible for
interest Subsidy Payments, while the borrower is in school and during the Grace
and Deferment Periods, may be paid monthly or quarterly or capitalized (added to
the principal balance) not more frequently than quarterly.
92
<PAGE>
Fees
Guarantee Fee. A Guarantee Agency is authorized to charge a premium, or
guarantee fee, of up to 1% of the principal amount of the loan, which must be
deducted proportionately from each installment payment of the proceeds of the
loan to the borrower. Guarantee fees may not currently be charged to borrowers
of Consolidation Loans. However, lenders may be charged an insurance fee to
cover the costs of increased or extended liability with respect to Consolidation
Loans. For loans made prior to July 1, 1994, the maximum guarantee fee was 3% of
the principal amount of the loan, but no such guarantee fee was authorized to be
charged with respect to Unsubsidized Stafford Loans.
Origination Fee. An eligible lender is authorized to charge the borrower
of a Stafford or PLUS Loan an origination fee in an amount not to exceed 3% of
the principal amount of the loan, and is required to charge the borrower of an
Unsubsidized Stafford Loan an origination fee in the amount of 3% of the
principal amount of the loan. These fees must be deducted proportionately from
each installment payment of the loan proceeds prior to payment to the borrower
and are not retained by the lender, but must be passed on to the Secretary of
Education. For loans made prior to July 1, 1994, the maximum authorized fee for
Stafford, PLUS and SLS Loans was 5%, and the required fee for Unsubsidized
Stafford Loans was 6.5% of the principal amount of the loan.
Lender Origination Fee. The lender of any loan under the FFELP made on
or after October 1, 1993 is required to pay to the Secretary of Education a fee
equal to 0.5% of the principal amount of such loan.
Rebate Fee on Consolidation Loans. The holder of any Consolidation Loan
made on or after October 1, 1993 is required to pay to the Secretary of
Education a monthly fee equal to .0875% (1.05% per annum) of the principal
amount of, and accrued interest on, such Consolidation Loan. For loans made
pursuant to applications received on or after October 1, 1998, and on or before
January 31, 1999 the fee on consolidation loans of 1.0% is reduced to .62%.
Interest Subsidy Payments
"Interest Subsidy Payments" are interest payments paid with respect to
an eligible loan during the period prior to the time that the loan enters
repayment and during Grace and Deferment Periods. The Secretary of Education and
the Guarantee Agencies entered into Interest Subsidy Agreements (as described in
"Description of the Guarantee Agencies -- Federal Agreements") whereby the
Secretary of Education agrees to pay Interest Subsidy Payments to the holders of
eligible guaranteed loans for the benefit of students meeting certain
requirements, subject to the holders' compliance with all requirements of the
Higher Education Act. Only Stafford Loans and Consolidation Loans for which the
application was received on or after January 1, 1993, are eligible for Interest
Subsidy Payments. Consolidation Loans made after August 10, 1993 are eligible
for Interest Subsidy Payments only if all loans consolidated thereby are
Stafford Loans, except that Consolidation Loans for which the application is
received by an eligible lender on or after November 13, 1997 and before October
1, 1998, are eligible for Interest Subsidy Payments on that portion of the
Consolidation Loan that repays Stafford Loans or similar subsidized loans made
under the direct loan program. In addition, to be eligible for Interest Subsidy
Payments, guaranteed loans must be made by an eligible lender under the
applicable Guarantee Agency's guarantee program, and must meet requirements
prescribed by the rules and regulations promulgated under the Higher Education
Act.
93
<PAGE>
The Secretary of Education makes Interest Subsidy Payments quarterly on
behalf of the borrower to the holder of a guaranteed loan in a total amount
equal to the interest which accrues on the unpaid principal amount prior to the
commencement of the repayment period of the loan or during any Deferment Period.
A borrower may elect to forego Interest Subsidy Payments, in which case the
borrower is required to make interest payments.
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, the date the loan was originally made or insured and the type of funds
used to finance such loan (taxable or tax-exempt). The amount of the Special
Allowance Payments, which are made on a quarterly basis, is computed by
reference to the average of the bond equivalent rates of the 91-day Treasury
bills auctioned during the preceding quarter (the "T-Bill Rate").
Federal Subsidized and Unsubsidized Stafford Loans. The effective
formulas for special allowance payment rates for Stafford and Unsubsidized
Stafford Loans are summarized in the following chart:
Date of Loans Annualized SAP Rate
On or after October 1, 1981 T-Bill Rate less Applicable Interest Rate + 3.5%
On or after November 16, 1986 T-Bill Rate less Applicable Interest Rate + 3.25%
On or after October 1, 1992 T-Bill Rate less Applicable Interest Rate + 3.1%
On or after July 1, 1995 T-Bill Rate less Applicable Interest Rate + 2.5%(1)
On or after July 1, 1998 T-Bill Rate less Applicable Interest Rate + 2.1%(2)
(1) Applies to Stafford and Unsubsidized Stafford Loans prior to the time
such loans enter repayment and during any Deferment Periods.
(2) Substitute 2.8% in this formula while such loans are in repayment.
For Loans made on or after October 1, 1998, the special allowance
formula is revised similarly to the manner in which the applicable interest rate
formula is revised (as defined above under "Interest Rates for Stafford Loans").
94
<PAGE>
The effective formulas for special allowance payment rates for
Subsidized Federal Stafford Loans differ depending on whether loans to borrowers
whose first loans were disbursed prior to July 23, 1992 were acquired or
originated with the proceeds of tax-exempt obligations. 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).
Federal PLUS and SLS Loans. For PLUS and SLS Loans which bear interest
at rates adjusted annually, Special Allowance Payments are made only in years
during which the interest rate ceiling on such loans operates to reduce the rate
that would otherwise apply based upon the applicable formula. See "Interest
Rates for PLUS Loans" and "Interest Rates for SLS Loans" above. Special
Allowance Payments are paid with respect to PLUS Loans made on or after July 1,
1994 only if the rate that would otherwise apply exceeds 10% per annum,
notwithstanding that the interest rate ceiling on such loans is 9% per annum.
The portion, if any, of a Consolidation Loan that repaid a loan made under Title
VII, Sections 700-721 of the Public Health Services Act, as amended, is
ineligible for Special Allowance Payments.
The Balanced Budget and Deficit Control Act of 1985, as amended (known
as the "Gramm-Rudman Law") requires the President to issue a sequester order for
any federal fiscal year in which the projected budget exceeds the target for
that year. A sequester order for any fiscal year would apply to loans made on or
after October 1 of that fiscal year. The sequester order would change the
formula for calculating Special Allowance Payments for the first four Special
Allowance Payment periods relating to loans originally disbursed during that
fiscal year. The special allowance formula would be reduced to the T-Bill Rate
plus 3.0% (for loans with a special allowance formula of the T-Bill Rate plus
3.1%).
The Higher Education Act provides that if Special Allowance Payments or
Interest Subsidy Payments have not been made within 30 days after the Secretary
of Education receives an accurate, timely and complete request therefor, the
special allowance payable to such holder shall be increased by an amount equal
to the daily interest accruing on the Special Allowance and Interest Subsidy
Payments due the holder.
Special Allowance Payments and Interest Subsidy Payments are reduced by
the amount which the lender is authorized or required to charge as an
origination fee, as described above under "Fees -- Origination Fee". In
addition, the amount of the lender origination fee described above under "Fees
- -- Lender Origination Fees" is collected by offset to Special Allowance Payments
and Interest Subsidy Payments.
DESCRIPTION OF THE GUARANTEE AGENCIES
The financed student loans in the trust estate will be guaranteed by any
one or more Guarantee Agencies identified in the related Prospectus Supplement.
The following discussion relates to Guarantee Agencies under the FFELP.
A Guarantee Agency guarantees loans made to students or parents of
students by lending institutions such as banks, credit unions, savings and loan
associations, certain schools, pension funds and insurance companies. A
Guarantee Agency generally purchases defaulted student loans which it has
guaranteed from its cash and reserves (generally referred to herein as its
"Reserve Fund") A lender may submit a default claim to the Guarantee Agency
after the student loan has been delinquent for at least 240 days. The default
claim package must include all information and documentation required under the
FFELP regulations and the Guarantee Agency's policies and procedures.
95
<PAGE>
In general, a Guarantee Agency's Reserve Fund has been funded
principally by administrative cost allowances paid by the Secretary of
Education, guarantee fees paid by lenders, investment income on moneys in the
Reserve Fund, and a portion of the moneys collected from borrowers on Guaranteed
Loans that have been reimbursed by the Secretary of Education to cover the
Guarantee Agency's administrative expenses.
Various changes to the Higher Education Act have adversely affected the
receipt of revenues by the Guarantee Agencies and their ability to maintain
their Reserve Funds at previous levels, and may adversely affect their ability
to meet their guarantee obligations. These changes include the reduction in
reinsurance payments from the Secretary of Education because of reduced
reimbursement percentages; the reduction in maximum permitted guarantee fees
from 3% to 1% for loans made on or after July 1, 1994; the replacement of the
administrative cost allowance with a student loan processing and issuance fee
equal to 65 basis points (40 basis points for loans made one or after October 1,
1993) paid at the time a loan is guaranteed, and an account maintenance fee of
12 basis points (10 basis points for fiscal years 2001-2003) paid annually on
outstanding guaranteed student loans; the reduction in supplemental preclaims
assistance payments from the Secretary of Education; and the reduction in
retention by a Guarantee Agency of collections on defaulted loans from 27% to
24% (23% beginning on October 1, 2003). Additionally, the adequacy of a
Guarantee Agency's Reserve Fund to meet its guarantee obligations with respect
to existing student loans depends, in significant part, on its ability to
collect revenues generated by new loan guarantees. The Federal Direct Student
Loan Program discussed below may adversely affect the volume of new loan
guarantees. Future legislation may make additional changes to the Higher
Education Act that would significantly affect the revenues received by Guarantee
Agencies and the structure of the guarantee agency program.
The Higher Education Act gives the Secretary of Education various
oversight powers over Guarantee Agencies. These include requiring a Guarantee
Agency to maintain its Reserve Fund at a certain required level and taking
various actions relating to a Guarantee Agency if its administrative and
financial condition jeopardizes its ability to meet its obligations. These
actions include, among others, providing advances to the Guarantee Agency,
terminating the Guarantee Agency's Federal Reimbursement Contracts, assuming
responsibility for all functions of the Guarantee Agency, and transferring the
Guarantee Agency's guarantees to another Guarantee Agency or assuming such
guarantees. The Higher Education Act provides that a Guarantee Agency's Reserve
Fund shall be considered to be the property of the United States to be used in
the operation of the FFELP or the Federal Direct Student Loan Program, and,
under certain circumstances, the Secretary of Education may demand payment of
amounts in the Reserve Fund. The 1998 Amendments mandate the recall of Guarantee
Agency reserve funds by the Secretary of Education amounting to $85 million in
fiscal year 2002, $82.5 million in fiscal year 2006, and $82.5 million in fiscal
year 2007. However, certain minimum reserve levels are protected from recall and
under the 1998 Amendments, Guarantee Agency reserve funds were restructured to
provide Guarantee Agencies with additional flexibility in choosing how to spend
certain funds they receive. The new recall of reserves for Federal Guarantee
Agencies increases the risk that resources available to Guarantee Agencies to
meet their guarantee obligation will be significantly reduced. Relevant federal
laws, including the Higher Education Act, be further changed in a manner that
may adversely affect the ability of a Guarantee Agency to meet its guarantee
obligations. See "Description of the Federal Family Education Loan Program"
herein.
96
<PAGE>
Under the Higher Education Act, if the Department of Education has
determined that a Guarantee Agency is unable to meet its insurance obligations,
the holders of loans guaranteed by such Guarantee Agency must submit claims
directly to the Department of Education, and the Department of Education is
required to pay the full Guarantee Payment due with respect thereto in
accordance with guarantee claims processing standards no more stringent than
those applied by the Guarantee Agency.
There are no assurances as to the Secretary of Education's actions if a
Guarantee Agency encounters administrative or financial difficulties or that the
Secretary of Education will not demand that a Guarantee Agency transfer
additional portions or all of its Reserve Fund to the Secretary of Education.
Information relating to the particular Guarantee Agencies guaranteeing
the Financed Student Loans will be set forth in the Prospectus Supplement. Such
information will be provided by the respective Guarantee Agencies, and neither
such information nor information included in the reports referred to therein has
been verified by, or is guaranteed as to accuracy or completeness by, the Issuer
or the underwriters. No representation is made by the Company or the
underwriters as to the accuracy or adequacy of such information or the absence
of material adverse changes in such information subsequent to the dates thereof.
Federal Agreements
General. A Guaranty Agency's right to receive federal reimbursements for
various guarantee claims paid by such Guarantee Agency is governed by the Higher
Education Act and various contracts entered into between Guarantees Agencies and
the Secretary of Education. Each Guarantee Agency and the Secretary of Education
have entered into Federal Reimbursement Contracts pursuant to the Higher
Education Act, which provide for the Guarantee Agency to receive reimbursement
of a percentage of insurance payments that the Guarantee Agency makes to
eligible lenders with respect to loans guaranteed by the Guarantee Agency prior
to the termination of the Federal Reimbursement Contracts or the expiration of
the authority of the Higher Education Act. The Federal Reimbursement Contracts
provide for termination under certain circumstances and also provide for certain
actions short of termination by the Secretary of Education to protect the
federal interest.
In addition to guarantee benefits, qualified Student Loans acquired
under the FFELP benefit from certain federal subsidies. Each Guarantee Agency
and the Secretary of Education have entered into an Interest Subsidy Agreement
under the Higher Education Act; which entitles the holders of eligible loans
guaranteed by the Guarantee Agency to receive Interest Subsidy Payments from the
Secretary of Education on behalf of certain students while the student is in
school, during a six to twelve month Grace Period after the student leaves
school, and during certain Deferment Periods, subject to the holders' compliance
with all requirements of the Higher Education Act. See "Description of the FFELP
- -- Federal Interest Subsidy Payments" for a more detailed description of the
Interest Subsidy Payments.
97
<PAGE>
United States Courts of Appeals have held that the federal government,
through subsequent legislation, has the right unilaterally to amend the
contracts between the Secretary of Education and the Guarantee Agencies
described herein. Amendments to the Higher Education Act in 1986, 1987, 1992,
1993, and 1998, respectively (i) abrogated certain rights of guarantee agencies
under contracts with the Secretary of Education relating to the repayment of
certain advances from the Secretary of Education, (ii) authorized the Secretary
of Education to withhold reimbursement payments otherwise due to certain
guarantee agencies until specified amounts of such guarantee agencies' reserves
had been eliminated, (iii) added new reserve level requirements for guarantee
agencies and authorized the Secretary of Education to terminate the Federal
Reimbursement Contracts under circumstances that did not previously warrant such
termination, (iv) expanded the Secretary of Education's authority to terminate
such contracts and to seize guarantee agencies' reserves, and (v) mandated the
additional recall of Guarantee Agency reserve funds.
Federal Insurance and Reimbursement of Guarantee Agencies
Effect of Annual Claims Rate. With respect to loans made prior to
October 1, 1993, the Secretary of Education currently agrees to reimburse the
Guarantee Agency for up to 100% of the amounts so expended, as discussed in the
formula described below, so long as the eligible lender has properly serviced
such loan. The amount of reimbursement is lower for loans originated after
October 1, 1993, as described below. Depending on the claims rate experience of
a Guarantee Agency, such reimbursement may be reduced as discussed in the
formula described below. The Secretary of Education also agrees to repay 100% of
the unpaid principal plus applicable accrued interest expended by a Guarantee
Agency in discharging its guarantee obligation as a result of the bankruptcy,
death, or total and permanent disability of a borrower, or in the case of a PLUS
Loan, the death of the student on behalf of whom the loan was borrowed, or in
certain circumstances, as a result of school closures, which reimbursements are
not to be included in the calculations of the Guarantee Agency's Claims Rate
experience for the purpose of federal reimbursement under the Federal
Reimbursement Contracts.
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.
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. The
1998 Amendments further reduce the federal reimbursement amounts from 98% to 95%
, 88% to 85%, and 78% to 75% respectively, for student loans first disbursed on
or after October 1, 1998.
The reduced reinsurance for federal guaranty agencies increases the risk
that resources available to Guarantee Agencies to meet their guarantee
obligation will be significantly reduced.
98
<PAGE>
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. 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.
Under the 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.
Under present practice, after the Secretary of Education reimburses a
Guarantee Agency for a default claim paid on a guaranteed loan, the Guarantee
Agency continues to seek repayment from the borrower. The Guarantee Agency
returns to the Secretary of Education payments that it receives from a borrower
after deducting and retaining: a percentage amount equal to the complement of
the reimbursement percentage in effect at the time the loan was reimbursed, and
an amount equal to 27% (or 18-1/2% in the case of a payment from the proceeds of
a Consolidation Loan) of such payments for certain administrative costs. The
Secretary of Education may, however, require the assignment to the Secretary of
defaulted guaranteed loans, in which event no further collections activity need
be undertaken by the Guarantee Agency, and no amount of any recoveries shall be
paid to the Guarantee Agency. Prior to the 1993 changes, the percentage of
collections which Guarantee Agencies could retain was 30%.
A Guarantee Agency may enter into an addendum to its Interest Subsidy
Agreement that allows the Guarantee Agency to refer to the Secretary of
Education certain defaulted guaranteed loans. Such loans are then reported to
the IRS to "offset" any tax refunds which may be due any defaulted borrower. To
the extent that the Guarantee Agency has originally received less than 100%
reimbursement from the Secretary of Education with respect to such a referred
loan, the Guarantee Agency will not recover any amounts subsequently collected
by the federal government which are attributable to that portion of the
defaulted loan for which the Guarantee Agency has not been reimbursed.
Rehabilitation of Defaulted Loans. Under of the Higher Education Act,
the Secretary of Education is authorized to enter into an agreement with a
Guarantee Agency pursuant to which the Guarantee Agency shall sell defaulted
loans that are eligible for rehabilitation to an eligible lender. The Guarantee
Agency shall repay the Secretary of Education an amount equal to 81.5% of the
then current principal balance of such loan, multiplied by the reimbursement
percentage in effect at the time the loan was reimbursed. The amount of such
repayment shall be deducted from the amount of federal reimbursement payments
for the fiscal year in which such repayment occurs, for purposes of determining
the reimbursement rate for that fiscal year.
For a loan to be eligible for rehabilitation, the Guarantee Agency must
have received consecutive payments for 12 months of amounts owed on such loan.
Upon rehabilitation, a loan is eligible for all the benefits under the Higher
Education Act for which it would have been eligible had no default occurred
(except that a borrower's loan may only be rehabilitated once).
99
<PAGE>
Eligibility for Federal Reimbursement. To be eligible for federal
reimbursement payments, guaranteed loans must be made by an eligible lender
under the applicable Guarantee Agency's Guarantee Program, which must meet
requirements prescribed by the rules and regulations promulgated under the
Higher Education Act, including the borrower eligibility, loan amount,
disbursement, interest rate, repayment period and guarantee fee provisions
described herein and the other requirements set forth in the Higher Education
Act.
Prior to the 1998 Amendments, a Federal Family Loan was considered in to
be in default for purposes of the Higher Education Act when the borrower failed
to make an installment payment when due, or to comply with the 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. Under the 1998 Amendments, the
delinquency period required for a student loan to be declared in default is
increased from 180 days to 240 days for loans on which the first day of
delinquency occurs on or after the date of enactment of the 1998 Amendments.
The Guarantee Agency must pay the lender for the defaulted loan prior to
submitting a claim to the Secretary of Education for reimbursement. The
Guarantee Agency must submit a reimbursement claim to the Secretary of Education
within 45 days after it has paid the lender's default claim. As a prerequisite
to entitlement to payment on the guarantee by the Guarantee Agency, and in turn
payment of reimbursement by the Secretary of Education, the lender must have
exercised reasonable care and diligence in making, servicing and collecting the
guaranteed loan. Generally, these procedures require that completed loan
applications be processed, a determination of whether an applicant is an
eligible borrower attending an eligible institution under the Higher Education
Act be made, the borrower's responsibilities under the loan be explained to him
or her, the promissory note evidencing the loan be executed by the borrower and
that the loan proceeds be disbursed by the lender in a specified manner. After
the loan is made, the lender must establish repayment terms with the borrower,
properly administer deferments 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, demand
letters, skiptracing procedures and requesting assistance from the applicable
Guarantee Agency, that vary depending upon the length of time a loan is
delinquent.
Direct Loans
The 1993 Amendments authorized a program of "direct loans," to be
originated by schools with funds provided by the Secretary of Education. Under
the direct loan program, the Secretary of Education is directed to enter into
agreements with schools, or origination agents in lieu of schools, to disburse
loans with funds provided by the Secretary. Participation in the program by
schools is voluntary. The goals set forth in the 1993 Amendments call for the
direct loan program to constitute 5% of the total volume of loans made under the
FFELP and the direct loan program for academic year 1994-1995, 40% for academic
year 1995-1996, 50% for academic years 1996-1997 and 1997-1998 and 60% for
academic year 1998-1999. No provision is made for the size of the direct loan
program thereafter. Based upon information released by the General Accounting
Office, participation by schools in the direct loan program has not been
sufficient to meet the goals for the 1995-1996 or 1996-1997 academic years. The
1998 Amendments removed references to the "phase-in" of the Direct Loan Program,
including restrictions on annual limits for Direct Loan Program volume and the
Secretary's authority to select additional institutions to achieve balanced
school representation.
100
<PAGE>
The loan terms are generally the same under the direct loan program as
under the FFELP, though more flexible repayment provisions are available under
the direct loan program. At the discretion of the Secretary of Education,
students attending schools that participate in the direct loan program (and
their parents) may still be eligible for participation in the FFELP, though no
borrower could obtain loans under both programs for the same period of
enrollment.
It is difficult to predict the impact of the direct lending program.
There is no way to accurately predict the number of schools that will
participate in future years, or, if the Secretary authorizes students attending
participating schools to continue to be eligible for FFELP loans, how many
students will seek loans under the direct loan program instead of the FFELP. In
addition, it is impossible to predict whether future legislation will eliminate,
limit or expand the direct loan program or the FFELP.
Other Guarantee Agencies
Although the Company expects that most of the student loans it acquires
under the Indenture will be guaranteed by the Guarantee Agencies described in
the related Prospectus Supplement, the Company may acquire student 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
student loans are paid, which payment may be in the form of scheduled
amortization or prepayments. For this purpose, the term "prepayments" includes
prepayments in full or in part, including payments received from the proceeds of
Consolidation Loans or as a result of (i) borrower default, death, disability or
bankruptcy, (ii) a closing of or a false certification by the borrower's school,
(iii) collection of guarantee payments with respect thereto, and (iv) financed
student loans being repurchased by the respective seller as a result of a breach
of a representation and warranty. All of the financed student 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. 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 student 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 student loans. The addition of financed student
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 student 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 student 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.
101
<PAGE>
In light of the above consideration, there can be no assurance as to the
timing or amount of principal payments to be made on the Notes of a given
series, since those payments will depend, in part, on the amount of principal
collected on the pool of financed student loans. Any reinvestment risks
resulting from a faster or slower incidence of prepayment of financed student
loans will be borne entirely by the holders of a given series of the Notes. The
related Prospectus Supplement may set forth certain additional information with
respect to the maturity and prepayment considerations applicable to the financed
student loans and the related series of Notes.
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 Company. 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,
including but not limited to, foreign investors. In addition, this summary is
generally limited to investors who will hold the Notes as "capital assets"
(generally, property held for investment) within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended (the "Code"). Investors should
consult their own tax advisors to determine the federal, state, local and other
tax consequences of the purchase, ownership and disposition of the Notes of any
Series. Prospective investors should note that no rulings have been or will be
sought from the Internal Revenue Service (the "Service") with respect to any of
the federal income tax consequences discussed below, and no assurance can be
given that the Service will not take contrary positions.
Characterization of the Trust Estate
Based upon certain assumptions and certain representations of the
Company, Kutak Rock has rendered, with respect to the Prior Notes, and will
render, with respect to the Additional Notes, its opinion to the Company to the
effect that the Notes, issued or to be issued, as the case may be, should be
treated as debt of the Company, rather than as an interest in the financed
student 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 student 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 Company as a corporate entity, the transaction
were treated as creating a partnership among the Registered Owners, the servicer
and the Company which has purchased the underlying financed student loans, the
resulting partnership would not be subject to federal income tax. Rather, the
servicer, the Company 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.
102
<PAGE>
If, alternatively, it were determined that this transaction created an
entity other than the Company which was classified as a corporation or a
publicly traded partnership taxable as a corporation and treated as having
purchased the financed student loans, the Trust would be subject to federal
income tax at corporate income tax rates on the income it derives from the
financed student 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
accumulated and current earnings and profits. A similar result would apply if
the Registered Owners were deemed to have acquired stock or other equity
interests in the Company. However, as noted above, the Company has been advised
that the Notes should be treated as debt of the Company for federal income tax
purposes.
Characterization of the Notes as Indebtedness
The Company and the Registered Owners express in the Indenture their
intent that, for federal income tax purposes, the Notes will be indebtedness of
the Company secured by the financed student loans. The Company and the
Registered Owners, by accepting the Notes, have agreed to treat the Notes as
indebtedness of the Company for federal income tax purposes. The Company 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 Company believes that it has retained the preponderance of the
primary benefits and burdens associated with ownership of the financed student
loans and should, thus, be treated as the owner of the financed student loans
for federal income tax purposes. If, however, the Service were successfully to
assert that this transaction should be treated as a sale of the financed student
loans, the Service could further assert that the entity created pursuant to the
Indenture, as the owner of the financed student loans for federal income tax
purposes, should be deemed engaged in a business and, therefore, characterized
as a publicly traded partnership 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 of
accounting. 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.
103
<PAGE>
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 Company expects that interest payable with
respect to the Accrual Notes, if any, will not be qualified stated interest and
that such Accrual Notes will be issued with original issue 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 Company believes, based on the advice of counsel, that it will retain
ownership of the financed student 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 student loans for federal income tax purposes instead of the
Company (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.
104
<PAGE>
The Company makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Notes under the tax laws of any state,
locality or foreign jurisdiction. Investors considering an investment in the
Notes should consult their own tax advisors regarding such tax consequences.
Limitation on the Deductibility of Certain Expenses
Under Section 67 of the Code, an individual may deduct certain
miscellaneous itemized deductions only to the extent that the sum of such
deductions for the taxable year exceed 2% of his or her adjusted gross income.
If contrary to expectation, the entity created under the Indenture were treated
as the owner of the financed student loans (and not as an association taxable as
a corporation), then the Company 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 Company that the Notes should 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 holder's
basis in 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. In the event any of the Notes are issued with
original issue discount, in certain circumstances, a portion of the gain can be
recharacterized as ordinary income.
If the term of a Note was materially modified, in certain circumstances,
a new debt obligation would be deemed created and exchanged for the prior
obligation in a taxable transaction. Among the modifications which may be
treated as material are those which relate to the redemption provisions and, in
the case of a nonrecourse obligation, those which involve the substitution of
collateral. Each potential holder of a Note should consult its own tax advisor
concerning the circumstances in which the Notes would be deemed reissued and the
likely effects, if any, of such reissuance.
105
<PAGE>
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 Title I of ERISA. 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 governmental plan
or church plan which is qualified under Section 401(a) and exempt from taxation
under Section 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in Section 503 of 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. Section 502(l) of ERISA requires the Secretary of the U.S.
Department of Labor (the "DOL") to assess a civil penalty against a fiduciary
who breaks any fiduciary responsibility under or commits any other violation of
part 4 of Title I of ERISA or any other person who knowingly participates in
such breach or violation.
The investment in a security by a Plan may, in certain circumstances, be
deemed to include an investment in the assets of the Company of such security.
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 such Regulations the assets of an ERISA Plan will not include an
interest in the assets of an entity, the equity interests of which are acquired
by the ERISA Plan, if at no time do ERISA Plans in the aggregate own 25% or more
of the value of any class of 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.
106
<PAGE>
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 Company 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. The
related Prospectus Supplement will set forth whether any Class of Notes may be
purchased by Plans.
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 Company 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 Company 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 Company expects to acquire all of the financed student loans to be
pledged to the Trustee from Union Bank pursuant to student loan purchase
agreements, and the Company may acquire additional student loans from Union Bank
in the future. Union Bank will, unless specified with respect to a series of the
Notes in the related Prospectus Supplement, also act as servicer for all other
financed student loans pursuant to the Servicing Agreement. However, UNIPAC, as
subservicer, will discharge the servicer's duties with respect to financed
student loans pursuant to a Subservicing Agreement with Union Bank. UNIPAC is a
privately held corporation which is 80.5% owned by Union Bank. UNIPAC will also
act as custodian for the financed student loans. See "Risk Factors-Reliance upon
Sellers," "-Certain Legal Aspects" and "-Perfection of Security Interest in
Student loans" herein.
The Company 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
107
<PAGE>
The Company may sell the Notes of each series to or through underwriters
by "best efforts" underwriting or a negotiated firm commitment underwriting by
the underwriters, and also may sell the Notes directly to other purchasers or
through agents. If so indicated in the Prospectus Supplement, the Company may
sell such Notes, directly or through agents, through a competitive bidding
process described in the applicable Prospectus Supplement. The Company intends
that 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 the Notes may be made through a
combination of such methods.
The distribution of the 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 Notes.
In connection with the sale of the Notes, underwriters may receive
compensation from the Company or from the purchasers of such Notes for whom they
may act as agents in the form of discounts, concessions or commissions.
Underwriters 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 and/or commissions from the purchasers for
whom they may act as agents. Underwriters, 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 Company and any
profit on the resale of the Notes by them may be deemed to be underwriting
discounts and commissions, under the Securities Act. Any such underwriters will
be identified, and any such compensation received from the Company will be
described, in the applicable Prospectus Supplement.
Under agreements which may be entered into by the Company, the
underwriters and agents who participate in the distribution of the Notes may be
entitled to indemnification by the Company against certain liabilities,
including liabilities under the Securities Act, or to contribution with respect
to payments which the underwriters or agents may be required to make in respect
thereto.
If so indicated in the Prospectus Supplement, the Company will authorize
underwriters or other persons acting as the Company's agents to solicit offers
by certain institutions to purchase the Notes from the Company 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 Company. The obligation of any purchaser under any such contract will be
subject to the condition that the purchaser of the 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 and such other
agents will not have responsibility in respect of the validity or performance of
such contracts.
The underwriters 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, LLP, Denver, Colorado as Company's Counsel and by Kutak Rock, Denver,
Colorado as Note Counsel and as special tax counsel. Other counsel, if any,
passing upon legal matters for the Company or any placement agent or underwriter
will be identified in the related Prospectus Supplement.
108
<PAGE>
FINANCIAL INFORMATION
The Company has determined that its financial statements are not
material to the offering made hereby. The Company will engage in no activities
other than as described herein. Accordingly, no financial statements with
respect to the Company are included in this Prospectus.
RATINGS
It is a condition to the issuance of the 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 owners of
the Notes 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 student loans, and the structural, legal and tax
aspects associated with the rated Notes.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
109
<PAGE>
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
"Definitions and Provisions Related to ARC Notes and Auction
Procedures-Auction-Related Definitions" and certain definitions related to LIBOR
Rate Notes are set forth herein under "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.
91-day Treasury Bills.........................................................9
Account.....................................................................115
Act.........................................................................115
Aggregate Market Value......................................................115
All Hold Rate.............................................................. 19
Applicable LIBOR-Based Rate..................................................19
Applicable Number of Business Days...........................................19
Applicable Rate..............................................................46
Auction..................................................................... 19
Auction Agent .............................................................. 19
Auction Agent Agreement......................................................19
Auction Agent Fee............................................................19
Auction Date ........................................................... 8, 20
Auction Note Interest Rate...................................................20
Auction Period ...........................................................8, 20
Auction Period Adjustment................................................20, 41
Auction Procedures...........................................................20
Auction Rate ........................................................... 8, 20
Authorized Denominations.................................................20, 46
Authorized Officer..........................................................115
Authorized Representative...................................................115
Available Auction Rate Notes.............................................20, 34
Beneficial Owner.............................................................52
Bid..................................................................... 20, 31
Bid Auction Rate.............................................................20
Bid/Hold Orders..............................................................25
Bidder.................................................................. 20, 31
Board or Board of Directors.................................................115
Bond-Equivalent Yield........................................................46
Book-entry Form..............................................................21
Broker-Dealer .............................................................. 21
Broker-Dealer Agreement......................................................21
Business Day ......................................................... 46, 115
Buyer's Broker-Dealer........................................................43
110
<PAGE>
Calculation Agent............................................................46
Carry-over Amount............................................................21
Cede...................................................................... xiii
Certificate of Insurance....................................................115
Class A Notes.............................................................. 115
Class B Notes........................................................ viii, 115
Class C Notes.............................................................. 115
Closing Date ................................................................21
Code...................................................................102, 115
Commercial Paper Dealer......................................................21
Commission................................................................. 116
Company Derivative Payment..................................................116
Contract of Insurance.......................................................116
Custodian Agreement.........................................................116
Cutoff Date ................................................................116
Date of Issuance....................................................... ....116
Deferral Phase ..............................................................xi
Department .............................................................. xi
Depository .............................................................. 46
Derivative Payment Date.....................................................116
Derivative Product..........................................................116
Derivative Value............................................................116
Disqualified Persons........................................................106
DOL ........................................................................106
DTC .......................................................................xiii
Dutch Auction.............................................................. 25
Eligible Borrower...........................................................116
Eligible Carry-over Make-Up Amount...........................................22
Eligible Lender.............................................................117
Eligible Loan 117
Eligible Loan Acquisition Certificate.......................................117
ERISA .....................................................................106
ERISA Plans ............................................................... 106
Event of Bankruptcy.........................................................117
Event of Default............................................................117
Events of Default............................................................61
Existing Owner ..............................................................22
Existing Owner Registry......................................................22
Federal Reimbursement Contracts.............................................117
Financed Eligible Loans......................................................xi
Financed or Financing.......................................................117
Fiscal Year ............................................................... 117
Fitch .................................................................... 117
Funds ..................................................................... 118
Guarantee Agencies............................................................i
Guarantee Agreements........................................................118
Guarantee or Guaranteed.....................................................118
Guaranty Agency.............................................................118
111
<PAGE>
Highest Priority Obligations................................................118
Hold Order ..............................................................22, 31
Holder ......................................................................46
Indenture ................................................................. 118
Index Rates...................................................................7
Indirect Participants........................................................52
Initial Auction Agent........................................................22
Initial Auction Agent Agreement..............................................22
Initial Interest Payment Date................................................47
Initial Interest Period......................................................47
Initial Period.............................................................. 22
Initial Period Interest......................................................47
Initial Rate ..............................................................22
Initial Rate Adjustment Date.................................................22
Insolvency Laws...........................................................3, 76
Insolvency Proceeding.........................................................3
Insurance or Insured or Insuring............................................118
Interest Amount..............................................................47
Interest Benefit Payment....................................................118
Interest Payment Date.........................................8, 9, 22, 47, 118
Interest Period.......................................................9, 22, 47
Interest Rate Adjustment Date................................................22
Interest Rate Determination Date.............................................23
Investment Agreement........................................................118
Investment Securities.......................................................118
IRAs ......................................................................106
ISDA Master Agreement.......................................................120
Issuer's Counsel............................................................120
Junior-Subordinate Notes....................................................120
Junior-Subordinate Obligations..............................................121
L/C Bank ................................................................. ..74
LIBOR Determination Date.....................................................47
LIBOR Rate Notes.............................................................ix
LIBOR-Based Rate.............................................................47
Loan Rates ................................................................ 7
Market Agent .............................................................. 23
Maturity ............................................................. 121
Maximum Auction Rate..........................................................8
Maximum Interest Rate........................................................47
National Direct Student Loan.................................................88
Ninety-One Day United States Treasury Bill Rate..............................23
Non-Payment Rate.............................................................23
Note Counsel ..............................................................121
Note Payment Date...........................................................121
Notes ............................................................. 121
Obligations ..............................................................121
One-Month LIBOR..........................................................23, 47
One-Year LIBOR.......................................................... 23, 47
112
<PAGE>
Order....................................................................24, 31
Outstanding ............................................................. 121
Participant .......................................................... 48, 121
Participants .............................................................. 52
Parties in Interest.........................................................106
Payment Default..........................................................24, 48
Person .......................................................... 48, 121
Plan ............................................................. 106
Plans .............................................................. 106
Potential Bid Orders.........................................................26
Potential Owner..............................................................24
Principal Office............................................................121
Program ............................................................. 121
Program Expenses............................................................121
PTCE .............................................................. 107
Qualified Retirement Plans..................................................106
Rating ............................................................... 122
Rating Agency.............................................................. 122
Rating Confirmation.........................................................122
Reciprocal Payments.........................................................122
Reciprocal Payor............................................................122
Record Date ...................................................... 8, 48, 122
Recoveries of Principal.....................................................122
Redemption Date..............................................................48
Registered Owner............................................................122
Registered Owners.............................................................7
Regular Record Date..........................................................24
Regulations .............................................................. 106
Repayment Phase..............................................................xi
Reserve Fund Requirement....................................................122
Reuters Screen LIBOR Page....................................................24
Revenue or Revenues.........................................................122
S&P ................................................................ 24, 123
Secretary .............................................................. 123
Securities Depository...................................................46, 123
Securities Exchange Act......................................................48
Sell Order .......................................................... 24, 31
Sell Orders .............................................................. 26
Seller ............................................................. 123
Seller's Broker-Dealer.......................................................43
Senior Notes .......................................................... 8, 123
Senior Obligations..........................................................123
Service ............................................................. 102
Servicer ............................................................. 123
Servicing Agreement.........................................................123
Six-Month LIBOR..........................................................23, 47
Special Allowance Payments..................................................123
Special Record Date.....................................................10, 123
113
<PAGE>
State.......................................................................123
Stated Maturity.............................................................123
Student Loan Purchase Agreement.............................................123
Subaccount ............................................................. 124
Submission Deadline..........................................................25
Submitted Bid ..........................................................25, 34
Submitted Bids ..............................................................34
Submitted Hold Order.....................................................25, 34
Submitted Hold Orders........................................................34
Submitted Order..............................................................34
Submitted Orders.........................................................25, 34
Submitted Sell Order.....................................................25, 34
Submitted Sell Orders........................................................34
Subordinate Notes........................................................8, 124
Subordinate Obligations.....................................................124
Subservicing Agreement......................................................124
Substitute Auction Agent.....................................................25
Substitute Auction Agent Agreement...........................................25
Sufficient Bids..........................................................25, 34
Supplemental Indenture......................................................124
Tax-Favored Plans...........................................................106
Three-Month LIBOR........................................................23, 47
Transfer Date .............................................................124
Transfer Taxes ..............................................................82
Treasury Bill Rate..........................................................124
UFS ......................................................... 76, 107
UNIPAC ........................................................... .. 79
Value ............................................................. 124
Variable Rate.............................................................. 25
114
<PAGE>
Glossary of Terms
There follows definitions of certain capitalized terms used in this
Prospectus. 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 account created and established within any Fund
by the Indenture.
"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 promulgated from time to time
thereunder.
"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 Company 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 Officer" shall mean, when used with reference to the
Company, its Chairman, President, Vice President or Secretary, or any other
officer or board member authorized in writing by the Board to act on behalf of
the Company.
"Authorized Representative" shall mean, when used with reference to the
Company, (a) an Authorized Officer or (b) any affiliate organization or other
entity authorized by the Board to act on the Company's behalf.
"Board" or "Board of Directors" shall mean the Board of Directors of the
Company.
"Business Day" shall mean the definition of Business Day found in the
Supplemental Indenture authorizing a series of Notes.
"Certificate of Insurance" shall mean any certificate evidencing a
Financed Eligible Loan is Insured pursuant to a Contract of Insurance.
"Class A Notes" shall mean the Company's Student Loan Asset-Backed Notes
issued pursuant to the Indenture and designated as Class A.
"Class B Notes" shall mean the Company's Student Loan Asset-Backed Notes
issued pursuant to the Indenture and designated as Class B.
"Class C Notes" shall mean the Company's Student Loan Asset-Backed Notes
issued pursuant to the Indenture and designated as Class C.
115
<PAGE>
"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.
"Commission" shall mean the Securities and Exchange Commission.
"Company Derivative Payment" shall mean a payment required to be made by
or on behalf of the Company due to a Reciprocal Payor pursuant to a Derivative
Product.
"Contract of Insurance" shall mean the contract of insurance between the
Eligible Lender and the Secretary.
"Custodian Agreement" shall mean, collectively, the custodian agreements
with any Servicer or other custodian or bailee 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 the date of original issuance and delivery
of any Notes to an underwriter or placement agent.
"Derivative Payment Date" shall mean, with respect to a Derivative
Product, any date specified in the Derivative Product on which both or either of
the Company Derivative Payment and/or a Reciprocal Payment is due and payable
under the Derivative Product.
"Derivative Product" shall mean a written contract or agreement between
the Company and a Reciprocal Payor, which provides that the Company's
obligations thereunder will be conditioned on the absence of (i) a failure by
the Reciprocal Payor to make any payment required thereunder when due and
payable, or (ii) a default thereunder with respect to the financial status of
the Reciprocal Payor, and:
(a) under which the Company is obligated to pay (whether on a net
payment basis or otherwise) on one or more scheduled and specified
Derivative Payment Dates, the Company Derivative Payments in exchange
for the Reciprocal Payor' s obligation to pay (whether on a net payment
basis or otherwise), or to cause to be paid, to the Company, Reciprocal
Payments on one or more scheduled and specified Derivative Payment Dates
in the amounts set forth in the Derivative Product;
(b) for which the Company's obligation to make Company Derivative
Payments may be secured by a pledge of and lien on the trust estate on
an equal and ratable basis with any class of the Company's Outstanding
Notes and which Company Derivative Payments may be equal in priority
with any priority classification of the Company's Outstanding Notes; and
(c) under which Reciprocal Payments are to be made directly to
the Trustee for deposit into the Revenue Fund.
116
<PAGE>
"Derivative Value" shall mean the value of the Derivative Product, if
any, to the Reciprocal Payor, provided that such value is defined and calculated
in substantially the same manner as amounts are defined and calculated pursuant
to the applicable provisions of an ISDA Master Agreement.
"Eligible Borrower" shall mean a borrower who is eligible under the
Higher Education Act to be the obligor of a loan for financing a program of
education at an Eligible Institution or for consolidating two or more such
loans, including without limitation a borrower who is eligible under the Higher
Education Act to be an obligor of a loan made pursuant to Section 428A, 428B or
428C of the Act.
"Eligible Lender" shall mean any "eligible lender," as defined in the
Act, and which has received an eligible lender designation from the Secretary
with respect to Eligible Loans made under the Act.
"Eligible Loan" shall mean any loan made to finance post-secondary
education that is (a) made under the Act; (b)insured by the Secretary of Health
and Human Services pursuant to the Public Health Services Act; or (c) otherwise
permitted to be acquired by the Company pursuant to its Program (provided a
Rating Confirmation is received with respect thereto).
"Eligible Loan Acquisition Certificate" shall mean a certificate signed
by an Authorized Representative of the Company.
"Event of Bankruptcy" shall mean (a) the Company 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
Company seeking liquidation, reorganization, or other relief with respect to it
or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian, or other similar official of it or any substantial part
of its property provided such action or proceeding is not dismissed within 60
days.
"Event of Default" shall have the meaning specified in the Indenture.
"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 student 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,
shall mean or refer to Eligible Loans (a) acquired by the Company with balances
in the Acquisition Fund or otherwise deposited in or accounted for in the
Acquisition Fund or otherwise constituting a part of the trust estate and (b)
Eligible Loans substituted or exchanged for Financed Eligible Loans, but does
not include Eligible Loans released from the lien of the Indenture and sold or
transferred, to the extent permitted by the Indenture.
117
<PAGE>
"Fiscal Year" shall mean the fiscal year of the Company as established
from time to time.
"Fitch" shall mean Fitch IBCA, Inc., a corporation organized and
existing under the laws of the-State of Delaware, its successors and assigns.
"Funds" shall mean the funds created under Section 5.01 of the Indenture
and held by the Trustee, including the Acquisition Fund, the Revenue Fund and
the Reserve Fund.
"Guarantee" or "Guaranteed" shall mean, with respect to an Eligible
Loan, the insurance or guarantee by the Guaranty Agency pursuant to such
Guaranty Agency's Guarantee Agreement of the maximum percentage of the principal
of and accrued interest on such Eligible Loan allowed by the terms of the Act
with respect to such Eligible Loan at the time it was originated and the
coverage of such Eligible Loan by the federal reimbursement contracts,
providing, among other things, for reimbursement to the Guaranty Agency for
payments made by it on defaulted Eligible Loans insured or guaranteed by the
Guaranty Agency of at least the minimum reimbursement allowed by the Act with
respect to a particular Eligible Loan.
"Guarantee Agreements" shall mean a guaranty or lender agreement between
the Trustee and any Guaranty Agency, and any amendments thereto.
"Guaranty Agency" shall mean any entity authorized to guarantee student
loans under the Act and with which the Trustee maintains a Guarantee Agreement.
"Highest Priority Obligations" shall mean, (a) at any time when Senior
Obligations are Outstanding, the Senior Obligations, (b) at any time when no
Senior Obligations are Outstanding, the Subordinate Obligations, and (c) at any
time when no Senior Obligations or Subordinate Obligations are Outstanding, the
Junior-Subordinate Obligations (and any priorities as between Junior-Subordinate
Obligations as shall be established by Supplemental Indentures).
"Indenture" shall mean the Indenture of Trust dated as of ________ _,
____, including all supplements and amendments thereto.
"Insurance" or "Insured" or "Insuring" means, with respect to an
Eligible Loan, the insuring by the Secretary (as evidenced by a Certificate of
Insurance or other document or certification issued under the provisions of the
Act) under the Act of 100% of the principal of and accrued interest on such
Eligible Loan.
"Interest Benefit Payment" shall mean an interest payment on Eligible
Loans received pursuant to the Act and an agreement with the federal government,
or any similar payments.
"Interest Payment Date" shall mean the Interest Payment Dates specified
for Notes in the Supplemental Indenture authorizing the issuance of such Notes.
"Investment Agreement" shall mean any investment agreement approved by
the Rating Agencies.
"Investment Securities" shall mean:
118
<PAGE>
(a) direct obligations of, or obligations on which the timely
payment of the -principal of and interest on which are unconditionally
and fully guaranteed by, the United States of America;
(b) interest-bearing time or demand deposits, certificates of
deposit or other similar banking arrangements with a maturity of 12
months or less with any bank, trust company, national banking
association or other depository institution, including those of the
Trustee, provided that, at the time of deposit or purchase such
depository institution has commercial paper which is rated "A-1+" by S&P
and "F-1+" by Fitch;
(c) interest-bearing time or demand deposits, certificates of
deposit or other similar banking arrangements with a maturity of 24
months or less, but more than 12 months, with any bank, trust company,
national banking association or other depository institution, including
those of the Trustee and any of its affiliates, provided that, at the
time of deposit or purchase such depository institution has senior debt
rated "A" or higher by S&P and "A" or higher, and, if commercial paper
is outstanding, commercial paper which is rated "A-1+" by S&P and "F-1+"
by Fitch;
(d) interest-bearing time or demand deposits, certificates of
deposit or other similar banking arrangements with a maturity of more
than 24 months with any bank, trust company, national banking
association or other depository institution, including those of the
Trustee and any of its affiliates, provided that, at the time of deposit
or purchase such depository institution has senior debt rated "AA" or
higher by S&P and "AA" or higher by Fitch and, if commercial paper is
outstanding, commercial paper which is rated "A-1+" by S&P and "F-1+" by
Fitch;
(e) bonds, debentures, notes or other evidences of indebtedness
issued or guaranteed by any of the following agencies: Federal Farm
Credit Banks, Federal Home Loan Mortgage Corporation; the Export-Import
Bank of the United States; the Federal National Mortgage Association;
the Student Loan Marketing Association; the Farmers Home Administration;
Federal Home Loan Banks provided such obligation is rated "AAA" by S&P
and "AAA" by Fitch; or any agency or instrumentality of the United
States of America which shall be established for the purposes of
acquiring the obligations of any of the foregoing or otherwise providing
financing therefor;
(f) repurchase agreements and reverse repurchase agreements,
other than overnight repurchase agreements and overnight reverse
repurchase agreements, with banks, including the Trustee and any of its
affiliates, which are members of the Federal Deposit Insurance
Corporation or firms which are members of the Securities Investors
Protection Corporation, in each case whose outstanding, unsecured debt
securities are rated no lower than two subcategories below the highest
rating on any series of Outstanding Notes by S&P and Fitch and, if
commercial paper is outstanding, commercial paper which is rated "A-1+"
by S&P and "F-1+" by Fitch;
(g) overnight repurchase agreements and overnight reverse
repurchase agreements at least 101% collateralized by securities
described in subparagraph (a) of this definition and with a
counterparty, including the Trustee and any of its affiliates, that has
senior debt rated "A" or higher by S&P and "A" or higher by Fitch and,
if commercial paper is outstanding, commercial paper which is rated
"A-1+" by S&P and "F-1+" by Fitch or a counterparty approved in writing
by S&P and Fitch, respectively;
119
<PAGE>
(h) investment agreements or guaranteed investment contracts,
which may be entered into by and among the Company and/or the Trustee
and any bank, bank holding company, corporation or any other financial
institution, including the Trustee and any of its affiliates, whose
outstanding (i) commercial paper is rated "A-1+" by S&P and "F-1+" by
Fitch for agreements or contracts with a maturity of 12 months or less;
(ii) unsecured long-term debt is rated no lower than two subcategories
below the highest rating on any series of Outstanding Notes by S&P and
Fitch and, if commercial paper is outstanding, commercial paper which is
rated "A-1+" by S&P and "F-1+" by Fitch for agreements or contracts with
a maturity of 24 months or less, but more than 12 months, or (iii)
unsecured long-term debt which is rated no lower than two subcategories
below the highest rating on any series of Outstanding Notes by S&P and
Fitch and, if commercial paper is outstanding, commercial paper which is
rated "A-1+" by S&P and "F-1+" by Fitch for agreements or contracts with
a maturity of more than 24 months, or, in each case, by an insurance
company whose claims-paying ability is so rated;
(i) collateralized investment agreements or collateralized
guaranteed investment agreements, which may be entered into by and among
the Company, the Trustee and any bank, bank holding company, corporation
or any other financial institution, including the Trustee and any of its
affiliates, so long as (i) the collateral consists of securities of the
types specified in (a) or (e) above, at the levels shown below under (v)
below; (ii) the Trustee has possession of the collateral; (iii) the
Trustee has a perfected first priority security interest in the
collateral; (iv) the collateral is free and clear of third party liens
and, in the case of a SIPC broker, was not acquired pursuant to a
repurchase agreement or reverse repurchase agreement; and (v) the
collateral shall be valued (based upon current market price plus accrued
interest) weekly and shall be equal to not less than 103% of the amount
of the deposit (or 105% in the case where the collateral consists of
obligations of the Federal National Mortgage Association or the Federal
Home Loan Mortgage Issuer);
(j) "tax exempt bonds" as defined in Section 1 50(a)(6) of the
Code, other than "specified private activity bonds" as defined in
Section 57(a)(5)(C) of the Code, that are rated in the highest category
by S&P and Fitch for long-term or short-term debt or shares of a
so-called money market or mutual fund rated "AA/A1" or higher by S&P and
"AA/F1+" or higher by Fitch, that do not constitute "investment
property" within the meaning of Section 148(b)(2) of the Code, provided
that the fund has all of its assets invested in obligations of such
rating quality;
(k) commercial paper, including that of the Trustee and any of
its affiliates, which is rated in the single highest classification,
"A+" by S&P and "F-1+" by Fitch, and which matures not more than 270
days alter the date of purchase;
(l) investments in a money market fund rated at least "AA" or "A"
by S&P and "AA" or "F-1+" by Fitch, including funds for which the
Trustee or an affiliate thereof acts as investment advisor or provides
other similar services for a fee;
(m) any Investment Agreement; and
(n) any other investment with a Rating Confirmation from each
Rating Agency.
120
<PAGE>
"ISDA Master Agreement" shall mean the ISDA Interest Rate and Currency
Exchange Agreement, copyright 1992, as amended from time to time, and as in
effect with respect to any Derivative Product.
"Issuer's Counsel" shall mean Ballard Spahr Andrews & Ingersoll, LLP,
Denver, Colorado.
"Junior-Subordinate Notes" shall mean Notes, the principal of and
interest on which is payable on a subordinated basis to the payment of the
principal of and interest on the Senior Notes and the Subordinate Notes;
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.
"Junior-Subordinate Obligations" shall mean Junior-Subordinate Notes and
any Derivative Product, the priority of payment of which is equal with that of
any series or subseries of Junior-Subordinate Notes.
"Maturity" when used with respect to any Note, shall mean the date on
which the principal thereof becomes due and payable as therein or herein
provided, whether at its Stated Maturity, by earlier redemption, by declaration
of acceleration, or otherwise.
"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
Company and reasonably acceptable to the Trustee.
"Note Payment Date" shall mean, for any Note, any Interest Payment Date,
its Stated Maturity or the date of any other regularly scheduled principal
payment with respect thereto.
"Notes" shall mean the Company's Notes or other obligations issued under
the Indenture.
"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.
"Obligations" shall mean Senior Obligations, Subordinate Obligations and
Junior-Subordinate
Obligations.
"Participant" means a member of, or participant in, the Depository.
"Person" shall mean an individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated organization,
or government or agency or political subdivision thereof.
"Principal Office" shall mean the principal corporate trust office of
the Trustee.
"Program" shall mean the Company's program for the origination and the
purchase of Eligible Loans, as the same may be modified from time to time.
121
<PAGE>
"Program Expenses" shall mean (a) the fees and expenses of the Trustee;
(b) the fees and expenses of any auction agent, any market agent, any
calculation agent and any broker-dealer then acting under a Supplemental
Indenture with respect to auction rate Notes; (c) the fees and expenses of any
remarketing agent then acting under a Supplemental Indenture with respect to
variable rate Notes; (d) the fees and expenses due to any credit provider of any
Notes for which a credit facility or liquidity facility is in place; (e) the
fees of any servicer and/or custodian under any servicing agreement or custodian
agreement; (f) the fees and expenses of the Company incurred in connection with
the preparation of legal opinions and other authorized reports or statements
attributable to the Notes and the Financed Eligible Loans; (g) transfer fees,
purchase premiums and loan origination fees on Financed Eligible Loans; (h) fees
and expenses associated with the delivery of a substitute credit facility or
liquidity facility under a Supplemental Indenture; (i) fees and expenses
associated with (but not payments under) Derivative Products; (j) the costs of
remarketing any variable rate Notes and (k) expenses incurred for the Company's
maintenance and operation of its Program as a direct consequence of the
Indenture, the Notes or the Financed Eligible Loans; including, but not limited
to, taxes, the reasonable fees and expenses of attorneys, agents, financial
advisors, consultants, accountants and other professionals, attributable to such
maintenance and operation, marketing expenses for the Program and a prorated
portion of the rent, personnel compensation, office supplies and equipment,
travel expenses and other lawful payments made to members of the Board.
"Rating" shall mean one of the rating categories of S&P and Fitch or any
other Rating Agency, provided S&P and Fitch or any other Rating Agency, as the
case may be, is currently rating the Notes.
"Rating Agency" shall mean, collectively, S&P and Fitch and their
successors and assigns or any other Rating Agency requested by the Company to
maintain a Rating on any of the Notes.
"Rating Confirmation" means a letter form each Rating Agency then
providing a Rating for any of the Notes, confirming that the action proposed to
be taken by the Company will not, in and of itself, result in a downgrade of any
of the Ratings then applicable to the Notes, or cause any Rating Agency to
suspend or withdraw the Ratings then applicable to the Note.
"Reciprocal Payments" shall mean any payment to be made to, or for the
benefit of, the Company under a Derivative Product.
"Reciprocal Payor" shall mean a third party which, at the time of
entering into a Derivative Product, has at least an "AA/A-1" rating, or its
equivalent, from a Rating Agency, and which is obligated to make Reciprocal
Payments under a Derivative Product.
"Record Date" shall mean the Record Date established for any Notes
pursuant to the Supplemental Indenture authorizing the issuance of such Notes.
"Recoveries of Principal" shall mean all amounts received by the Trustee
from or on account of any Financed Eligible Loan as a recovery of the principal
amount thereof, including scheduled, delinquent and advance payments, payouts or
prepayments, proceeds from insurance or from the sale, assignment, transfer,
reallocation or other disposition of a Financed Eligible Loan and any payments
representing such principal from the guarantee or insurance of any Financed
Eligible Loan.
"Registered Owner" shall mean the Person in whose name a Note is
registered on the Note registration books maintained by the Trustee, and shall
also mean with respect to a Derivative Product, any Reciprocal Payor, unless the
context otherwise requires.
122
<PAGE>
"Reserve Fund Requirement" shall mean an amount, if any, required to be
on deposit in the Reserve Fund with respect to any Notes issued pursuant to the
Supplemental Indenture authorizing the issuance of such Notes.
"Revenue" or "Revenues" shall mean all Recoveries of Principal,
payments, proceeds, charges and other income received by the Trustee or the
Company from or on account of any Financed Eligible Loan (including scheduled,
delinquent and advance payments of and any insurance proceeds with respect to,
interest, including Interest Benefit Payments, on any Financed Eligible Loan and
any Special Allowance Payment received by the Company with respect to any
Financed Eligible Loan) and all interest earned or gain realized from the
investment of amounts in any Fund or Account and all payments received by the
Company pursuant to a Derivative Product.
"S&P" shall mean Standard & Poor's Ratings Group, a Division of The
McGraw-Hill Companies, Inc., its successors and assigns.
"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 Depository" or "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 Company
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.
"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.
"Senior Notes" shall mean all Notes secured on a senior priority to the
Subordinate Obligations and the Junior-Subordinate Obligations.
"Senior Obligations" shall mean Senior Notes and any Derivative Product,
the priority of payment of which is equal with that of Senior Notes.
"Servicer" shall mean, collectively, Union Bank and Trust Company,
UNIPAC Service Corporation, InTuition, Inc., USA Group Loan Services, Inc., AFSA
Data Corporation, Pennsylvania Higher Education Association and any other
additional Servicer or successor Servicer selected by the Company, including an
affiliate of the Company, so long as the Company obtains a Rating Confirmation
as to each such other Servicer.
"Servicing Agreement" shall mean the servicing agreements with any
Servicer relating to Financed Eligible Loans, as amended from time to time.
123
<PAGE>
"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, if any, authorized from time to time by federal law or regulation.
"Special Record Date" shall have the meaning set forth in a Supplemental
Indenture.
"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.
"Student Loan Purchase Agreement" shall mean a loan purchase agreement
entered into for the purchase of Eligible Loans into the trust estate.
"Subaccount" shall mean any of the subaccounts which may be created and
established within any Account by the Indenture.
"Subordinate Notes" shall mean any Notes secured on a priority
subordinate to the Senior Obligations and on a priority senior to the
Junior-Subordinate Obligations.
"Subordinate Notes" shall mean the Class B Notes.
"Subordinate Obligations" shall mean Subordinate Notes and any
Derivative Product, the priority of payment of which is equal with that of
Subordinate Notes.
"Subservicing Agreement" shall mean the Servicing Agreement, dated as of
January 1, 1995, as amended by the First Amendment to Servicing Agreement dated
as of March 1, 1996 and the Second Amendment to Servicing Agreement dated as of
June 19, 1996, each between the Servicer and the subservicer and any other
subservicing agreement with any other subservicer relating to Financed Eligible
Loans.
"Supplemental Indenture" shall mean an agreement supplemental to the
Indenture executed pursuant to the Indenture.
"Transfer Date" shall mean each January 1 and July 1, commencing _______
__, ____.
"Treasury Bill Rate" shall mean the Bond Equivalent Yield for auctions
of 91-day United States Treasury Bills on 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.
"Value" on any calculation date when required under this Indenture shall
mean the value of the trust estate calculated by the Company as to (a) below and
by the Trustee as to (b) through (e), inclusive, below, as follows:
(a) with respect to any Eligible Loan, the unpaid principal
amount thereof plus any accrued but unpaid interest, Interest Benefit
Payments and Special Allowance Payments;
124
<PAGE>
(b) with respect to any funds of the Company held under the
Indenture and 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 bid price of the shares as reported by the investment
company plus accrued but unpaid interest;
(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): the average of the bid and asked
prices for such investments so published on or most recently prior to
such time of determination; 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 Company 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.
125
<PAGE>
APPENDIX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Notes (the
"Global Securities") will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through any of The Depository
Trust Company, Cedel Bank or Euroclear. The Global Securities will be tradeable
as home market instruments in both the European and U.S. domestic markets.
Initial settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel Bank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Asset-Backed Certificates issues.
Secondary, cross-market trading between Cedel Bank or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedel Bank and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf of
their participants through their respective Depositaries, which in turn will
hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior Asset-Backed Certificates
issues. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
1
<PAGE>
Investors electing to hold their Global Securities through Cedel Bank or
Euroclear accounts will follow the settlement procedures applicable to
conventional Eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Student
Loan Asset-Backed Securities issues in same-day funds.
Trading between Cedel Bank and/or Euroclear Participants. Secondary
market trading between Cedel Bank Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC Seller and Cedel Bank or Euroclear Purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Bank Participant or a Euroclear Participant, the
purchaser will send instructions to Cedel Bank or Euroclear through a Cedel Bank
Participant or Euroclear Participant at least one business day prior to
settlement. Cedel Bank or Euroclear will instruct the respective Depositary, as
the case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days, or a 360-day year of twelve 30-day months, as applicable. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will then
be made by the respective Depositary of the DTC Participant's account against
delivery of the Global Securities. After settlement has been completed, the
Global Securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the Cedel Bank
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York.) If
settlement is not completed on the intended value date (i.e., the trade fails),
the Cedel Bank, or Euroclear cash debt will be valued instead as of the actual
settlement date.
Cedel Bank Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel Bank or Euroclear. Under
this approach, they may take on credit exposure to Cedel Bank or Euroclear until
the Global Securities are credited to their accounts one day later.
2
<PAGE>
As an alternative, if Cedel Bank or Euroclear has extended a line of
credit to them, Cedel Bank Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedel Bank Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Cedel Bank Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Bank Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Cedel Bank or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Bank Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred the respective clearing system, through
the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel Bank or Euroclear through a Cedel Bank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedel Bank or Euroclear will instruct the Depositary, as appropriate, to
deliver the Global Securities to the DTC Participant's account against payment.
Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date on the
basis of the actual number of days in such accrual period and a year assumed to
consist of 360 days, or a 360-day year of twelve 30-day months, as applicable.
For transactions settling on the 31st of the month, payment will include
interest accrued to an excluding the first day of the following month. The
payment will then be reflected in the account of the Cedel Bank Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Bank Participant's or Euroclear Participant's account would be back-valued
to the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Bank Participant or Euroclear Participant have a
line of credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Bank Participant's or Euroclear Participant's
account would instead be valued as of the actual settlement date.
3
<PAGE>
Finally, day traders that use Cedel Bank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Bank Participants
or Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel Bank or Euroclear for one day (until
the purchase side of the day trade is reflected in their Cedel Bank or
Euroclear accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their Cedel
Bank or Euroclear accounts in order to settle the sale side of the
trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant
is at least one day prior to the value date for the sale to the Cedel
Bank Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through Cedel
Bank, or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate.
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
4
<PAGE>
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries. (Form 1001). Non-U.S. Persons that are Note Owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Note Owners or his
agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Note Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership, or other entity taxable as such,
organized in or under the laws of the United States or any political subdivision
thereof, (iii) an estate the income of which is includible in gross income for
United States tax purposes, regardless of its source or (iv) a trust other than
a "Foreign Trust," as defined in Section 7701(a)(31) of the Code. This summary
does not deal with all aspects of U.S. Federal income tax withholding that may
be relevant to foreign holders of the Global Securities. Investors are advised
to consult their own tax advisors for specific tax advice concerning their
holding and disposing of the Global Securities as well as the application of
recently issued Treasury regulations relating to tax documentation requirements
that are generally effective with respect to payments made after December 31,
1998.
5
<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....................... $______
*Accounting fees and expenses.............. _____
*Legal fees and expenses................... _____
*Printing costs............................ _____
*Blue Sky fees and expenses................ _____
*Trustee's fees............................ _____
*Rating Agency fees........................ _____
*Miscellaneous.............................
Total.............................. $_____
- --------------------
*Estimates based on the offering of a single Series of Offered Notes in the
aggregate principal amount of $_____ million.
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.
<PAGE>
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) 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. 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 Agreement
4.1 Form of Indenture of Trust by and between Registrant and Zions First
National Bank, a national banking association
* 5.1 Opinion of Kutak Rock as to the validity of the Notes
* 8.1 Opinion of Kutak Rock Regarding Tax Matters (included in Exhibit 5.1)
10.1 Administrative Services Agreement, dated as of August 1,
1996, by and between Union Financial Services, Inc. and
the Registrant was filed as an Exhibit to the Registrant's
Registration Statement on Form S-3 (File No. 333-28551)
and is hereby incorporated by reference.
<PAGE>
10.1.1 Amendment to Administrative Services Agreement dated as of
November 1, 1996, by and between the Registrant and Union
Financial Services, Inc., was filed as an Exhibit to the
Registrant's Registration on Form S-3 (File No. 333-28551)
and is hereby incorporated by reference.
10.2 Amended and Restated Servicing Agreement dated as of June
19, 1996, by and between the Registrant and Union Bank and
Trust Company was filed as an Exhibit to Registrant's
Registration Statement on Form S-3 (File No. 333-28551)
and is hereby incorporated by reference.
10.2.1 Second Amended and Restated Servicing Agreement dated as
of December 18, 1998 by and between the Registrant and
Union Bank and Trust Company was filed as an Exhibit to
the Registrant's current report on Form 8-K on January 6,
1999, as is hereby incorporated by reference.
* 12.1 Statement of Computation of Ratio of Earnings to Fixed Charges
* 23.1 Consent of Kutak Rock (included in Exhibit 5.1 hereto)
* 23.2 Consent of Ballard Spahr Andrews & Ingersoll, LLP
24.1 Power of Attorney (included on page II-6 of the Registration Statement)
* 24.2 Consent of KPMG Peat Marwick LLP, Independent Auditors
* 25.1 Statement of Eligibility of Zions First National Bank, Trustee on Form
T-1
* To be filed by Pre-Effective 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;
<PAGE>
(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) 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
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:
<PAGE>
(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.
<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 Phoenix, State of Arizona, on April 5, 1999.
UNION FINANCIAL SERVICES-1, INC.,
a Nevada corporation
By /s/ Stephen F. Butterfield
---------------------------------
Stephen F. Butterfield, President
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below 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 April 5, 1999
- ----------------------
Michael S. Dunlap (Principal Executive Officer)
/s/ Stephen F. Butterfield President and Director April 5, 1999
- --------------------------
Stephen F. Butterfield
/s/ Ronald W. Page Vice-President, Secretary, April 5, 1999
- ------------------
Ronald W. Page Treasurer and Director
(Principal Financial and
Accounting Officer)
Director April 5, 1999
- -----------------
Ross Wilcox
________________ Director April 5, 1999
Dr. Paul Hoff
INDENTURE OF TRUST
by and between
UNION FINANCIAL SERVICES-1, INC.
and
ZIONS FIRST NATIONAL BANK
as Trustee
Dated as of _________ 1, 1999
<PAGE>
UNION FINANCIAL SERVICES-1, INC.
Reconciliation and tie between Trust Indenture Act of 1939 and Indenture
of Trust dated as of ________ 1, 1999.
Trust Indenture Act Section Indenture Section
Section 310(a)(1) 7.23
(a)(2) 7.23
(b) 7.23,7.09
Section 312(c) 9.16
Section 314(a) 4.16
(a)(4) 4.17
Section 315(b) 8.04
Section 317(a)(1) 4.18
(a)(2) 7.24
Section 318(a) 9.09
(c) 9.09
- --------------------
NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Indenture.
Attention should also be directed to Section 318(c) of the 1939 Act, which
provides that the provisions of Sections 310 to and including 317 of the 1939
Act are a part of and govern every qualified indenture, whether or not
physically contained therein.
<PAGE>
TABLE OF CONTENTS
(This Table of Contents is for convenience of reference only and is not
intended to define, limit or describe the purpose or intent of any provisions of
this Indenture of Trust.)
Page
Article I
DEFINITIONS AND USE OF PHRASES............................................... 3
Article II
NOTE DETAILS, FORM OF NOTES, REDEMPTION OF NOTES AND USE OF PROCEEDS OF NOTES
Section 2.01. Note Details...................................................14
Section 2.02. Execution of Notes.............................................14
Section 2.03. Registration, Transfer and Exchange of Notes;
Persons Treated as Registered Owners...........................14
Section 2.04. Lost, Stolen, Destroyed and Mutilated Notes....................15
Section 2.05. Trustee's Authentication Certificate...........................15
Section 2.06. Cancellation and Destruction of Notes by the Trustee...........15
Section 2.07. Temporary Notes................................................16
Section 2.08. Issuance of Notes..............................................16
Article III
PARITY AND PRIORITY OF LIEN; OTHER OBLIGATIONS; AND DERIVATIVE PRODUCTS
Section 3.01. Parity and Priority of Lien....................................17
Section 3.02. Other Obligations..............................................17
Section 3.03. Derivative Products; Reciprocal Payments;
Issuer Derivative Payments.....................................18
Article IV
PROVISIONS APPLICABLE TO THE NOTES; DUTIES OF THE ISSUER
Section 4.01. Payment of Principal, Interest and Premium.....................19
Section 4.02. Representations and Warranties of the Issuer...................19
Section 4.03. Covenants as to Additional Conveyances.........................19
Section 4.04. Further Covenants of the Issuer................................20
i
<PAGE>
Section 4.05. Enforcement of Servicing Agreements............................21
Section 4.06. Procedures for Transfer of Funds...............................22
Section 4.07. Additional Covenants with Respect to the Act...................22
Section 4.08. Financed Eligible Loans; Collections Thereof;
Assignment Thereof.............................................23
Section 4.09. Appointment of Agents, Etc.....................................23
Section 4.10. Capacity to Sue................................................23
Section 4.11. Continued Existence; Successor to Issuer.......................23
Section 4.12. Amendment of Student Loan Purchase Agreements..................23
Section 4.13. Representations; Negative Covenants............................24
Section 4.14. Additional Covenants...........................................29
Section 4.15. Providing of Notice............................................30
Section 4.16. Reports by Issuer..............................................31
Section 4.17. Statement as to Compliance.....................................31
Section 4.18. Collection of Indebtedness and Suits for
Enforcement by Trustee.........................................31
Article V
FUNDS
Section 5.01. Creation and Continuation of Funds and Accounts................32
Section 5.02. Acquisition Fund...............................................32
Section 5.03. Revenue Fund...................................................34
Section 5.04. Reserve Fund...................................................35
Section 5.05. Operating Fund.................................................36
Section 5.06. Transfers to Issuer............................................37
Section 5.07. Investment of Funds Held by Trustee............................37
Section 5.08. Release........................................................38
Section 5.09. Purchase of Notes..............................................38
Article VI
DEFAULTS AND REMEDIES
Section 6.01. Events of Default Defined......................................38
Section 6.02. Remedy on Default; Possession of Trust Estate..................39
Section 6.03. Remedies on Default; Advice of Counsel.........................40
Section 6.04. Remedies on Default; Sale of Trust Estate......................40
Section 6.05. Appointment of Receiver........................................41
Section 6.06. Restoration of Position........................................41
Section 6.07. Purchase of Properties by Trustee or Registered Owners.........41
Section 6.08. Application of Sale Proceeds...................................42
Section 6.09. Accelerated Maturity...........................................42
Section 6.10. Remedies not Exclusive.........................................42
Section 6.11. Direction of Trustee...........................................42
Section 6.12. Right to Enforce in Trustee....................................43
Section 6.13. Physical Possession of Obligations not Required................43
Section 6.14. Waivers of Events of Default...................................43
ii
<PAGE>
Article VII
THE TRUSTEE
Section 7.01. Acceptance of Trust............................................44
Section 7.02. Recitals of Others.............................................44
Section 7.03. As to Filing of Indenture......................................44
Section 7.04. Trustee May Act Through Agents.................................45
Section 7.05. Indemnification of Trustee.....................................45
Section 7.06. Trustee's Right to Reliance....................................46
Section 7.07. Compensation of Trustee........................................47
Section 7.08. Trustee May Own Notes..........................................47
Section 7.09. Resignation of Trustee.........................................47
Section 7.10. Removal of Trustee.............................................47
Section 7.11. Successor Trustee..............................................48
Section 7.12. Manner of Vesting Title in Trustee.............................48
Section 7.13. Additional Covenants by the Trustee to Conform to the Act......49
Section 7.14. Right of Inspection............................................49
Section 7.15. Limitation with Respect to Examination of Reports..............49
Section 7.16. Servicing Agreement............................................49
Section 7.17. Additional Covenants of Trustee................................49
Section 7.18. Duty of Trustee with Respect to Rating Agencies................50
Section 7.19. Merger of the Trustee..........................................50
Section 7.20. Receipt of Funds from Servicer.................................50
Section 7.21. Special Circumstances Leading to Resignation of Trustee........50
Section 7.22. Survival of Trustee's Rights to Receive Compensation,
Reimbursement and Indemnification..............................51
Section 7.23. Corporate Trustee Required; Eligibility; Conflicting Interests.51
Section 7.24. Trustee May File Proofs of Claim...............................51
Article VIII
SUPPLEMENTAL INDENTURES
Section 8.01. Supplemental Indentures Not Requiring
Consent of Registered Owners...................................52
Section 8.02. Supplemental Indentures Requiring Consent
of Registered Owners...........................................53
Section 8.03. Additional Limitation on Modification of Indenture.............54
Section 8.04. Notice of Defaults.............................................54
Section 8.05. Conformity with the Trust Indenture Act........................55
iii
<PAGE>
Article IX
GENERAL PROVISIONS
Section 9.01. Notices........................................................55
Section 9.02. Covenants Bind Issuer..........................................56
Section 9.03. Lien Created...................................................56
Section 9.04. Severability of Lien...........................................56
Section 9.05. Consent of Registered Owners Binds Successors..................57
Section 9.06. Nonliability of Directors; No General Obligation...............57
Section 9.07. Nonpresentment of Notes or Interest Checks.....................57
Section 9.08. Security Agreement.............................................57
Section 9.09. Laws Governing.................................................57
Section 9.10. Severability...................................................57
Section 9.11. Exhibits.......................................................58
Section 9.12. Non-Business Days..............................................58
Section 9.13. Parties Interested Herein......................................58
Section 9.14. Obligations Are Limited Obligations............................58
Section 9.15. Reciprocal Payor Rights........................................58
Section 9.16. Disclosure of Names and Addresses of Registered Owners.........58
Section 9.17. Aggregate Principal Amount of Obligations......................58
Section 9.18. Financed Eligible Loans........................................58
Article X
PAYMENT AND CANCELLATION OF NOTES AND SATISFACTION OF INDENTURE
Section 10.01. Trust Irrevocable..............................................59
Section 10.02. Satisfaction of Indenture......................................59
Section 10.03. Cancellation of Paid Notes.....................................60
Article XI
TERMINATION
Section 11.01. Termination of the Trust.......................................61
Section 11.02. Notice.........................................................62
Article XII
REPORTING REQUIREMENTS
Section 12.01. Annual Statement as to Compliance..............................62
Section 12.02. Annual Independent Public Accountants' Servicing Report........62
Section 12.03. Servicer's Certificate.........................................63
Section 12.04. Statements to Registered Owners................................63
iv
<PAGE>
INDENTURE OF TRUST
THIS INDENTURE OF TRUST, dated as of _________ 1, 1999 (this
"Indenture"), is by and between UNION FINANCIAL SERVICES-1, INC. (the "Issuer"),
a corporation duly organized and existing under the laws of the State of Nevada
(the "State"), and ZIONS FIRST NATIONAL BANK, a national banking association
duly organized and operating under the laws of the United States of America
(together with its successors, the "Trustee"), as trustee hereunder (all
capitalized terms used in these preambles, recitals and granting clauses shall
have the same meanings assigned thereto in Article I hereof);
W I T N E S S E T H:
WHEREAS, the Issuer represents that it is duly created as a corporation
under the laws of the State and that by proper action of its governing body it
has duly authorized the execution and delivery of this Indenture, which
Indenture provides for the payment of student loan asset-backed notes (the
"Notes") and the payments to any Reciprocal Payor (as defined herein), all to be
issued pursuant to the terms of Supplemental Indentures; and
WHEREAS, this Indenture is subject to the provisions of the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act" or "TIA"), that are
deemed to be incorporated into this Indenture and shall, to the extent
applicable, be governed by such provisions; and
WHEREAS, the Trustee has agreed to accept the trusts herein created upon
the terms herein set forth; and
WHEREAS, it is hereby agreed between the parties hereto, the Registered
Owners of any Notes (the Registered Owners evidencing their consent by their
acceptance of the Notes) and any Reciprocal Payor (the Reciprocal Payor
evidencing its consent by its execution and delivery of a Derivative Product (as
defined herein)) that in the performance of any of the agreements of the Issuer
herein contained, any obligation it may thereby incur for the payment of money
shall not be general debt on its part, but shall be secured by and payable
solely from the Trust Estate, payable in such order of preference and priority
as provided herein;
NOW, THEREFORE, the Issuer, in consideration of the premises and
acceptance by the Trustee of the trusts herein created, of the purchase and
acceptance of the Notes by the Registered Owners thereof, of the execution and
delivery of any Derivative Product by a Reciprocal Payor and the Issuer and the
acknowledgement thereof by the Trustee, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
does hereby GRANT, CONVEY, PLEDGE, TRANSFER, ASSIGN AND DELIVER to the Trustee,
for the benefit of the Registered Owners of the Notes, any Reciprocal Payor (to
secure the payment of any and all amounts which may from time to time become due
and owing to a Reciprocal Payor pursuant to any Derivative Product), all of the
moneys, rights, and properties described in the granting clauses A through F
below (the "Trust Estate"), as follows:
1
<PAGE>
GRANTING CLAUSE A
The Revenues (other than Revenues deposited in the Operating Fund or
otherwise released from the lien of the Trust Estate as provided herein);
GRANTING CLAUSE B
All moneys and investments held in the Funds created under Section
5.01(a) hereof (other than the moneys and investments held in the Operating
Fund);
GRANTING CLAUSE C
The Financed Eligible Loans;
GRANTING CLAUSE D
The rights of the Issuer in and to the Servicing Agreements, the Student
Loan Purchase Agreements and the Guarantee Agreements as the same relate to
Financed Eligible Loans;
GRANTING CLAUSE E
The rights of the Issuer in and to any Derivative Product and any
Reciprocal Payor Guarantee; provided, however, that this Granting Clause E shall
not be for the benefit of a Reciprocal Payor with respect to its Derivative
Product; and
GRANTING CLAUSE F
Any and all other property, rights and interests of every kind or
description that from time to time hereafter is granted, conveyed, pledged,
transferred, assigned or delivered to the Trustee as additional security
hereunder.
TO HAVE AND TO HOLD the Trust Estate, whether now owned or held or
hereafter acquired, unto the Trustee and its successors or assigns,
IN TRUST NEVERTHELESS, upon the terms and trusts herein set forth for
the equal and proportionate benefit and security of all present and future
Registered Owners of the Notes, without preference of any Note over any other,
except as provided herein, and for enforcement of the payment of the Notes in
accordance with their terms, and all other sums payable hereunder (including
payments due and payable to any Reciprocal Payor) or on the Notes, and for the
performance of and compliance with the obligations, covenants, and conditions of
this Indenture, as if all the Notes and other Obligations (as defined herein) at
any time Outstanding had been executed and delivered simultaneously with the
execution and delivery of this Indenture;
PROVIDED, HOWEVER, that if the Issuer, its successors or assigns, shall
well and truly pay, or cause to be paid, the principal of the Notes and the
interest due and to become due thereon, or provide fully for payment thereof as
herein provided, at the times and in the manner mentioned in the Notes according
to the true intent and meaning thereof, and shall make all required payments
into the Funds as required under Article V hereof, or shall provide, as
2
<PAGE>
permitted hereby, for the payment thereof by depositing with the Trustee sums
sufficient to pay or to provide for payment of the entire amount due and to
become so due as herein provided (including payments due and payable to any
Reciprocal Payor), then this Indenture (other than Sections 4.13, 4.14 and 7.05
hereof) and the rights hereby granted shall cease, terminate and be void;
otherwise, this Indenture shall be and remain in full force and effect;
NOW, THEREFORE, it is mutually covenanted and agreed as follows:
Article I
DEFINITIONS AND USE OF PHRASES
The following terms have the following meanings unless the context
clearly requires otherwise:
"Account" shall mean any of the accounts created and established within
any Fund by this Indenture.
"Acquisition Fund" shall mean the Fund by that name created in Section
5.01(a)(i) hereof and further described in Section 5.02 hereof, including any
Accounts and Subaccounts created therein.
"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 promulgated from time to time
thereunder.
"Administrative Services Agreement" shall mean any administrative
services agreement entered into between the Issuer and an entity who will
provide administrative services for the Issuer, as supplemented and amended.
"Agent Member" shall mean a member of, or participant in, the Securities
Depository.
"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
but which has not yet been removed from the Trust Estate.
"Authorized Officer" shall mean, when used with reference to the Issuer,
its Chairman, President, Vice President or Secretary, or any other officer or
board member authorized in writing by the Board to act on behalf of the Issuer.
"Authorized Representative" shall mean, when used with reference to the
Issuer, (a) an Authorized Officer or (b) any affiliate organization or other
entity authorized by the Board to act on the Issuer's behalf.
"Board" or "Board of Directors" shall mean the Board of Directors of the
Issuer.
3
<PAGE>
"Business Day" shall mean the definition of Business Day found in the
Supplemental Indenture authorizing a series of Notes.
"Certificate of Insurance" shall mean any Certificate evidencing a
Financed Eligible Loan is Insured pursuant to a Contract of Insurance.
"Commission" shall mean the Securities and Exchange Commission.
"Contract of Insurance" shall mean the contract of insurance between the
Eligible Lender and the Secretary.
"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 applicable temporary
and proposed regulations, relating to such section which are applicable to the
Notes or 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.
"Custodian Agreement" shall mean, collectively, the custodian agreements
with any Servicer or other custodian or bailee related to Financed Eligible
Loans.
"Date of Issuance" shall mean the date of original issuance and delivery
of any Notes to an Underwriter or placement agent.
"Derivative Payment Date" shall mean, with respect to a Derivative
Product, any date specified in the Derivative Product on which both or either of
the Issuer Derivative Payment and/or a Reciprocal Payment is due and payable
under the Derivative Product.
"Derivative Product" shall mean a written contract or agreement between
the Issuer and a Reciprocal Payor, which provides that the Issuer's obligations
thereunder will be conditioned on the absence of (i) a failure by the Reciprocal
Payor to make any payment required thereunder when due and payable, or (ii) a
default thereunder with respect to the financial status of the Reciprocal Payor,
and:
(a) under which the Issuer is obligated to pay (whether on a net
payment basis or otherwise) on one or more scheduled and specified
Derivative Payment Dates, the Issuer Derivative Payments in exchange for
the Reciprocal Payor's obligation to pay (whether on a net payment basis
or otherwise), or to cause to be paid, to the Issuer, Reciprocal
Payments on one or more scheduled and specified Derivative Payment Dates
in the amounts set forth in the Derivative Product;
(b) for which the Issuer's obligation to make Issuer Derivative
Payments may be secured by a pledge of and lien on the Trust Estate on
an equal and ratable basis with any class of the Issuer's Outstanding
Notes and which Issuer Derivative Payments may be equal in priority with
any priority classification of the Issuer's Outstanding Notes; and
(c) under which Reciprocal Payments are to be made directly to
the Trustee for deposit into the Revenue Fund.
4
<PAGE>
"Derivative Value" shall mean the value of the Derivative Product, if
any, to the Reciprocal Payor, provided that such value is defined and calculated
in substantially the same manner as amounts are defined and calculated pursuant
to the applicable provisions of an ISDA Master Agreement.
"Dissolution" means, with respect to Article XI and the Issuer, the
occurrence of any of the events which would cause a dissolution of a limited
partnership organized under the laws of the State of Delaware, the sole general
partner of which is the Issuer.
"Eligible Lender" shall mean any "eligible lender," as defined in the
Act, and which has received an eligible lender designation from the Secretary
with respect to Eligible Loans made under the Act.
"Eligible Loan" shall mean any loan made to finance post-secondary
education that is (a) made under the Act; (b) insured by the Secretary of Health
and Human Services pursuant to the Public Health Services Act; or (c) otherwise
permitted to be acquired by the Issuer pursuant to its Program (provided a
Rating Confirmation is received with respect thereto).
"Eligible Loan Acquisition Certificate" shall mean a certificate signed
by an Authorized Representative of the Issuer in substantially the form attached
as Exhibit A hereto.
"Event of Bankruptcy" shall mean (a) the Issuer shall have commenced a
voluntary case or other proceeding seeking liquidation, reorganization, or other
relief with respect to itself or its debts under any bankruptcy, insolvency, or
other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian, or other similar official of it or any
substantial part of its property, or shall have made a general assignment for
the benefit of creditors, or shall have declared a moratorium with respect to
its debts or shall have failed generally to pay its debts as they become due, or
shall have taken any action to authorize any of the foregoing; or (b) an
involuntary case or other proceeding shall have been commenced against the
Issuer seeking liquidation, reorganization, or other relief with respect to it
or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian, or other similar official of it or any substantial part
of its property provided such action or proceeding is not dismissed within 60
days.
"Event of Default" shall have the meaning specified in Article VI hereof.
"Financed" or "Financing," when used with respect to Eligible Loans,
shall mean or refer to Eligible Loans (a) acquired by the Issuer with balances
in the Acquisition Fund or otherwise deposited in or accounted for in the
Acquisition Fund or otherwise constituting a part of the Trust Estate and (b)
Eligible Loans substituted or exchanged for Financed Eligible Loans, but does
not include Eligible Loans released from the lien of this Indenture and sold or
transferred, to the extent permitted by this Indenture.
"Fiscal Year" shall mean the fiscal year of the Issuer as established
from time to time.
"Fitch" shall mean Fitch IBCA, Inc., a corporation organized and
existing under the laws of the State of Delaware, its successors and assigns.
5
<PAGE>
"Funds" shall mean each of the Funds created pursuant to Section 5.01(a)
and (b) hereof.
"Guarantee" or "Guaranteed" shall mean, with respect to an Eligible
Loan, the insurance or guarantee by the Guaranty Agency pursuant to such
Guaranty Agency's Guarantee Agreement of the maximum percentage of the principal
of and accrued interest on such Eligible Loan allowed by the terms of the Act
with respect to such Eligible Loan at the time it was originated and the
coverage of such Eligible Loan by the federal reimbursement contracts,
providing, among other things, for reimbursement to the Guaranty Agency for
payments made by it on defaulted Eligible Loans insured or guaranteed by the
Guaranty Agency of at least the minimum reimbursement allowed by the Act with
respect to a particular Eligible Loan.
"Guarantee Agreements" shall mean a guaranty or lender agreement between
the Trustee and any Guaranty Agency, and any amendments thereto.
"Guaranty Agency" shall mean any entity authorized to guarantee student
loans under the Act and with which the Trustee maintains a Guarantee Agreement.
"Highest Priority Obligations" shall mean, (a) at any time when Senior
Obligations are Outstanding, the Senior Obligations, (b) at any time when no
Senior Obligations are Outstanding, the Subordinate Obligations, and (c) at any
time when no Senior Obligations or Subordinate Obligations are Outstanding, the
Junior-Subordinate Obligations (and any priorities as between Junior-Subordinate
Obligations as shall be established by Supplemental Indentures).
"Indenture" shall mean this Indenture of Trust, including all
supplements and amendments hereto.
"Insurance" or "Insured" or "Insuring" means, with respect to an
Eligible Loan, the insuring by the Secretary (as evidenced by a Certificate of
Insurance or other document or certification issued under the provisions of the
Act) under the Act of 100% of the principal of and accrued interest on such
Eligible Loan.
"Interest Benefit Payment" shall mean an interest payment on Eligible
Loans received pursuant to the Act and an agreement with the federal government,
or any similar payments.
"Interest Payment Date" shall mean the Interest Payment Dates specified
for Notes in the Supplemental Indenture authorizing the issuance of such Notes.
"Investment Agreement" shall mean any investment agreement approved by
the Rating Agencies.
"Investment Securities" shall mean:
(a) direct obligations of, or obligations on which the timely
payment of the principal of and interest on which are unconditionally
and fully guaranteed by, the United States of America;
(b) interest-bearing time or demand deposits, certificates of
deposit or other similar banking arrangements with a maturity of 12
months or less with any bank, trust company, national banking
association or other depository institution, including those of the
Trustee, provided that, at the time of deposit or purchase such
depository institution has commercial paper which is rated "A-1+" by S&P
and "F-1+" by Fitch;
6
<PAGE>
(c) interest-bearing time or demand deposits, certificates of
deposit or other similar banking arrangements with a maturity of 24
months or less, but more than 12 months, with any bank, trust company,
national banking association or other depository institution, including
those of the Trustee and any of its affiliates, provided that, at the
time of deposit or purchase such depository institution has senior debt
rated "A" or higher by S&P and "A" or higher, and, if commercial paper
is outstanding, commercial paper which is rated "A-1+" by S&P and "F-1+"
by Fitch;
(d) interest-bearing time or demand deposits, certificates of
deposit or other similar banking arrangements with a maturity of more
than 24 months with any bank, trust company, national banking
association or other depository institution, including those of the
Trustee and any of its affiliates, provided that, at the time of deposit
or purchase such depository institution has senior debt rated "AA" or
higher by S&P and "AA" or higher by Fitch and, if commercial paper is
outstanding, commercial paper which is rated "A-1+" by S&P and "F-1+" by
Fitch;
(e) bonds, debentures, notes or other evidences of indebtedness
issued or guaranteed by any of the following agencies: Federal Farm
Credit Banks, Federal Home Loan Mortgage Corporation; the Export-Import
Bank of the United States; the Federal National Mortgage Association;
the Student Loan Marketing Association; the Farmers Home Administration;
Federal Home Loan Banks provided such obligation is rated "AAA" by S&P
and "AAA" by Fitch; or any agency or instrumentality of the United
States of America which shall be established for the purposes of
acquiring the obligations of any of the foregoing or otherwise providing
financing therefor;
(f) repurchase agreements and reverse repurchase agreements,
other than overnight repurchase agreements and overnight reverse
repurchase agreements, with banks, including the Trustee and any of its
affiliates, which are members of the Federal Deposit Insurance
Corporation or firms which are members of the Securities Investors
Protection Corporation, in each case whose outstanding, unsecured debt
securities are rated no lower than two subcategories below the highest
rating on any series of Outstanding Notes by S&P and Fitch and, if
commercial paper is outstanding, commercial paper which is rated "A-1+"
by S&P and "F-1+" by Fitch;
(g) overnight repurchase agreements and overnight reverse
repurchase agreements at least 101% collateralized by securities
described in subparagraph (a) of this definition and with a
counterparty, including the Trustee and any of its affiliates, that has
senior debt rated "A" or higher by S&P and "A" or higher by Fitch and,
if commercial paper is outstanding, commercial paper which is rated
"A-1+" by S&P and "F-1+" by Fitch or a counterparty approved in writing
by S&P and Fitch, respectively;
(h) investment agreements or guaranteed investment contracts,
which may be entered into by and among the Issuer and/or the Trustee and
7
<PAGE>
any bank, bank holding company, corporation or any other financial
institution, including the Trustee and any of its affiliates, whose
outstanding (i) commercial paper is rated "A-1+" by S&P and "F-1+" by
Fitch for agreements or contracts with a maturity of 12 months or less;
(ii) unsecured long-term debt is rated no lower than two subcategories
below the highest rating on any series of Outstanding Notes by S&P and
Fitch and, if commercial paper is outstanding, commercial paper which is
rated "A-1+" by S&P and "F-1+" by Fitch for agreements or contracts with
a maturity of 24 months or less, but more than 12 months, or (iii)
unsecured long-term debt which is rated no lower than two subcategories
below the highest rating on any series of Outstanding Notes by S&P and
Fitch and, if commercial paper is outstanding, commercial paper which is
rated "A-1+" by S&P and "F-1+" by Fitch for agreements or contracts with
a maturity of more than 24 months, or, in each case, by an insurance
company whose claims-paying ability is so rated;
(i) collateralized investment agreements or collateralized
guaranteed investment agreements, which may be entered into by and among
the Issuer, the Trustee and any bank, bank holding company, corporation
or any other financial institution, including the Trustee and any of its
affiliates, so long as (i) the collateral consists of securities of the
types specified in (a) or (e) above, at the levels shown below under (v)
below; (ii) the Trustee has possession of the collateral; (iii) the
Trustee has a perfected first priority security interest in the
collateral; (iv) the collateral is free and clear of third-party liens
and, in the case of a SIPC broker, was not acquired pursuant to a
repurchase agreement or reverse repurchase agreement; and (v) the
collateral shall be valued (based upon current market price plus accrued
interest) weekly and shall be equal to not less than 103% of the amount
of the deposit (or 105% in the case where the collateral consists of
obligations of the Federal National Mortgage Association or the Federal
Home Loan Mortgage Issuer);
(j) "tax exempt bonds" as defined in Section 150(a)(6) of the
Code, other than "specified private activity bonds" as defined in
Section 57(a)(5)(C) of the Code, that are rated in the highest category
by S&P and Fitch for long-term or short-term debt or shares of a
so-called money market or mutual fund rated "AA/A1" or higher by S&P and
"AA/F1+" or higher by Fitch, that do not constitute "investment
property" within the meaning of Section 148(b)(2) of the Code, provided
that the fund has all of its assets invested in obligations of such
rating quality;
(k) commercial paper, including that of the Trustee and any of
its affiliates, which is rated in the single highest classification,
"A-1+" by S&P and "F-1+" by Fitch, and which matures not more than 270
days after the date of purchase;
(l) investments in a money market fund rated at least "AA" or
"A-1" by S&P and "AA" or "F-1+" by Fitch, including funds for which the
Trustee or an affiliate thereof acts as investment advisor or provides
other similar services for a fee;
(m) any Investment Agreement; and
(n) any other investment with a Rating Confirmation from each
Rating Agency.
8
<PAGE>
"ISDA Master Agreement" shall mean the ISDA Interest Rate and Currency
Exchange Agreement, copyright 1992, as amended from time to time, and as in
effect with respect to any Derivative Product.
"Issuer" shall mean Union Financial Services-1, Inc., a corporation
organized and existing under the laws of the State, and any successor thereto.
"Issuer Order" shall mean a written order signed in the name of the
Issuer by an Authorized Representative.
"Issuer Derivative Payment" shall mean a payment required to be made by
or on behalf of the Issuer due to a Reciprocal Payor pursuant to a Derivative
Product.
"Junior-Subordinate Notes" shall mean Notes, the principal of and
interest on which is payable on a subordinated basis to the payment of the
principal of and interest on the Senior Notes and the Subordinate Notes;
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.
"Junior-Subordinate Obligations" shall mean Junior-Subordinate Notes and
any Derivative Product, the priority of payment of which is equal with that of
any series or subseries of Junior-Subordinate Notes.
"Maturity" when used with respect to any Note, shall mean the date on
which the principal thereof becomes due and payable as therein or herein
provided, whether at its Stated Maturity, by earlier redemption, by declaration
of acceleration, or otherwise.
"Note Payment Date" shall mean, for any Note, any Interest Payment Date,
its Stated Maturity or the date of any other regularly scheduled principal
payment with respect thereto.
"Notes" shall mean any notes or other debt obligations issued pursuant
to Section 2.08 of this Indenture.
"Obligations" shall mean Senior Obligations, Subordinate Obligations and
Junior-Subordinate Obligations.
"Operating Fund" shall mean the fund by that name continued by Section
5.01 and further described in Section 5.05 hereof.
"Outstanding" shall mean, when used in connection with any Note, a Note
which has been executed and delivered pursuant to this Indenture which at such
time remains unpaid as to principal or interest, unless provision has been made
for such payment pursuant to Section 10.02 hereof, excluding Notes which have
been replaced pursuant to Section 2.09 hereof.
"Person" shall mean an individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated organization,
or government or agency or political subdivision thereof.
9
<PAGE>
"Principal Office" shall mean the principal office of the party
indicated, as set forth in Section 9.01 hereof or elsewhere in this Indenture.
"Program" shall mean the Issuer's program for the origination and the
purchase of Eligible Loans, as the same may be modified from time to time.
"Program Expenses" shall mean (a) the fees and expenses of the Trustee;
(b) the fees and expenses of any auction agent, any market agent, any
calculation agent and any broker-dealer then acting under a Supplemental
Indenture with respect to auction rate Notes; (c) the fees and expenses of any
remarketing agent then acting under a Supplemental Indenture with respect to
variable rate Notes; (d) the fees and expenses due to any credit provider of any
Notes for which a credit facility or liquidity facility is in place; (e) the
fees of any Servicer and/or Custodian under any servicing agreement or custodian
agreement; (f) the fees and expenses of the Issuer incurred in connection with
the preparation of legal opinions and other authorized reports or statements
attributable to the Notes and the Financed Eligible Loans; (g) transfer fees,
purchase premiums and loan origination fees on Financed Eligible Loans; (h) fees
and expenses associated with the delivery of a substitute credit facility or
liquidity facility under a Supplemental Indenture; (i) fees and expenses
associated with (but not payments under) Derivative Products; (j) the costs of
remarketing any variable rate Notes and (k) expenses incurred for the Issuer's
maintenance and operation of its Program as a direct consequence of this
Indenture, the Notes or the Financed Eligible Loans; including, but not limited
to, taxes, the reasonable fees and expenses of attorneys, agents, financial
advisors, consultants, accountants and other professionals, attributable to such
maintenance and operation, marketing expenses for the Program and a prorated
portion of the rent, personnel compensation, office supplies and equipment,
travel expenses and other lawful payments made to members of the Board.
"Rating" shall mean one of the rating categories of S&P and Fitch or any
other Rating Agency, provided S&P and Fitch or any other Rating Agency, as the
case may be, is currently rating the Notes.
"Rating Agency" shall mean, collectively, S&P and Fitch and their
successors and assigns or any other Rating Agency requested by the Issuer to
maintain a Rating on any of the Notes.
"Rating Confirmation" means a letter from each Rating Agency then
providing a Rating for any of the Notes, confirming that the action proposed to
be taken by the Issuer will not, in and of itself, result in a downgrade of any
of the Ratings then applicable to the Notes, or cause any Rating Agency to
suspend or withdraw the Ratings then applicable to the Notes.
"Reciprocal Payments" shall mean any payment to be made to, or for the
benefit of, the Issuer under a Derivative Product.
"Reciprocal Payor" shall mean a third party which, at the time of
entering into a Derivative Product, has at least an "AA/A-1" rating, or its
equivalent, from a Rating Agency, and which is obligated to make Reciprocal
Payments under a Derivative Product.
"Record Date" shall mean the Record Date established for any Notes
pursuant to the Supplemental Indenture authorizing the issuance of such Notes.
10
<PAGE>
"Recoveries of Principal" shall mean all amounts received by the Trustee
from or on account of any Financed Eligible Loan as a recovery of the principal
amount thereof, including scheduled, delinquent and advance payments, payouts or
prepayments, proceeds from insurance or from the sale, assignment, transfer,
reallocation or other disposition of a Financed Eligible Loan and any payments
representing such principal from the guarantee or insurance of any Financed
Eligible Loan.
"Registered Owner" shall mean the Person in whose name a Note is
registered on the Note registration books maintained by the Trustee, and shall
also mean with respect to a Derivative Product, any Reciprocal Payor, unless the
context otherwise requires.
"Regulations" shall mean the Regulations promulgated from time to time
by the Secretary or any Guaranty Agency guaranteeing Financed Eligible Loans.
"Reserve Fund" shall mean the Fund by that name created in Section
5.01(a)(iii) hereof and further described in Section 5.04 hereof, including any
Accounts and Subaccounts created therein.
"Reserve Fund Requirement" shall mean an amount, if any, required to be
on deposit in the Reserve Fund with respect to any Notes issued pursuant to the
Supplemental Indenture authorizing the issuance of such Notes.
"Resolution" shall mean a resolution duly adopted by the Board.
"Revenue" or "Revenues" shall mean all Recoveries of Principal,
payments, proceeds, charges and other income received by the Trustee or the
Issuer from or on account of any Financed Eligible Loan (including scheduled,
delinquent and advance payments of and any insurance proceeds with respect to,
interest, including Interest Benefit Payments, on any Financed Eligible Loan and
any Special Allowance Payment received by the Issuer with respect to any
Financed Eligible Loan) and all interest earned or gain realized from the
investment of amounts in any Fund or Account and all payments received by the
Issuer pursuant to a Derivative Product.
"Revenue Fund" shall mean the Fund by that name created in Section
5.01(a)(ii) hereof and further described in Section 5.03 hereof.
"S&P" shall mean Standard & Poor's Ratings Group, a Division of The
McGraw-Hill Companies, Inc., its successors and assigns.
"Secretary" shall mean the Secretary of the United States Department of
Education or any successor to the pertinent functions thereof under the Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Depository" or "Depository" shall mean The Depository Trust
Company and its successors and assigns or if, (a) the then Securities Depository
resigns from its functions as depository of the Notes or (b) the Issuer
discontinues use of the Securities Depository, 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.
11
<PAGE>
"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.
"Senior Notes" shall mean all Notes secured on a senior priority to the
Subordinate Obligations and the Junior-Subordinate Obligations.
"Senior Obligations" shall mean Senior Notes and any Derivative Product,
the priority of payment of which is equal with that of Senior Notes.
"Servicer" shall mean, collectively, Union Bank and Trust Company,
UNIPAC Service Corporation, InTuition, Inc., USA Group Loan Services, Inc., AFSA
Data Corporation, Pennsylvania Higher Education Association and any other
additional Servicer or successor Servicer selected by the Issuer, including an
affiliate of the Issuer, so long as the Issuer obtains a Rating Confirmation as
to each such other Servicer.
"Servicing Agreement" shall mean the servicing agreements with any
Servicer relating to Financed Eligible Loans, as amended from time to time.
"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, if any, authorized from time to time by federal law or regulation.
"Special Record Date" shall have the meaning set forth in a Supplemental
Indenture.
"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.
"Student Loan Purchase Agreement" shall mean a loan purchase agreement
entered into for the purchase of Eligible Loans into the Trust Estate.
"Subaccount" shall mean any of the subaccounts which may be created and
established within any Account by this Indenture.
"Subordinate Notes" shall mean any Notes secured on a priority
subordinate to the Senior Obligations and on a priority senior to the
Junior-Subordinate Obligations.
"Subordinate Obligations" shall mean Subordinate Notes and any
Derivative Product, the priority of payment of which is equal with that of
Subordinate Notes.
12
<PAGE>
"Supplemental Indenture" shall mean an agreement supplemental hereto
executed pursuant to Article VIII hereof.
"Trust Estate" shall mean the property described as such in the granting
clauses hereto.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939, as
amended, and as in force at the date as of which this Indenture was executed,
except as provided in Section 8.05.
"Trustee" shall mean Zions First National Bank, acting in its capacity
as Trustee under this Indenture, or any successor trustee designated pursuant to
this Indenture.
"Underwriter" shall mean the underwriter or underwriters of the Notes.
"Value" on any calculation date when required under this Indenture shall
mean the value of the Trust Estate calculated by the Issuer as to (a) below and
by the Trustee as to (b) through (e), inclusive, below, as follows:
(a) with respect to any Eligible Loan, the unpaid principal
amount thereof plus any accrued but unpaid interest, Interest Benefit
Payments and Special Allowance Payments;
(b) with respect to any funds of the Issuer held under this
Indenture and 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 bid price of the shares as reported by the investment
company plus accrued but unpaid interest;
(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): the average of the bid and asked
prices for such investments so published on or most recently prior to
such time of determination; 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.
Words importing the masculine gender include the feminine gender, and
words importing the feminine gender include the masculine gender. Words
importing persons include firms, associations and corporations. Words importing
the singular number include the plural number and vice versa. Additional terms
are defined in the body of this Indenture.
13
<PAGE>
Article II
NOTE DETAILS, FORM OF NOTES, REDEMPTION OF NOTES
AND USE OF PROCEEDS OF NOTES
Section 2.01. NOTE DETAILS. The details of each series of Notes authorized
pursuant to this Indenture and a Supplemental Indenture, shall be contained in
the applicable Supplemental Indenture. Such details shall include, but are not
limited to, the principal amount, authorized denomination, dated date, interest
rate, principal maturity date, redemption provisions and registration
provisions.
Section 2.02. EXECUTION OF NOTES. The Notes shall be executed in the name and on
behalf of the Issuer by the manual or facsimile signature of the Chairman of the
Board, President or the acting Chairman of the Board and attested by the manual
or facsimile signature of the Secretary of the Issuer or any other member of the
Board (to the extent not executed by such person). Any Note may be signed
(manually or by facsimile) or attested on behalf of the Issuer by any person
who, at the date of such act, shall hold the proper office, notwithstanding that
at the date of authentication, issuance or delivery, such person may have ceased
to hold such office.
Section 2.03. REGISTRATION, TRANSFER AND EXCHANGE OF NOTES; PERSONS TREATED AS
REGISTERED OWNERS. The Issuer shall cause books for the registration and for the
transfer of the Notes as provided in this Indenture to be kept by the Trustee
which is hereby appointed the transfer agent of the Issuer for the Notes.
Notwithstanding such appointment and with the prior written consent of the
Issuer, the Trustee is hereby authorized to make any arrangements with other
institutions which it deems necessary or desirable in order that such
institutions may perform the duties of transfer agent for the Notes. Upon
surrender for transfer of any Note at the Principal Office of the Trustee, duly
endorsed for transfer or accompanied by an assignment duly executed by the
Registered Owner or his attorney duly authorized in writing, the Issuer shall
execute and the Trustee shall authenticate and deliver in the name of the
transferee or transferees a new fully registered Note or Notes of the same
interest rate and for a like series, subseries, if any, and aggregate principal
amount of the same maturity.
Notes may be exchanged at the Principal Office of the Trustee for a like
aggregate principal amount of fully registered Notes of the same series,
subseries, if any, interest rate and maturity in authorized denominations. The
Issuer shall execute and the Trustee shall authenticate and deliver Notes which
the Registered Owner making the exchange is entitled to receive, bearing numbers
not contemporaneously outstanding. The execution by the Issuer of any fully
registered Note of any authorized denomination shall constitute full and due
authorization of such denomination and the Trustee shall thereby be authorized
to authenticate and deliver such fully registered Note.
The Trustee shall not be required to transfer or exchange any Note
during the period of 15 business days next preceding the mailing of notice of
redemption as herein provided. After the giving of such notice of redemption,
the Trustee shall not be required to transfer or exchange any Note, which Note
or portion thereof has been called for redemption.
As to any Note, the person in whose name the same shall be registered
shall be deemed and regarded as the absolute owner thereof for all purposes, and
payment of either principal or interest on any fully registered Note shall be
made only to or upon the written order of the Registered Owner thereof or his
legal representative but such registration may be changed as hereinabove
provided. All such payments shall be valid and effectual to satisfy and
discharge the liability upon such Note to the extent of the sum or sums paid.
The Trustee shall require the payment by any Registered Owner requesting
exchange or transfer of any tax or other governmental charge required to be paid
with respect to such exchange or transfer. The applicant for any such transfer
or exchange may be required to pay all taxes and governmental charges in
connection with such transfer or exchange.
14
<PAGE>
Section 2.04. LOST, STOLEN, DESTROYED AND MUTILATED NOTES. Upon receipt by the
Trustee of evidence satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of any Note and, in the case of a lost, stolen or
destroyed Note, of indemnity satisfactory to it, and upon surrender and
cancellation of the Note, if mutilated, (a) the Issuer shall execute, and the
Trustee shall authenticate and deliver, a new Note of the same series,
subseries, if any, interest rate, maturity and denomination in lieu of such
lost, stolen, destroyed or mutilated Note or (b) if such lost, stolen, destroyed
or mutilated Note shall have matured or have been called for redemption, in lieu
of executing and delivering a new Note as aforesaid, the Issuer may pay such
Note. Any such new Note shall bear a number not contemporaneously outstanding.
The applicant for any such new Note may be required to pay all taxes and
governmental charges and all expenses and charges of the Issuer and of the
Trustee in connection with the issuance of such Note. All Notes shall be held
and owned upon the express condition that, to the extent permitted by law, the
foregoing conditions are exclusive with respect to the replacement and payment
of mutilated, destroyed, lost or stolen Notes, negotiable instruments or other
securities.
Section 2.05. TRUSTEE'S AUTHENTICATION CERTIFICATE. The Trustee's
authentication certificate upon any Notes shall be substantially in the form
provided in the Supplemental Indenture authorizing the issuance of such Notes.
No Note shall be secured hereby or entitled to the benefit hereof, or shall be
valid or obligatory for any purpose, unless a certificate of authentication,
substantially in such form, has been duly executed by the Trustee; and such
certificate of the Trustee upon any Note shall be conclusive evidence and the
only competent evidence that such Note has been authenticated and delivered
hereunder and under a Supplemental Indenture. The Trustee's certificate of
authentication shall be deemed to have been duly executed by it if manually
signed by an authorized officer or signatory of the Trustee, but it shall not be
necessary that the same person sign the certificate of authentication on all of
the Notes issued hereunder.
Section 2.06. CANCELLATION AND DESTRUCTION OF NOTES BY THE TRUSTEE. Whenever
any Outstanding Notes shall be delivered to the Trustee for the cancellation
thereof pursuant to this Indenture, upon payment of the principal amount and
interest represented thereby, or for replacement pursuant to Section 2.03
hereof, such Notes shall be promptly cancelled and, within a reasonable time,
cremated or otherwise destroyed by the Trustee and counterparts of a certificate
of destruction evidencing such cremation or other destruction shall be furnished
by the Trustee to the Issuer.
15
<PAGE>
Section 2.07. TEMPORARY NOTES. Pending the preparation of definitive Notes,
the Issuer may execute and the Trustee shall authenticate and deliver temporary
Notes. Temporary Notes shall be issuable as fully registered Notes without
coupons, of any denomination, and substantially in the form of the definitive
Notes but with such omissions, insertions and variations as may be appropriate
for temporary Notes, all as may be determined by the Issuer. Every temporary
Note shall be executed by the Issuer and be authenticated by the Trustee upon
the same conditions and in substantially the same manner, and with like effect,
as the definitive Notes. As promptly as practicable the Issuer shall execute and
shall furnish definitive Notes and thereupon temporary Notes may be surrendered
in exchange therefor without charge at the principal office of the Trustee, and
the Trustee shall authenticate and deliver in exchange for such temporary Notes
a like aggregate principal amount of definitive Notes. Until so exchanged the
temporary Notes shall be entitled to the same benefits under this Indenture as
definitive Notes.
Section 2.08. ISSUANCE OF NOTES.
(a) The Issuer shall have the authority, upon complying with the provisions
of this Section, to issue and deliver from time to time Notes secured by
the Trust Estate on a parity with the Senior Notes, the Subordinate
Notes or the Junior-Subordinate Notes, if any, secured hereunder as
shall be determined by the Issuer. In addition, the Issuer may enter
into any Derivative Products it deems necessary or desirable with
respect to any or all of the Notes.
(b) No Notes shall be authenticated and delivered pursuant to this Indenture
until the following conditions have been satisfied:
(i) The Issuer and the Trustee have entered into a Supplemental
Indenture (which Supplemental Indenture shall not require the
approval of the Registered Owners of any of the Outstanding Notes
or Derivative Products) providing the terms and forms of the
proposed Notes as described in Section 2.01 hereof, including the
designation of such Notes as Senior Notes, Subordinate Notes or
Junior-Subordinate Notes, the redemption and selection provisions
applicable to such Notes, and the Reserve Fund Requirement with
respect to such Notes, if any.
(ii) The Trustee shall have received a Rating Confirmation from each
Rating Agency which has assigned a Rating or Ratings to any
Outstanding Notes that such Rating or Ratings will not be reduced
or withdrawn as a result of the issuance of the proposed Notes.
(iii) The Trustee shall have received an opinion of Note Counsel to the
effect that all of the foregoing conditions to the issuance of
the proposed Notes have been satisfied.
(iv) Upon the issuance of the proposed Notes, an amount equal to the
Reserve Fund Requirement with respect to such Notes, if any,
shall be deposited in the Reserve Fund.
16
<PAGE>
(c) The Trustee is authorized to set up any additional Funds or Accounts or
Subaccounts under this Indenture which it deems necessary or convenient
in connection with the issuance and delivery of any Notes.
Article III.
PARITY AND PRIORITY OF LIEN; OTHER OBLIGATIONS;
AND DERIVATIVE PRODUCTS
Section 3.01. PARITY AND PRIORITY OF LIEN. The provisions, covenants and
agreements herein set forth 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 Obligations, 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 Obligations over any other thereof, except as
expressly provided in this Indenture with respect to certain payment and other
priorities.
Section 3.02. OTHER OBLIGATIONS.
(a) The Issuer reserves the right to issue other notes or obligations which
do not constitute or create a lien on the Trust Estate.
(b) The Issuer shall not commingle the Funds established by this 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 this
Indenture may at all times be identified by source and application, and
if necessary, separated.
(c) The revenues and other moneys, Financed Eligible Loans, securities,
evidences of indebtedness, interests, rights and properties pledged
under this Indenture are and will be owned by the Issuer free and clear
of any pledge, lien, charge or encumbrance thereon or with respect
thereto prior to, of equal rank with or subordinate to the respective
pledges created by this Indenture, except as otherwise expressly
provided herein, and all action on the part of the Issuer to that end
has been duly and validly taken. If any Financed Eligible Loan is found
to have been subject to a lien at the time such Financed Eligible Loan
was acquired, the Issuer shall cause such lien to be released, shall
purchase such Financed Eligible Loan from the Trust Estate for a
purchase price equal to its principal amount plus any unamortized
premium, if any, and interest accrued thereon or shall replace such
Financed Eligible Loan with another Eligible Loan with substantially
identical characteristics which replacement Eligible Loan shall be free
and clear of liens at the time of such replacement. Except as otherwise
provided herein, the Issuer shall not create or voluntarily permit to be
created any debt, lien, or charge on the Financed Eligible Loans which
would be on a parity with, subordinate to, or prior to the lien of this
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 this
17
<PAGE>
Indenture or the priority of such lien for the Obligations hereby
secured might or could be lost or impaired; and will pay or cause to be
paid or will 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 this Indenture as a lien or charge
upon the Financed Eligible Loans; provided, however, that nothing in
this subsection (c) 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 Obligations; and provided further that any subordinate lien hereon
(i.e., subordinate to the lien securing the Senior Obligations, the
Subordinate Obligations and the Junior-Subordinate Obligations) 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 Obligations have been paid or deemed paid hereunder.
Section 3.03. DERIVATIVE PRODUCTS; RECIPROCAL PAYMENTS; ISSUER DERIVATIVE
PAYMENTS. The Issuer hereby authorizes and directs the Trustee to acknowledge
and agree to any Derivative Product hereafter entered into by the Issuer and a
Reciprocal Payor under which (a) the Issuer may be required to make, from time
to time, Issuer Derivative Payments and (b) the Trustee may receive, from time
to time, Reciprocal Payments for the account of the Issuer. No Derivative
Product shall be entered into unless (i) the Trustee shall have received a
Rating Confirmation from each Rating Agency that such Derivative Product will
not adversely affect the Rating on any of the Notes and (ii) all Issuer
Derivative Payments and Reciprocal Payments are made on the third Business Day
immediately preceding a Note Payment Date. Anything in this Indenture to the
contrary notwithstanding, any Revenues representing Reciprocal Payments shall
not be available to make an Issuer Derivative Payment or to pay any other
amounts owed to a Reciprocal Payor under a Derivative Product.
No later than the fourth Business Day immediately preceding each Note
Payment Date on which a Reciprocal Payment or Issuer Derivative Payment is due
pursuant to the applicable Derivative Product through and including the
termination date of a Derivative Product, the Issuer shall give written notice
to the Trustee stating either (a) the amount of any Reciprocal Payment due to be
received by the Trustee for the account of the Issuer on the third Business Day
immediately preceding such Note Payment Date or (b) the amount of any Issuer
Derivative Payment to be paid to the Reciprocal Payor on the third Business Day
immediately preceding such Note Payment Date. If the Trustee fails to receive
such written notification from the Issuer by the end of such fourth Business
Day, it shall immediately notify the Issuer of such fact in writing.
On the third Business Day immediately preceding each Note Payment Date
on which a Reciprocal Payment is due pursuant to the applicable Derivative
Product in accordance with the written notification received from the Issuer,
the Trustee shall deposit all moneys received representing such Reciprocal
Payment in the Revenue Fund to be applied in accordance with the provisions of
Section 5.03 hereof. The Trustee shall notify the Issuer on such Business Day,
if (a) the amount received from the Reciprocal Payor is not equal to the amount
specified in the written notification of the Issuer, (b) no amount is received
from the Reciprocal Payor or (c) the amount received is not received in
immediately available funds.
18
<PAGE>
On the third Business Day immediately preceding any Note Payment Date
with respect to which an Issuer Derivative Payment is due in accordance with the
written notification received from the Issuer or, with respect to a payment in
respect of an early termination date due pursuant to the terms of a Derivative
Product from the Issuer, the Trustee shall make payment to the Reciprocal Payor
from moneys in the Revenue Fund of the amount of the Issuer Derivative Payment
specified in such written notification of the Issuer, due on such date by the
deposit or wire transfer of immediately available funds to the credit of the
account of the Reciprocal Payor specified in such written notification of the
Issuer, but only to the extent such payment will not result in a deficiency in
the amount due on the next succeeding Note Payment Date to the Registered Owners
of any class of Obligations having a priority equal to or higher than such
Reciprocal Payor under such Derivative Product.
If any payment to such a Reciprocal Payor described in the paragraph
above would result in a deficiency in the amounts required to make payments to
the Registered Owners of the Obligations referred to in the paragraph above on
such Note Payment Date, then the Trustee shall delay the making of such payment
to the Reciprocal Payor until the first date on which no deficiency would result
from such payment.
Article IV.
PROVISIONS APPLICABLE TO THE NOTES;
DUTIES OF THE ISSUER
Section 4.01. PAYMENT OF PRINCIPAL, INTEREST AND PREMIUM. The Issuer covenants
that it will promptly pay, but solely from the Trust Estate, the principal of
and interest, if any, on each and every Obligation issued under the provisions
of this Indenture at the places, on the dates and in the manner specified herein
and in said Obligations and any premium required for the retirement of said
Obligations by purchase or redemption according to the true intent and meaning
thereof. The Obligations shall be and are hereby declared to be payable from and
equally secured by an irrevocable first lien on and pledge of the properties
constituting the Trust Estate, subject to the application thereof as permitted
by this Indenture, but in no event shall the Registered Owners or any Reciprocal
Payor have any right to possession of any Financed Eligible Loans, which shall
be held only by the Trustee or its agent or bailee.
Section 4.02. REPRESENTATIONS AND WARRANTIES OF THE ISSUER. The Issuer
represents and warrants that it is duly authorized under the laws of the State
to create and issue the Notes and to execute and deliver this Indenture and any
Derivative Product and to make the pledge to the payment of Notes and any Issuer
Derivative Payments hereunder, that all necessary action on the part of the
Issuer and the Board for the creation and issuance of the Notes and the
execution and delivery of this Indenture and any Derivative Product has been
duly and effectively taken; and that the Notes in the hands of the Registered
Owners thereof and the Issuer Derivative Payments are and will be valid and
enforceable special limited obligations of the Issuer secured by and payable
solely from the Trust Estate.
Section 4.03. 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 hereby
transferred and pledged, or intended so to be transferred and pledged.
19
<PAGE>
Section 4.04. FURTHER COVENANTS OF THE ISSUER.
(a) 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 the State and any other jurisdiction necessary to
perfect and maintain the security interest granted by the Issuer
hereunder.
(b) 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 this Indenture and the other agreements to
which the Issuer is a party pursuant to the transactions contemplated
herein, and will punctually perform all duties required by the Articles
of Incorporation and Bylaws of the Issuer and the laws of the State.
(c) The Issuer shall be operated on the basis of its Fiscal Year.
(d) 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
and any Derivative Product.
(e) 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 66% 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.
(f) 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 and each Rating Agency within 150 days of the close of each
Fiscal Year. The Trustee shall be under no obligation to review or
otherwise analyze such audit.
(g) 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 this Indenture and pursuant to the Servicing Agreement
or a custodian agreement.
(h) Notwithstanding anything to the contrary contained herein, except upon
the occurrence and during the continuance of an Event of Default
hereunder, the Issuer hereby expressly reserves and retains the
privilege to receive and, subject to the terms and provisions of this
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
20
<PAGE>
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 Section 5.02 hereof (which Financed
Eligible Loans may be held by the Trustee's agent or bailee) so long as
such loans are subject to the lien of this Indenture.
(i) The Issuer shall notify the Trustee and each Rating Agency in writing
prior to entering into any Derivative Product.
Section 4.05. ENFORCEMENT OF SERVICING AGREEMENTS. The Issuer shall comply
with and shall require the Servicer to comply with the following whether or not
the Issuer is otherwise in default under this Indenture:
(a) cause to be diligently enforced and taken all reasonable steps, actions
and proceedings necessary for the enforcement of all terms, covenants
and conditions of all Servicing Agreements, including the prompt payment
of all amounts due the Issuer thereunder, including without limitation
all principal and interest payments, and Guarantee payments which relate
to any Financed Eligible Loans and cause the Servicer to specify whether
payments received by it represent principal or interest;
(b) not permit the release of the obligations of any Servicer under any
Servicing Agreement except in conjunction with amendments or
modifications permitted by (g) below;
(c) at all times, to the extent permitted by law, cause to be defended,
enforced, preserved and protected the rights and privileges of the
Issuer and of the Registered Owners under or with respect to each
Servicing Agreement;
(d) at its own expense, the Issuer shall duly and punctually perform and
observe each of its obligations to the Servicer under the Servicing
Agreement in accordance with the terms thereof;
(e) the Issuer agrees to give the Trustee prompt written notice of each
default on the part of the Servicer of its obligations under the
Servicing Agreement coming to the Issuer's attention;
(f) the Issuer shall not waive any default by the Servicer under the
Servicing Agreement without the written consent of the Trustee; and
(g) not consent or agree to or permit any amendment or modification of any
Servicing Agreement which will in any manner materially adversely affect
the rights or security of the Registered Owners. The Issuer shall be
entitled to receive and rely upon an opinion of its counsel that any
such amendment or modification will not materially adversely affect the
rights or security of the Registered Owners.
21
<PAGE>
Section 4.06. PROCEDURES FOR TRANSFER OF FUNDS. In any instance where this
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.
Section 4.07. ADDITIONAL COVENANTS WITH RESPECT TO THE ACT. The Issuer
covenants that it will cause the Trustee to be, or replace the Trustee with, an
Eligible Lender under the Act, that it will acquire or cause to be acquired
Eligible Loans originated and held only by an Eligible Lender and 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 Act or Regulations adopted thereunder require an Eligible Lender
to be the owner or holder of Guaranteed Eligible Loans; provided, however, that
nothing above shall prevent the Issuer from delivering the Eligible Loans to the
Servicer or the Guarantee Agency. The Registered Owners of the Notes shall not
in any circumstances be deemed to be the owner or holder of the Guaranteed
Eligible Loans.
The Issuer, or its designated agent, shall be responsible for each of
the following actions with respect to the Act:
(a) the Issuer, or its designated agent, 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 shall be responsible for dealing with the Guarantee Agencies
with respect to the rights, benefits and obligations under the Guarantee
Agreements with respect to the Financed Eligible Loans;
(b) the Issuer, or its designated agent, shall cause to be diligently
enforced, and shall cause to be taken all reasonable steps, actions and
proceedings necessary or appropriate for the enforcement of all terms,
covenants and conditions of all Financed Eligible Loans and agreements
in connection therewith, including the prompt payment of all principal
and interest payments and all other amounts due thereunder;
(c) the Issuer, or its designated agent, shall cause the Financed Eligible
loans to be serviced by entering into the Servicing Agreement or other
agreement with the Servicer for the collection of payments made for, and
the administration of the accounts of, the Financed Eligible Loans;
(d) the Issuer, or its designated agent, shall comply, and shall cause all
of its officers, directors, employees and agents to comply, with the
provisions of the 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 hereunder. 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.
22
<PAGE>
The Trustee shall not be deemed to be the designated agent for
the purposes of this Section 4.07 unless it has agreed in writing to be
such agent.
Section 4.08. FINANCED ELIGIBLE 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, guarantee 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 Act and Regulations which apply to the Program and to such Financed
Eligible Loans.
Section 4.09 . APPOINTMENT OF AGENTS, ETC. The Issuer shall employ and appoint
all employees, agents, consultants and attorneys which it may consider
necessary. No member of the Board, neither singly or collectively, shall be
personally liable for any act or omission not willfully fraudulent or mala fide.
Section 4.10. 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.
Section 4.11. CONTINUED EXISTENCE; SUCCESSOR TO ISSUER. The Issuer agrees that
it will do or cause to be done all things necessary to preserve and keep in full
force and effect its existence, rights and franchises as a Nevada corporation,
except as otherwise permitted by this Section 4.11. The Issuer further agrees
that it will not (a) sell, transfer or otherwise dispose of all or substantially
all, of its assets (except Financed Eligible Loans if such sale, transfer or
disposition will discharge this Indenture in accordance with Article X hereof);
(b) consolidate with or merge into another corporation or entity; or (c) permit
one or more other corporations or entities to consolidate with or merge into it.
The preceding restrictions in (a), (b) and (c) shall not apply to a transaction
if the transferee or the surviving or resulting corporation or entity, if other
than the Issuer, by proper written instrument for the benefit of the Trustee,
irrevocably and unconditionally assumes the obligation to perform and observe
the agreements and obligations of the Issuer under this Indenture.
If a transfer is made as provided in this Section, the provisions of
this Section shall continue in full force and effect and no further transfer
shall be made except in compliance with the provisions of this Section.
Section 4.12. AMENDMENT OF STUDENT LOAN PURCHASE AGREEMENTS. The Issuer shall
notify the Trustee in writing of any proposed amendments to any existing Student
Loan Purchase Agreement. No such amendment shall become effective unless and
until the Trustee consents thereto in writing. The consent of the Trustee shall
not be unreasonably withheld and shall not be withheld if the Trustee receives
an opinion of counsel acceptable to them that such an amendment is required by
the Act and is not materially prejudicial to the Registered Owners.
Notwithstanding the foregoing, however, the Trustee shall consent to an
amendment from time to time so long as it is not materially prejudicial to the
interests of the Registered Owners, and the Trustee may rely on an opinion of
counsel to such effect.
23
<PAGE>
Section 4.13. REPRESENTATIONS; NEGATIVE COVENANTS.
(a) The Issuer hereby makes the following representations and warranties to
the Trustee on which the Trustee relies in authenticating the Notes and
on which the Registered Owners have relied in purchasing the Notes. Such
representations and warranties shall survive the transfer and assignment
of the Trust Estate to the Trustee.
(i) Organization and Good Standing. The Issuer is duly organized and
validly existing under the laws of the State, and has the power
to own its assets and to transact the business in which it
presently engages.
(ii) Due Qualification. The Issuer is duly qualified to do business
and is in good standing, and has obtained all material necessary
licenses and approvals, in all jurisdictions where the failure to
be so qualified, have such good standing or have such licenses or
approvals would have a material adverse effect on the Issuer's
business and operations or in which the actions as required by
this Indenture require or will require such qualification.
(iii) Authorization. The Issuer has the power, authority and legal
right to execute, deliver and perform this Indenture and to grant
the Trust Estate to the Trustee and the execution, delivery and
performance of this Indenture and grant of the Trust Estate to
the Trustee have been duly authorized by the Issuer by all
necessary corporate action.
(iv) Binding Obligation. This Indenture, assuming due authorization,
execution and delivery by the Trustee, constitutes a legal,
valid and binding obligation of the Issuer enforceable against
the Issuer in accordance with its terms, except that (A) such
enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws (whether
statutory, regulatory or decisional) now or hereafter in effect
relating to creditors' rights generally and (B) the remedy of
specific performance and injunctive and other forms of equitable
relief may be subject to certain equitable defenses and to the
discretion of the court before which any proceeding therefor may
be brought, whether a proceeding at law or in equity.
(v) No Violation. The consummation of the transactions contemplated
by this Indenture and the fulfillment of the terms hereof does
not conflict with, result in any breach of any of the terms and
provisions of or constitute (with or without notice, lapse of
time or both) a default under the organizational documents of
the Issuer, or any material indenture, agreement, mortgage, deed
of trust or other instrument to which the Issuer is a party or
by which it is bound, or result in the creation or imposition of
any lien upon any of its material properties pursuant to the
terms of any such indenture, agreement, mortgage, deed of trust
or other instrument, other than this Indenture, nor violate any
law or any order, rule or regulation applicable to the Issuer of
any court or of any federal or state regulatory body,
administrative agency, or other governmental instrumentality
having jurisdiction over the Issuer or any of its properties.
24
<PAGE>
(vi) No Proceedings. There are no proceedings, injunctions, writs,
restraining orders or investigations to which the Issuer or any
of such entity's affiliates is a party pending, or, to the best
of such entity's knowledge, threatened, before any court,
regulatory body, administrative agency, or other tribunal or
governmental instrumentality (A) asserting the invalidity of
this Indenture, (B) seeking to prevent the issuance of any Notes
or the consummation of any of the transactions contemplated by
this Indenture or (C) seeking any determination or ruling that
might materially and adversely affect the performance by the
Issuer of its obligations under, or the validity or
enforceability of this Indenture.
(vii) Approvals. All approvals, authorizations, consents, orders or
other actions of any person, corporation or other organization,
or of any court, governmental agency or body or official,
required on the part of the Issuer in connection with the
execution and delivery of this Indenture have been taken or
obtained on or prior to the Date of Issuance.
(viii) Place of Business. The Issuer's place of business and chief
executive office is in 2255-A Renaissance Drive, Las Vegas,
Nevada 89119.
(ix) Tax and Accounting Treatment. The Issuer intends to treat the
transactions contemplated by the Student Loan Purchase
Agreements as an absolute transfer rather than as a pledge of
the Financed Eligible Loans from the Seller for federal income
tax and financial accounting purposes and the Issuer will be
treated as the owner of the Financed Eligible Loans for all
purposes. The Issuer further intends to treat the Senior Notes
as its indebtedness for federal income tax and financial
accounting purposes.
(x) Taxes. The Issuer has filed (or caused to be filed) all federal,
state, county, local and foreign income, franchise and other tax
returns required to be filed by it through the date hereof, and
has paid all taxes reflected as due thereon. The Issuer has
taken all steps necessary to ensure that it is eligible to file
a consolidated federal income tax return with Union Financial
Services, Inc. and such returns will be filed for all taxable
years in which the Notes are Outstanding. There is no pending
dispute with any taxing authority that, if determined adversely
to the Issuer, would result in the assertion by any taxing
authority of any material tax deficiency, and the Issuer has no
knowledge of a proposed liability for any tax year to be imposed
upon such entity's properties or assets for which there is not
an adequate reserve reflected in such entity's current financial
statements.
(xi) Legal Name. The legal name of the Issuer is "Union Financial
Services-1, Inc." and has not changed since its inception. The
Issuer has no tradenames, fictitious names, assumed names or
"dba's" under which it conducts its business and has made no
filing in respect of any such name.
25
<PAGE>
(xii) Business Purpose. The Issuer has acquired the Financed Eligible
Loans conveyed to it under a Student Loan Purchase Agreement for
a bona fide business purpose and has undertaken the transactions
contemplated herein as principal rather than as an agent of any
other person. The Issuer has no subsidiaries, has adopted and
operated consistently with all corporate formalities with respect
to its operations and has engaged in no other activities other
than those specified in this Indenture and the Student Loan
Purchase Agreements and in accordance with the transactions
contemplated herein and therein.
(xiii) Compliance with Laws. The Issuer is in compliance with all
applicable laws and regulations with respect to the conduct of
its business and has obtained and maintains all permits, licenses
and other approvals as are necessary for the conduct of its
operations.
(xiv) Valid Business Reasons; No Fraudulent Transfers. The
transactions contemplated by this Indenture are in the ordinary
course of the Issuer's business and the Issuer has valid
business reasons for granting the Trust Estate pursuant to this
Indenture. At the time of each such grant: (A) the Issuer
granted the Trust Estate to the Trustee without any intent to
hinder, delay, or defraud any current or future creditor of the
Issuer; (B) the Issuer was not insolvent and did not become
insolvent as a result of any such grant; (C) the Issuer was not
engaged and was not about to engage in any business or
transaction for which any property remaining with such entity
was an unreasonably small capital or for which the remaining
assets of such entity are unreasonably small in relation to the
business of such entity or the transaction; (D) the Issuer did
not intend to incur, and did not believe or should not have
reasonably believed, that it would incur, debts beyond its
ability to pay as they become due; and (E) the consideration
paid received by the Issuer for the grant of the Trust Estate
was reasonably equivalent to the value of the related grant.
(xv) No Management of Affairs of Seller. The Issuer is not and will
not be involved in the day-to-day management of the Seller or the
Issuer's parent or any affiliate.
(xvi) No Intercorporate Transfers with Seller or Affiliates. Other than
the acquisition of assets and the transfer of any Notes pursuant
to this Indenture, the Issuer does not engage in and will not
engage in any intercorporate transactions with the Seller and
affiliates, except as provided herein with respect to Maintenance
and Operating Expenses or the payment of dividends to the
Issuer's parent.
(xvii) Ability to Perform. There has been no material impairment in the
ability of the Issuer to perform its obligations under this
Indenture.
26
<PAGE>
(xviii) Financial Condition. No material adverse change has occurred in
the Issuer's financial status since the date of its formation.
(xix) Event of Default. No Event of Default has occurred and no event
has occurred that, with the giving of notice, the passage of
time, or both, would become an Event of Default.
(xx) Acquisition of Financed Eligible Loans Legal. The Issuer has
complied with all applicable federal, state and local laws and
regulations in connection with its acquisition of the Financed
Eligible Loans from the Seller.
(xxi) No Material Misstatements or Omissions. No information,
certificate of an officer, statement furnished in writing or
report delivered to the Trustee, the Servicer or any Registered
Owner by the Issuer contains any untrue statement of a material
fact or omits a material fact necessary to make such information,
certificate, statement or report not misleading.
(b) The Issuer will not:
(i) sell, transfer, exchange or otherwise dispose of any portion of
the Trust Estate except as expressly permitted by this Indenture;
(ii) claim any credit on, or make any deduction from, the principal
amount of any of the Notes by reason of the payment of any taxes
levied or assessed upon any portion of the Trust Estate;
(iii) except as otherwise provided herein, dissolve or liquidate in
whole or in part, except with the prior written consent of the
Trustee, and to the extent Notes remain Outstanding, approval of
the Registered Owners and a Rating Confirmation;
(iv) permit the validity or effectiveness of this Indenture, any
Supplement or any grant hereunder to be impaired, or permit the
lien of this Indenture to be amended, hypothecated, subordinated,
terminated or discharged, or permit any Person to be released
from any covenants or obligations under this Indenture, except as
may be expressly permitted hereby;
(v) except as otherwise provided herein, permit any lien, charge,
security interest, mortgage or other encumbrance (other than the
lien of this Indenture) to be created on or extend to or
otherwise arise upon or burden the Trust Estate or any part
thereof or any interest therein or the proceeds thereof;
(vi) permit the lien of this Indenture not to constitute a valid first
priority, perfected security interest in the Trust Estate;
(vii) incur or assume any indebtedness or guarantee any indebtedness of
any Person whether secured by any Financed Eligible Loans under
this Indenture or otherwise, except for such obligations as may
be incurred by the Issuer in connection with the issuance of the
Notes pursuant to this Indenture and unsecured trade payables in
the ordinary course of its business;
27
<PAGE>
(viii) operate such that it would be consolidated with its parent or any
other affiliate and its separate corporate existence disregarded
in any federal or state proceeding;
(ix) act as agent of any Seller or, except as provided in the
Servicing Agreement, allow the Seller to act as its agent;
(x) allow the Seller or its parent or any other affiliate to pay its
expenses, guarantee its obligations or advance funds to it for
payment of expenses; or
(xi) consent to the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings of or relating
to the Issuer or of or relating to all or substantially all of
its property, or a decree or order of a court or agency or
supervisory authority having jurisdiction in the premises for
the appointment of a conservator or receiver or liquidator in
any insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the
Issuer; or the Issuer shall not consent to the appointment of a
receiver, conservator or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities,
voluntary liquidation or similar proceedings of or relating to
the Issuer or of or relating to all or substantially all of its
property; or admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage
of any applicable insolvency, bankruptcy or reorganization
statute, make an assignment for the benefit of its creditors or
voluntarily suspend payment of its obligations.
(c) The Issuer makes the following representations and warranties as to the
Trust Estate which is granted to the Trustee hereunder on such date, on
which the Trustee relies in accepting the Trust Estate. Such
representations and warranties shall survive the grant of the Trust
Estate to the Trustee pursuant to this Indenture:
(i) Financed Eligible Loans. Each Financed Eligible Loan acquired by
the Issuer shall constitute an Eligible Loan and contain the
characteristics found in a Student Loan Purchase Agreement.
Notwithstanding the definition of "Eligible Loans" herein, the
Issuer covenants not to acquire Eligible Loan delinquent by more
than 91 days. In addition, the Issuer covenants that no more than
20% of each purchase of Eligible Loans will be made up of
Eligible Loans delinquent by more than 30 days.]
(ii) Schedule of Financed Eligible Loans. The information set forth in
each Schedule of Financed Eligible Loans is true and correct in
all material respects as of the opening of business on the Date
of Issuance.
28
<PAGE>
(iii) Grant. It is the intention of the Issuer that the transfer herein
contemplated constitutes a grant of the Financed Eligible Loans
to the Trustee.
(iv) All Filings Made. All filings (including, without limitation,
UCC filings) necessary in any jurisdiction to give the Trustee a
first priority perfected ownership and security interest in the
Trust Estate, including the Financed Eligible Loans, have been
made no later than the Date of Issuance and copies of the
file-stamped financing statements shall be delivered to the
Trustee within five Business Days of receipt by the Issuer or
its agent from the appropriate secretary of state. The Issuer
has not caused, suffered or permitted any lien, pledges,
offsets, defenses, claims, counterclaims, charges or security
interest with respect to the promissory notes relating to the
Financed Eligible Loans (other than the security interest
created in favor of the Trustee) to be created.
(v) Transfer Not Subject to Bulk Transfer Act. Each grant of the
Financed Eligible Loans by the Issuer pursuant to this Indenture
is not subject to the bulk transfer act or any similar statutory
provisions in effect in any applicable jurisdiction.
(vi) No Transfer Taxes Due. Each grant of the Financed Eligible Loans
(including all payments due or to become due thereunder) by the
Issuer pursuant to this Indenture is not subject to and will not
result in any tax, fee or governmental charge payable by the
Issuer or the Seller to any federal, state or local government.
Section 4.14. ADDITIONAL COVENANTS. So long as any of the Notes are Outstanding:
(a) The Issuer shall not engage in any business or activity other than in
connection with the activities contemplated hereby and in the Student
Loan Purchase Agreements, and in connection with the issuance of Notes.
(b) The Issuer shall not consolidate or merge with or into any other entity
or convey or transfer its properties and assets substantially as an
entirety to any entity except as otherwise provided herein.
(c) The funds and other assets of the Issuer shall not be commingled with
those of any other individual, corporation, estate, partnership, joint
venture, association, joint stock company, trust, unincorporated
organization, or government or any agency or political subdivision
thereof.
(d) The Issuer shall not be, become or hold itself out as being liable for
the debts of any other party.
(e) The Issuer shall not form, or cause to be formed, any subsidiaries.
(f) The Issuer shall act solely in its own name and through its duly
authorized officers or agents in the conduct of its business, and shall
conduct its business so as not to mislead others as to the identity of
the entity with which they are concerned.
29
<PAGE>
(g) The Issuer shall maintain its records and books of account and shall not
commingle its records and books of account with the records and books of
account of any other Person. The books of the Issuer may be kept
(subject to any provision contained in the statutes) inside or outside
the State at such place or places as may be designated from time to time
by the board of trustees or in the bylaws of the Issuer.
(h) All actions of the Issuer shall be taken by a duly authorized
officer or agent of the Issuer.
(i) The Issuer shall not amend, alter, change or repeal any provision
contained in this Section 4.14 without (i) the prior written consent of
the Trustee and (ii) a Rating Confirmation from each Rating Agency
rating any Notes Outstanding (a copy of which shall be provided to the
Trustee) that such amendment, alteration, change or repeal will have no
adverse effect on the rating assigned to the Notes.
(j) The Issuer shall not amend its Articles of Incorporation without first
obtaining the prior written consent of each Rating Agency.
(k) All audited financial statements of the Issuer that are consolidated
with those of any affiliate thereof will contain detailed notes clearly
stating that (i) all of the Issuer's assets are owned by the Issuer, and
(ii) the Issuer is a separate entity with creditors who have received
ownership and/or security interests in the Issuer's assets.
(l) The Issuer will strictly observe legal formalities in its dealings with
the Seller, the Issuer's parent or any affiliate thereof, and funds or
other assets of the Issuer will not be commingled with those of the
Seller, the Issuer's parent or any other affiliate thereof. The Issuer
shall not maintain joint bank accounts or other depository accounts to
which the Seller, the Issuer's parent or any other affiliate has
independent access. None of the Issuer's funds will at any time be
pooled with any funds of the Seller, the Issuer's parent or any other
affiliate.
(m) The Issuer will maintain an arm's length relationship with the Seller
(and any affiliate). Any Person that renders or otherwise furnishes
services to the Issuer will be compensated by the Issuer at market rates
for such services it renders or otherwise furnishes to the Issuer except
as otherwise provided in this Indenture. Except as contemplated in this
Indenture, the Student Loan Purchase Agreements or the Servicing
Agreement, the Issuer will not hold itself out to be responsible for the
debts of the Seller, the parent or the decisions or actions respecting
the daily business and affairs of the Seller or parent.
Section 4.15. PROVIDING OF NOTICE. The Issuer, upon learning of any failure on
its part to observe or perform in any material respect any covenant,
representation or warranty of the Issuer set forth in this Indenture or the
Student Loan Purchase Agreements, or of any failure on the part of the Seller to
observe or perform in any material respect any covenant, representation or
warranty of the Seller set forth in the Student Loan Purchase Agreements, shall
promptly notify the Trustee, the Servicer and each Rating Agency of such
failure.
30
<PAGE>
Section 4.16. REPORTS BY ISSUER. The Issuer will:
(a) file with the Trustee, within 15 days after the Issuer is required to
file the same with the Commission, copies of the annual reports and of
the information, documents and other reports (or copies of such portions
of any of the foregoing as the Commission may from time to time by rules
and regulations prescribe) which the Issuer may be required to file with
the Commission pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act;
(b) file with the Trustee and the Commission, in accordance with rules and
regulations prescribed from time to time by the Commission, such
additional information, documents and reports with respect to compliance
by the Issuer with the conditions and covenants of this Indenture as may
be required from time to time by such rules and regulations; and
(c) transmit by mail to the Registered Owners of Notes, within 30 days after
the filing thereof with the Trustee, in the manner and to the extent
provided in TIA Section 313(c), such summaries of any information,
documents and reports required to be filed by the Issuer pursuant to
clauses (a) and (b) of this Section 4.16 as may be required by rules and
regulations prescribed from time to time by the Commission.
Section 4.17. STATEMENT AS TO COMPLIANCE. The Issuer will deliver to the
Trustee, within 120 days after the end of each fiscal year, a brief certificate
from the principal executive officer, principal financial officer or principal
accounting officer as to his or her knowledge of the Issuer's compliance with
all conditions and covenants under this Indenture and, in the event of any
noncompliance, specifying such noncompliance and the nature and status thereof.
For purposes of this Section 4.17, such compliance shall be determined without
regard to any period of grace or requirement of notice under this Indenture.
Section 4.18. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE.
The Issuer covenants that if:
(a) default is made in the payment of any installment of interest, if any,
on any Notes when such interest becomes due and payable and such default
continues for a period of 30 days; or
(b) default is made in the payment of the principal of (or premium, if any,
on) any Notes at its Maturity,
then the Issuer will, upon demand of the Trustee, pay to the Trustee, for the
benefit of the Registered Owners, the whole amount then due and payable on such
Notes for principal (and premium, if any) and interest, with interest upon any
overdue principal (and premium, if any) and, to the extent that payment of such
interest shall be legally enforceable, upon any overdue installments of
interest, if any, at the rate or rates borne by or provided for in such Notes,
and, in addition thereto, such further amount as shall be sufficient to cover
the costs and expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of the Trustee and its agents and counsel.
31
<PAGE>
If the Issuer fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as Trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree, and may enforce the same
against the Issuer or any other obligor upon such Notes of such series and
collect the moneys adjudged or decreed to be payable in the manner provided by
law out of the property of the Issuer or any other obligor upon such Notes,
wherever situated.
If an Event of Default with respect to Notes occurs and is continuing,
the Trustee may, after being indemnified to its satisfaction and in its
discretion, proceed to protect and enforce its rights and the rights of the
Registered Owners of Notes and any related coupons by such appropriate judicial
proceedings as the Trustee shall deem most effectual to protect and enforce any
such rights, whether for the specific enforcement of any covenant or agreement
in this Indenture or in aid of the exercise of any power granted herein, or to
enforce any other proper remedy.
Article V
FUNDS
Section 5.01. CREATION AND CONTINUATION OF FUNDS AND ACCOUNTS.
(a) There are hereby created and established the following Funds to be held
and maintained by the Trustee for the benefit of the Registered Owners:
(i) Acquisition Fund;
(ii) Revenue Fund; and
(iii) Reserve Fund.
(b) The Operating Fund has previously been established by the Issuer, is
hereby continued, does not constitute a Fund within the meaning of this
Indenture, and is held by a depository bank of the Issuer for the
benefit of the Issuer; and the Registered Owners shall have no right,
title or interest therein.
The Trustee is hereby authorized for the purpose of facilitating the
administration of the Trust Estate and for the administration of any Notes
issued hereunder to create further Accounts or Subaccounts in any of the various
Funds and Accounts established hereunder which are deemed necessary or
desirable.
Section 5.02. ACQUISITION FUND. There shall be deposited into the Acquisition
Fund moneys from proceeds of any Notes, moneys transferred thereto from the
Revenue Fund pursuant to Section 5.03(c) hereof. Financed Eligible Loans shall
be held by the Trustee or its agent or bailee (including the Servicer) and shall
be pledged to the Trust Estate and accounted for as a part of the Acquisition
Fund.
32
<PAGE>
Moneys on deposit in the Acquisition Fund shall be used, upon Issuer
Order, solely to pay costs of issuance of the Notes, to redeem Notes in
accordance with the provisions of any Supplemental Indenture, and, upon receipt
by the Trustee of an Eligible Loan Acquisition Certificate, to acquire Eligible
Loans at a price which would permit the results of cash flow analyses provided
to each Rating Agency on any Date of Issuance to be sustained as certified to
the Trustee on the Acquisition Certificate; provided that such price may be
increased if Rating Agency Confirmation is obtained, based on new cash flow
analyses containing such assumptions as the Issuer shall reasonably determine.
Any such Issuer Order or Eligible Loan Acquisition Certificate shall state that
such proposed use of moneys in the Acquisition Fund is in compliance with the
provisions of this Indenture. If the Issuer determines that all or any portion
of such moneys cannot be so used, then an Authorized Representative of the
Issuer may, by Issuer Order, direct the Trustee to redeem Notes in accordance
with any Supplemental Indenture.
Notwithstanding the foregoing, if on any Note Payment Date there are not
sufficient moneys on deposit in the Revenue Fund to make the transfers required
by Section 5.03(d)(i) through (vii) hereof, then, an amount equal to any such
deficiency may, upon Issuer Order, be transferred directly from the Acquisition
Fund.
While the Issuer will be the beneficial owner of the Financed Eligible
Loans and the Registered Owners will have a security interest therein, it is
understood and agreed that the Trustee will be the legal owner thereof and will
have a security interest in the Financed Eligible Loans for and on behalf of the
Registered Owners. The notes representing the Financed Eligible Loans will be
held in the name of the Trustee for the account of the Issuer, for the benefit
of the Registered Owners.
Financed Eligible Loans shall be sold, transferred or otherwise disposed
of (other than for consolidation, serialization or transfer to a Guaranty
Agency) by the Trustee free from the lien of this Indenture at any time pursuant
to an Issuer Order and if the Trustee is provided with the following:
(a) an Issuer Order stating the sale price and directing that Financed
Eligible Loans be sold, transferred or otherwise disposed of and
delivered to:
(i) if the Eligible Loan is originated under the Act and the Act
requires any such Eligible Loan to be held only by an Eligible
Lender, an Eligible Lender under the Act whose name shall be
specified; or
(ii) the trustee under another indenture securing notes issued by the Issuer;
and
(b) a certificate signed by an Authorized Representative of the Issuer to the
effect that:
(i) the disposition price is equal to or in excess of the principal
amount thereof (plus accrued interest) or equal to or in excess
of the purchase price paid by the Issuer for such Financed
Eligible Loan (less principal amounts received with respect to
such Financed Eligible Loan); or
33
<PAGE>
(ii) the disposition price is lower than the principal amount thereof
(plus accrued interest), and (A) the Issuer reasonably believes
that the Revenues expected to be received (after giving effect
to such disposition) would be at least equal to the Revenues
expected to be received assuming no such sale, transfer or other
disposition occurred, or (B) the Issuer shall remain able to pay
debt service on the Notes and make payment on any other
Obligations on a timely basis (after giving effect to such sale,
transfer or other disposition) whereas it would not have been
able to do so on a timely basis if it had not sold, transferred
or disposed of the Financed Eligible Loans at such discounted
amount, or (C) the Aggregate Market Value of the Trust Estate
(after giving effect to such sale, transfer or other
disposition) will be at least equal to 100% of the aggregate
principal amount of the Obligations plus accrued interest, or
(D) the amount for which the Financed Eligible Loans are being
sold, assigned, transferred or disposed of is equal to the
purchase price paid by the Issuer for such Financed Eligible
Loans (less principal amounts received with respect to such
Financed Eligible Loans).
Further, Financed Eligible Loans shall also be sold, transferred or
otherwise disposed of by the Trustee pursuant to an Issuer Order in which the
Issuer determines that such disposition of Financed Eligible Loans from the
Trust Estate is necessary in order to avoid the occurrence of an Event of
Default hereunder or to avoid any default in the payment obligations of the
Issuer under any reimbursement agreement, in such amount and at such times and
prices as may be specified in such Issuer Order. The Trustee, following receipt
of the foregoing and of a certificate of the Issuer indicating that such
purchaser or transferee is one of the entities described in clause (a) above, if
applicable, shall deliver such Financed Eligible Loans free from the lien of
this Indenture upon the receipt of the purchase price or consideration specified
in the Issuer Order, in compliance with the foregoing. The proceeds to be
received upon any disposition may consist of cash, Investment Securities and/or
Eligible Loans.
Section 5.03. REVENUE FUND.
(a) The Trustee shall deposit into the Revenue Fund all Revenues
derived from Financed Eligible Loans acquired by the Issuer from moneys
on deposit in the Acquisition Fund, and all other Revenue derived from
moneys or assets on deposit in the Acquisition Fund, the Reserve Fund,
all Reciprocal Payments and any other amounts deposited thereto upon
receipt of an Issuer Order.
(b) Upon receipt of an Issuer Order directing the same, moneys in the
Revenue Fund shall be used, on any date, to make a transfer to the
Operating Fund, subject to Section 5.05 hereof.
(c) All Recoveries of Principal constituting a portion of the Revenue
deposited in the Revenue Fund and so identified to the Trustee, shall be
transferred, as soon as practicable, to the Acquisition Fund.
(d) In addition, on each Note Payment Date and Derivative Payment Date,
money in the Revenue Fund shall be used and transferred to other funds
or Persons in the following order of precedence (any money not so
transferred or paid to remain in the Revenue Fund until subsequently
applied pursuant to this Section):
34
<PAGE>
(i) on a parity basis, to pay interest due on any Senior Notes on
such Note Payment Date and any Issuer Derivative Payment secured
on a parity with the Senior Notes due on such Derivative Payment
Date;
(ii) on a parity basis, to pay the principal of or premium, if any, on
any Senior Notes due on such Note Payment Date (if such Note
Payment Date is a Stated Maturity or mandatory sinking fund
redemption date with respect to such Senior Notes);
(iii) on a parity basis, to pay interest due on any Subordinate Notes
on such Note Payment Date and any Issuer Derivative Payment
secured on a parity with the Subordinate Notes due on such
Derivative Payment Date;
(iv) on a parity basis, to pay the principal of or premium, if any, on
any Subordinate Notes due on such Note Payment Date (if such Note
Payment Date is a Stated Maturity or mandatory sinking fund
redemption date with respect to such Subordinate Notes);
(v) on a parity basis, to pay interest on Junior-Subordinate Notes on
such Note Payment Date and to make any Issuer Derivative Payment
secured on a parity with such Junior-Subordinate Notes due on
such Derivative Payment Date;
(vi) on a parity basis, to pay the principal of or premium, if any, on
any Junior-Subordinate Notes due on such Note Payment Date (if
such Note Payment Date is a Stated Maturity or mandatory sinking
fund redemption date with respect to such Junior-Subordinate
Notes);
(vii) to the Reserve Fund the amount, if any, required by Section 5.04(b)
hereof;
(viii) at the option of the Issuer and upon Issuer Order, to the Acquisition
Fund; and
(ix) at the option of the Issuer and upon Issuer Order, to the Issuer
to the extent permitted by Section 5.06 hereof.
Section 5.04. RESERVE FUND.
(a) The Trustee shall deposit to the Reserve Fund the amount, if any,
specified in each Supplemental Indenture. On each Note Payment Date, to
the extent there are insufficient moneys in the Revenue Fund to make the
transfers required by Sections 5.03(d)(i) through (vi) hereof, then, the
amount of such deficiency shall be paid directly from the Reserve Fund
if such deficiency has not been paid from the Acquisition Fund.
(b) If the Reserve Fund is used for the purposes described in Section
5.04(a) hereof, the Trustee shall restore the Reserve Fund to the
Reserve Fund Requirement with respect thereto by transfers from the
35
<PAGE>
Revenue Fund on the next Note Payment Date pursuant to Section
5.03(d)(vii) hereof or from the Acquisition Fund pursuant to Section
5.02 hereof. If the full amount required to restore the Reserve Fund to
the applicable Reserve Fund Requirement is not available in the Revenue
Fund on such next succeeding Note Payment Date, the Trustee shall
continue to transfer funds from the Revenue Fund as they become
available and in accordance with Section 5.03(d)(vii) until the
deficiency in the Reserve Fund has been eliminated.
(c) On any day that the amount in the Reserve Fund exceeds the Reserve Fund
Requirement with respect thereto for any reason, the Trustee, at the
direction of the Issuer, shall transfer the excess to the Acquisition
Fund.
Section 5.05. OPERATING FUND. The Trustee shall deposit to the Operating Fund or
transfer to the Issuer's depository bank if not the Trustee, the amount, if any,
specified in each Supplemental Indenture. The Operating Fund is a special fund
created with a depository bank of the Issuer and shall be used to pay Program
Expenses. The Operating Fund shall be held by such depository bank of the
Issuer, and no Registered Owner shall have any right, title or interest in the
Operating Fund. Amounts deposited in the Operating Fund shall be used to pay
Program Expenses.
The amount deposited in the Operating Fund by transfer from the Revenue
Fund and, if necessary, from the Acquisition Fund, and the schedule of deposits
shall be determined by the Issuer, but the amount so transferred in any one
Fiscal Year shall not exceed the amount budgeted by the Issuer as Program
Expenses for such Fiscal Year with respect to the Notes and as may be limited by
a Supplemental Indenture, and shall not exceed the amount designated therefor in
the cash flows provided to each Rating Agency on each Date of Issuance, unless
the Issuer, after furnishing each Rating Agency with revised cash flows, shall
have received a Rating Confirmation. The Issuer shall provide the Trustee with
an Issuer Order from time to time as to the amount to be transferred.
At any time in order to meet expenses which have been incorporated in an
amended budget, the Issuer may requisition from the Trustee the amount which it
is anticipated will be required to pay the Program Expenses not in excess of the
amount budgeted with respect to the Notes for the period to the next deposit
into the Operating Fund. The requisition, in the form of an Issuer Order, shall
include a statement that the amount requisitioned, when combined with the amount
requisitioned previously in the Fiscal Year, does not exceed the amount
currently budgeted for that year as Program Expenses or as may be further
limited by a Supplemental Indenture.
Upon the receipt of such requisition, the Trustee shall withdraw the
amount requisitioned from the Revenue Fund, and if necessary, from the
Acquisition Fund (or so much thereof as is then on deposit in such Funds) and
transfer the same into the Operating Fund. The Issuer may request that the
Trustee pay the requisitioned amount in installments as specified by the Issuer.
In the event there is not sufficient money on hand in the Revenue Fund and the
Acquisition Fund to transfer the full amount requisitioned, the Trustee shall
notify the Issuer and the Issuer shall then determine the amount to be
transferred.
36
<PAGE>
Section 5.06. TRANSFERS TO ISSUER. Transfers from the Revenue Fund to the Issuer
may be made in accordance with Section 5.03(d)(ix); provided, however, that no
transfer of assets to the Issuer (other than pursuant to the Operating Fund as
otherwise permitted in Article V of the Indenture) shall be made if there is not
on deposit in the Reserve Fund an amount equal to at least the Reserve Fund
Requirement; and further provided, that no transfer shall be made to the Issuer
unless immediately after taking into account any such transfer, the Aggregate
Market Value of the assets in the Trust Estate will be equal to at least ___% of
the unpaid principal amount of the Senior Notes Outstanding and ___% of all
Senior and Subordinate Notes Outstanding, or such lesser percentages as are
acceptable to each Rating Agency then rating the Notes, as evidenced by a Rating
Confirmation.
The amounts so transferred to the Issuer may be used for any proper
purpose of the Issuer and investment earnings thereon shall be the property of
the Issuer.
Section 5.07. INVESTMENT OF FUNDS HELD BY TRUSTEE. The Trustee shall invest
money held for the credit of any Fund or Account or Subaccount held by the
Trustee hereunder as directed in writing (or orally, confirmed in writing) by an
Authorized Representative 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 any such direction and to the extent practicable, the Trustee
shall invest amounts held hereunder in those Investment Securities described in
clause (a) of the definition of the Investment Securities. The Trustee and the
Issuer hereby agree that unless an Event of Default shall have occurred
hereunder, the Issuer acting by and through an Authorized Representative 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 Securities 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 Subaccounts
or combination thereof, 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 Representative 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 this 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. The Trustee and its affiliates may act as
principal or agent in the acquisition or disposition of any Investment
Securities.
37
<PAGE>
Notwithstanding the foregoing, the Trustee shall not be responsible or
liable for any losses on investments made by it hereunder 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.
The Issuer acknowledges that to the extent the regulations of the
Comptroller of the Currency or other applicable regulatory agency grant the
Issuer the right to receive brokerage confirmations of security transactions,
the Issuer waives receipt of such confirmations.
Section 5.08. RELEASE. The Trustee shall, upon Issuer Order and subject to the
provisions of this Indenture, take all actions reasonably necessary to effect
the release of any Financed Eligible Loans from the lien of this Indenture to
the extent the terms hereof permit the sale, disposition or transfer of such
Financed Eligible Loans.
Section 5.09. PURCHASE OF NOTES. Pursuant to this Indenture, any amounts held
under this Indenture which are available to redeem Notes may instead be used to
purchase Notes outstanding under this Indenture at the same times and subject to
the same conditions (except as to price) as apply to the redemption of Notes.
Article VI
DEFAULTS AND REMEDIES
Section 6.01. EVENTS OF DEFAULT DEFINED. For the purpose of this Indenture, the
following events are hereby defined as, and are declared to be, "Events of
Default":
(a) default in the due and punctual payment of the principal of or interest
on any of the Senior Notes when due or failure to make any payment due
under any other Senior Obligations when due;
(b) if no Senior Obligations are Outstanding hereunder, default in the due
and punctual payment of the principal of or interest on any of the
Subordinate Notes when due or failure to make any payment due under any
other Subordinate Obligations when due;
(c) if no Senior Obligations or Subordinate Obligations are Outstanding
hereunder, default in the due and punctual payment of the principal of
or interest on any of the Junior-Subordinate Notes when due or failure
to make any payment due under any other Junior-Subordinate Obligations
when due;
(d) 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 this 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 Issuer; and
(e) the occurrence of an Event of Bankruptcy.
38
<PAGE>
Any notice herein provided to be given to 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, addressed to such Person at the post
office address as shown in Section 9.01 of this Indenture or such other address
as may hereafter be given as the principal office of the Issuer in writing to
the Trustee by an Authorized Officer of the Issuer. 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 Highest Priority Obligations at the time Outstanding
("Registered Owner Approval").
Section 6.02. REMEDY ON DEFAULT; POSSESSION OF TRUST ESTATE. Subject to Section
6.09 hereof, 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 then existing Trust Estate for that purpose, and collect and receive all
charges, income and Revenue of the same and of every part thereof, and after
deducting therefrom all expenses incurred hereunder and all other proper outlays
herein authorized, and all payments which may be made as just and reasonable
compensation for its own services, and for the services of its attorneys,
agents, and assistants, the Trustee shall apply the rest and residue of the
money received by the Trustee as follows:
(a) if the principal of none of the Obligations shall have become due,
first, to the payment of the interest in default on the Senior Notes and
to the payment of all Issuer Derivative Payments secured on a parity
with the Senior Notes then due, in order of the maturity of the
installments thereof, 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 and any such Issuer Derivative
Payments as provided in the ISDA Master Agreement then due, 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 and to the payment of all Issuer
Derivative Payments secured on a parity with the Subordinate Notes then
due, in order of the maturity of the installments of such interest and
any such Issuer Derivative Payments, 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 and any
such Issuer Derivative Payments then due, 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 and to the payment of all Issuer Derivative
Payments secured on a parity with such Junior-Subordinate Notes then
due, in order of the maturity of the installments of such interest and
any such Issuer Derivative Payments, 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
and any such Issuer Derivative Payments 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; and
39
<PAGE>
(b) if the principal of any of the Obligations shall have become due by
declaration of acceleration or otherwise, first to the payment of the
interest in default on the Senior Notes and all Issuer Derivative
Payments secured on a parity with the Senior Notes then due, in the
order of the maturity of the installments thereof, with interest on
overdue installments thereof at the same rates, respectively, as were
borne by the Senior Notes on which such interest shall be in default and
such Issuer Derivative Payments as provided in the ISDA Master Agreement
then due, as the case may be, second, to the payment of the principal of
all Senior Notes then due and any amount owed to a Reciprocal Payor
secured on a parity with Senior Obligations under the ISDA Master
Agreement, such payments to be made ratably to the parties entitled
thereto without discrimination or preference, third, to the payment of
the interest in default on the Subordinate Notes and all Issuer
Derivative Payments secured on a parity with the Subordinate Notes then
due, in the order of the maturity of the installments thereof with
interest on overdue installments thereof at the same rates,
respectively, as were borne by the Subordinate Notes on which such
interest shall be in default and such Issuer Derivative Payments as
provided in the ISDA Master Agreement then due, as the case may be,
fourth, to the payment of the principal of all Subordinate Notes then
due and any amount owed to a Reciprocal Payor secured on a parity with
Subordinate Obligations under the ISDA Master Agreement, such payments
to be made ratably to the parties entitled thereto without
discrimination or preference, fifth, to the payment of the interest in
default on the Junior-Subordinate Notes and all Issuer Derivative
Payments secured on a parity with such Junior-Subordinate Notes then
due, in the order of the maturity of the installments thereof, with
interest on overdue installments thereof at the same rates,
respectively, as were borne by the Junior-Subordinate Notes on which
such interest shall be in default and such Issuer Derivative Payments as
provided in the ISDA Master Agreement then due, as the case may be, and
sixth, to the payment of the principal of all Junior-Subordinate Notes
then due and any amount owed to a Reciprocal Payor secured on a parity
with Junior-Subordinate Obligations under the ISDA Master Agreement,
such payments to be made ratably to the parties entitled thereto without
discrimination or preference, except as may be provided in a
Supplemental Indenture.
Section 6.03. REMEDIES ON DEFAULT; ADVICE OF COUNSEL. Upon the happening of any
Event of Default, the Trustee may proceed to protect and enforce the rights of
the Trustee and the Registered Owners in such manner as counsel for the Trustee
may advise, whether for the specific performance of any covenant, condition,
agreement or undertaking herein contained, or in aid of the execution of any
power herein 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.
Section 6.04. REMEDIES ON DEFAULT; SALE OF TRUST ESTATE. Upon the happening of
any Event of Default and if the principal of all of the Outstanding Obligations
shall have been declared due and payable, then and in every such case, and
irrespective of whether other remedies authorized 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
40
<PAGE>
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 hereby
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 and the Registered Owners of the Obligations in such manner as counsel
for the Trustee may advise, whether for the specific performance of any
covenant, condition, agreement or undertaking herein contained, or in aid of the
execution of any power herein 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 Highest Priority Obligations at the time Outstanding.
Section 6.05. APPOINTMENT OF RECEIVER. In case an Event of Default occurs, and
if all of the Outstanding Obligations shall have been declared due and payable
and in case any judicial proceedings are commenced to enforce any right of the
Trustee or of the Registered Owners under this Indenture or otherwise, then as a
matter of right, the Trustee shall be entitled to the appointment of a receiver
of the Trust Estate and of the earnings, income or Revenue, rents, issues and
profits thereof with such powers as the court making such appointments may
confer.
Section 6.06. RESTORATION OF POSITION. In case the Trustee shall have proceeded
to enforce any rights under this 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, the Trustee and the
Registered Owners shall be restored to their former respective positions and the
rights hereunder 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.
Section 6.07. 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 Obligations hereby secured and any interest thereon due and unpaid, by
presenting such Obligations 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 Obligations so
presented.
41
<PAGE>
Section 6.08. 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 Section
6.02 hereof, and then to the Issuer or whomsoever shall be lawfully entitled
thereto.
Section 6.09. 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 Highest Priority Obligations then Outstanding, shall declare, the
principal of all Obligations then Outstanding, and the interest thereon, if not
previously due, immediately due and payable, anything in the Obligations or this
Indenture to the contrary notwithstanding; provided, however, that for a
declaration of acceleration upon a default pursuant to Section 6.01(d) hereof
shall require the consent of 100% of the Registered Owners of the collective
aggregate principal amount of the Highest Priority Obligations then Outstanding.
Section 6.10. REMEDIES NOT EXCLUSIVE. The remedies herein conferred upon or
reserved to the Trustee or the Registered Owners of Obligations are not intended
to be exclusive of any other remedy, but each remedy herein provided shall be
cumulative and shall be in addition to every other remedy given hereunder or now
or hereafter existing, and every power and remedy hereby given to the Trustee or
to the Registered Owners of Obligations, or any supplement hereto, 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 Obligations to exercise
any power or right arising from any default hereunder shall impair any such
right or power or shall be construed to be a waiver of any such default or to be
acquiescence therein.
Section 6.11. DIRECTION OF TRUSTEE. Upon the happening of any Event of Default,
the Registered Owners of at least 51% of the collective aggregate principal
amount of the Highest Priority Obligations 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 hereof 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 Obligations,
but the Trustee shall be entitled to assume that the action requested by the
Registered Owners of at least 51% of the collective aggregate principal amount
of the Highest Priority Obligations then Outstanding will not be prejudicial to
any non-assenting Registered Owners unless the Registered Owners of more than
50% of the collective aggregate principal amount of the non-assenting Registered
Owners of such Obligations, in writing, show the Trustee how they will be
prejudiced. Provided, however, that anything in this Indenture to the contrary
notwithstanding, the Registered Owners of a majority of the collective aggregate
principal amount of the Highest Priority Obligations then Outstanding together
with the Registered Owners of a majority of the collective aggregate principal
amount of all other Obligations then Outstanding shall 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 this
Indenture, or for the appointment of a receiver or any other proceedings
42
<PAGE>
hereunder, provided that such direction shall not be otherwise than in
accordance with the provisions of law and of this Indenture. The provisions of
this Section 6.11 shall be expressly subject to the provisions of Sections
7.01(c) and 7.05 hereof.
Section 6.12. RIGHT TO ENFORCE IN TRUSTEE. No Registered Owner of any Obligation
shall have any right as such Registered Owner to institute any suit, action, or
proceedings for the enforcement of the provisions of this Indenture or for the
execution of any trust hereunder or for the appointment of a receiver or for any
other remedy hereunder, all rights of action hereunder being vested exclusively
in the Trustee, unless and until such Registered Owner shall have previously
given to the Trustee written notice of a default hereunder, and of the
continuance thereof, and also unless the Registered Owners of the requisite
principal amount of the Obligations 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 indemnity and security satisfactory
to it against the costs, expenses, and liabilities to be incurred therein or
thereby, which offer of indemnity shall be an express condition precedent
hereunder to any obligation of the Trustee to take any such action hereunder,
and the Trustee for 30 days after receipt of such notification, request, and
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 Obligations shall have the right in any manner whatever by his or their
action to affect, disturb, or prejudice the lien of this Indenture or to enforce
any right hereunder except in the manner herein provided and for the equal
benefit of the Registered Owners of not less than a majority of the collective
aggregate principal amount of the Obligations then Outstanding.
Section 6.13. PHYSICAL POSSESSION OF OBLIGATIONS NOT REQUIRED. In any suit or
action by the Trustee arising under this Indenture or on all or any of the
Obligations issued hereunder, or any supplement hereto, the Trustee shall not be
required to produce such Obligations, but shall be entitled in all things to
maintain such suit or action without their production.
Section 6.14. WAIVERS OF EVENTS OF DEFAULT. The Trustee may in its discretion
waive any Event of Default hereunder and its consequences and rescind any
declaration of acceleration of Obligations, and shall do so upon the written
request of the Registered Owners of at least a majority of the collective
aggregate principal amount of the Highest Priority Obligations then Outstanding;
provided, however, that there shall not be waived (a) any Event of Default in
the payment of the principal of or premium on any Outstanding Obligations at the
date of maturity or redemption thereof, or any default in the payment when due
of the interest on any such Obligations, unless prior to such waiver or
rescission, all arrears of interest or all arrears of payments of principal and
premium, if any, and all expenses of the Trustee, in connection with such
default shall have been paid or provided for or (b) any default in the payment
of amounts set forth in Section 7.05 hereof. In case of any such waiver or
rescission, or in case any proceedings taken by the Trustee on account of any
such default shall have been discontinued or abandoned or determined adversely
to the Trustee, then and in every such case the Issuer, the Trustee and the
Registered Owners of Obligations shall be restored to their former positions and
rights hereunder respectively, but no such waiver or rescission shall extend to
or affect any subsequent or other default, or impair any rights or remedies
consequent thereon.
43
<PAGE>
Article VII
THE TRUSTEE
Section 7.01. ACCEPTANCE OF TRUST. The Trustee hereby accepts the trusts imposed
upon it by this 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 this Indenture, and no
implied covenants or obligations shall be read into this
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 this Indenture; but in the case of any such
certificates or opinions which by any provisions hereof 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 this
Indenture and whether or not they contain the statements required
under this 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 this Indenture,
shall use the same degree of care and skill in their exercise as a
prudent person would exercise or use under the circumstances in the
conduct of his or her own affairs.
(c) Before taking any action hereunder requested by Registered Owners, the
Trustee may require that it be furnished an indemnity bond 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.
Section 7.02. 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 this Indenture or of the Notes issued hereunder, and
the Trustee shall incur no responsibility in respect of such matters.
Section 7.03. AS TO FILING OF INDENTURE. The Trustee shall be under no duty (a)
to file or record, or cause to be filed or recorded, this Indenture or any
instrument supplemental hereto, (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 hereunder or
thereunder, (d) or to do any act which may be suitable to be done for the better
maintenance of the lien or security hereof (other than the filing of any
continuation (but not initial) statements), or (e) for giving notice of the
44
<PAGE>
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 hereunder are subject to the lien hereof. 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 in respect of such property or pledged
Revenue and Funds. The Trustee agrees to prepare, request that the Issuer
execute (if such execution is necessary for any such filing) and file in a
timely manner (if received from the Issuer in a timely manner) with any
necessary execution by the Issuer, the continuation statements referred to
herein; provided, that the Trustee shall have no responsibility for the
sufficiency, adequacy or priority of any initial filing and in the absence of
written notice to the contrary by the Issuer or other Authorized Representative,
may rely and shall be protected in relying on all information and exhibits in
such initial filings for the purposes of any continuation statements.
Section 7.04. TRUSTEE MAY ACT THROUGH AGENTS. The Trustee may execute any of the
trusts or powers hereof and perform any duty hereunder, either itself or by or
through its attorneys, agents, or employees, and it shall not be answerable or
accountable for any default, neglect, or misconduct of any such attorneys,
agents, or employees, if reasonable care has been exercised in the appointment,
supervision, and monitoring of the work performed. All reasonable costs incurred
by the Trustee and all reasonable compensation to all such persons as may
reasonably be employed in connection with the trusts hereof shall be paid by the
Issuer.
Section 7.05. INDEMNIFICATION OF TRUSTEE. Other than with respect to its duties
to make payment on the Obligations when due, and its duty to pursue the remedy
of acceleration as provided in Section 6.02 hereof, for each of which no
additional security or indemnity may be required, the Trustee shall be under no
obligation or duty to perform any act at the request of Registered Owners or to
institute or defend any suit in respect thereof unless properly indemnified and
provided with security to its satisfaction as provided in Section 7.01(c)
hereof. 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
hereunder and may conclusively assume that there has been no such default or
Event of Default (other than an Event of Default described in Sections 6.01(a),
(b), (c), or (d) hereof) unless and until it shall have been specifically
notified in writing at the address in Section 9.01 hereof of such default or
Event of Default by (a) the Registered Owners of the required percentages in
principal amount of the Obligations then Outstanding hereinabove specified or
(b) an Authorized Representative of the Issuer. However, the Trustee may begin
suit, or appear in and defend suit, execute any of the trusts hereby created,
enforce any of its rights or powers hereunder, or do anything else in its
judgment proper to be done by it as Trustee, without assurance of reimbursement
or indemnity, and in such case the Trustee shall be reimbursed or indemnified by
the Registered Owners requesting such action, if any, or the Issuer in all other
cases, for all fees, costs and expenses, liabilities, outlays and counsel fees
and other reasonable disbursements properly incurred in connection therewith,
unless such costs and expenses, liabilities, outlays and attorneys' fees and
other reasonable disbursements properly incurred in connection therewith are
adjudicated to have resulted from the negligence or willful misconduct of the
Trustee. In furtherance and not in limitation of this Section 7.05, the Trustee
shall not be liable for, and shall be held harmless by the Issuer from,
following any Orders, instructions or other directions upon which the Trustee is
authorized to rely pursuant to this Indenture or any other agreement to which it
is a party. If the Issuer or the Registered Owners, as appropriate, shall fail
45
<PAGE>
to make such reimbursement or indemnification, the Trustee may reimburse itself
from any money in its possession under the provisions of this Indenture, subject
only to the prior lien of the Notes for the payment of the principal thereof,
premium, if any, and interest thereon from the Revenue Fund. None of the
provisions contained in this Indenture or any other Agreement to which it is a
party shall require the Trustee to act or to expend or risk its own funds or
otherwise incur individual financial liability in the performance of any of its
duties or in the exercise of any of its rights or powers if the Registered
Owners shall not have offered security and indemnity acceptable to it or if it
shall have reasonable grounds for believing that prompt repayment of such funds
or adequate indemnity against such risk or liability is not reasonably assured
to it.
The Issuer agrees to indemnify and hold harmless the Trustee against any
and all claims, demands, suits, actions or other proceedings and all
liabilities, costs and expenses whatsoever caused by any untrue statement or
misleading statement or alleged untrue statement or alleged misleading statement
of a material fact contained in any offering document distributed in connection
with the issuance of the Notes or caused by any omission or alleged omission
from such offering document of any material fact required to be stated therein
or necessary in order to make the statements made therein in the light of the
circumstances under which they were made, not misleading.
Section 7.06. TRUSTEE'S RIGHT TO RELIANCE. The Trustee shall be protected in
acting upon any notice, resolution, request, consent, order, certificate,
report, appraisal, opinion, report or document of the Issuer or the Servicer 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 but need not be counsel for the Issuer, the Trustee,
or for a Registered Owner or who may be Note Counsel), 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
hereunder in good faith and in accordance with the opinion of such counsel.
Whenever in the administration hereof the Trustee shall reasonably deem
it desirable that a matter be proved or established prior to taking, suffering,
or omitting any action hereunder, the Trustee (unless other evidence be herein
specifically prescribed) may, in the absence of bad faith on its part, rely upon
a certificate signed by an Authorized Representative of the Issuer or an
authorized officer of the Servicer.
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 hereby; provided, however, that
the Trustee shall be liable for its negligence or willful misconduct in taking
such action.
The Trustee is authorized, under this Indenture, subject to Section 4.12
hereof, to sell, assign, transfer or convey Financed Eligible Loans in
accordance with an Issuer Order. If such Financed Eligible Loan was originated
under the Act, such Issuer Order shall certify that the Person to whom such
Financed Eligible Loan is sold, assigned, transferred, or conveyed is an
Eligible Lender unless not required by the Act. 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 this
Indenture.
46
<PAGE>
Section 7.07. COMPENSATION OF TRUSTEE. Except as otherwise expressly provided
herein, all advances, counsel fees (including without limitation allocated fees
of in-house counsel) and other expenses reasonably made or incurred by the
Trustee in and about the execution and administration of the trust hereby
created and reasonable compensation to the Trustee for its services in the
premises shall be paid by the Issuer. The compensation of the Trustee shall not
be limited to or by any provision of law in regard to the compensation of
trustees of an express trust. If not paid by the Issuer, the Trustee shall have
a lien against all money held pursuant to this Indenture, subject only to the
prior lien of the Obligations against the money and investments in the Revenue
Fund for the payment of the principal thereof, premium, if any, and interest
thereon, for such reasonable compensation, expenses, advances and counsel fees
incurred in and about the execution of the trusts hereby created and the
exercise and performance of the powers and duties of the Trustee hereunder and
the cost and expense incurred in defending against any liability in the premises
of any character whatsoever (unless such liability is adjudicated to have
resulted from the negligence or willful misconduct of the Trustee).
Section 7.08. TRUSTEE MAY OWN NOTES. The Trustee hereunder, 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 or to effect or aid in any reorganization growing out of the
enforcement of the Notes or of this 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 Obligations.
Section 7.09. RESIGNATION OF TRUSTEE. The Trustee and any successor to the
Trustee may resign and be discharged from the trust created by this Indenture by
giving to the Issuer notice in writing which notice shall specify the date on
which such resignation is to take effect; provided, however, that such
resignation shall only take effect on the day specified in such notice if a
successor Trustee shall have been appointed pursuant to Section 7.11 hereof (and
is qualified to be the Trustee under the requirements of Section 7.11 hereof).
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 the longer, the Trustee may (a) appoint a temporary successor Trustee having
the qualifications provided in Section 7.11 hereof or (b) request a court of
competent jurisdiction to (i) require the Issuer to appoint a successor, as
provided in Section 7.11 hereof, within three days of the receipt of citation or
notice by the court, or (ii) appoint a Trustee having the qualifications
provided in Section 7.11 hereof. 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 Section 7.11 hereof.
Section 7.10. 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 Highest Priority Obligations then Outstanding,
(b) by the Issuer for cause or upon the sale or other disposition of the Trustee
or its corporate trust functions or (c) by the Issuer without cause so long as
no Event of Default as described in Sections 6.01(a), (b), (c), (e) or (f)
47
<PAGE>
exists or has existed within the last 30 days, upon payment to the Trustee so
removed of all money then due to it hereunder and appointment of a successor
thereto by the Issuer and acceptance thereof by said successor. One copy of any
such order of removal shall be filed with the President 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 hereunder, such removal shall not become effective
until (a) in the case of removal by the Registered Owners, such Registered
Owners 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.
Section 7.11. 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 of the Notes 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 so long as such designation is necessary to maintain guarantees
and federal benefits under the Act with respect to the Financed Eligible Loans
originated under the Act.
Section 7.12. MANNER OF VESTING TITLE IN TRUSTEE. Any successor Trustee
appointed hereunder shall execute, acknowledge, and deliver to its predecessor
Trustee, and also to the Issuer, an instrument accepting such appointment
hereunder, 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 hereunder
(except that the predecessor Trustee shall continue to have the benefits to
indemnification hereunder together with the successor Trustee), with like effect
as if originally named as Trustee herein; but the Trustee ceasing to act shall
nevertheless, on the written request of an Authorized Representative 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, pay over, assign, and deliver to the successor Trustee
any money or other property or rights subject to the lien of this 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.
48
<PAGE>
In case any of the Notes to be issued hereunder shall 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
this Indenture.
Section 7.13. ADDITIONAL COVENANTS BY THE TRUSTEE TO CONFORM TO THE ACT. The
Trustee covenants that it will at all times be an Eligible Lender under the Act
so long as such designation is necessary, as determined by the Issuer, to
maintain the guarantees and federal benefits under the Act with respect to the
Financed Eligible Loans, that it will acquire Eligible Loans originated under
the Act in its capacity as an Eligible Lender and that it will not dispose of or
deliver any Financed Eligible Loans originated under the Act or any security
interest in any such Financed Eligible Loans to any party who is not an Eligible
Lender so long as the Act or Regulations adopted thereunder require an Eligible
Lender to be the owner or holder of such Financed Eligible Loans; provided,
however, that nothing above shall prevent the Trustee from delivering the
Eligible Loans to the Servicer or the Guaranty Agency.
Section 7.14. RIGHT OF INSPECTION. A Registered Owner 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.
Section 7.15. LIMITATION WITH RESPECT TO EXAMINATION OF REPORTS. Except as
provided in this 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.
Section 7.16. SERVICING AGREEMENT. The Trustee acknowledges the receipt of a
copy of the Servicing Agreement described in Section 4.05 hereof.
Section 7.17. ADDITIONAL COVENANTS OF TRUSTEE. The Trustee, by the execution
hereof, covenants, represents and agrees that:
(a) it will not exercise any of the rights, duties, or privileges under this
Indenture in such manner as would cause the Eligible Loans held or
acquired under the terms hereof to be transferred, assigned, or pledged
as security to any person or entity other than as permitted by this
Indenture; and
(b) it will comply with the Act and the Regulations and will, upon written
notice from an Authorized Representative of the Issuer, the Secretary,
or the Guaranty Agency, use its reasonable efforts to cause this
Indenture to be amended (in accordance with Section 8.01 hereof) if the
Act or Regulations are hereafter amended so as to be contrary to the
terms of this Indenture.
49
<PAGE>
Section 7.18. DUTY OF TRUSTEE WITH RESPECT TO RATING AGENCIES. It shall be the
duty of the Trustee to notify each Rating Agency then rating any of the Notes
(but the Trustee shall incur no liability for any failure to do so) of (a) any
change, expiration, extension, or renewal of this Indenture, (b) redemption or
defeasance of any or all the Notes, (c) any change in the Trustee or (d) any
other information reasonably required to be reported to each Rating Agency under
any Supplemental Indenture; 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 this Indenture. All notices required to be forwarded to the
Rating Agencies under this Section shall be sent in writing at the following
addresses:
Standard & Poor's Ratings Group
25 Broadway
New York, New York 10004
Attention: Asset-Backed Surveillance Group
Fitch IBCA, Inc.
One State Street Plaza
New York, New York 10004
Attention: Structured Finance
The Trustee also acknowledges that each Rating Agency's periodic review
for maintenance of a Rating on any series of the Notes may involve discussions
and/or meetings with representatives of the Trustee at mutually agreeable times
and places.
Section 7.19. MERGER OF THE TRUSTEE. Any corporation into which the Trustee may
be merged or with which it may be consolidated, or any corporation resulting
from any merger or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Indenture, without the execution or filing of any paper of any further act on
the part of any other parties hereto.
Section 7.20. RECEIPT OF FUNDS FROM SERVICER. The Trustee shall not be
accountable or responsible in any manner whatsoever for any action of the
Issuer, the depository bank of any funds of the Issuer, or the Servicer while
the Servicer is acting as bailee or agent of the Trustee with respect to the
Eligible Loans except, to the extent provided in any Servicing Agreement or
custodian agreement, for actions taken in compliance with any instruction or
direction given to the Trustee, or for the application of funds or moneys by the
Servicer until such time as funds are received by the Trustee.
Section 7.21. SPECIAL CIRCUMSTANCES LEADING TO RESIGNATION OF TRUSTEE. Because
the Trustee serves as trustee hereunder for Obligations of different priorities,
it is possible that circumstances may arise which will cause the Trustee to
resign from its position as trustee for one or more of the Obligations. In the
event that the Trustee makes a determination that it should so resign, due to
the occurrence of an Event of Default or potential default hereunder, or
otherwise, the Issuer may permit such resignation as to one or more of the
Obligations or request the Trustee's resignation as to all Obligations, as the
Issuer may elect. If the Issuer should determine that a conflict of interest has
arisen as to the trusteeship of any of the Obligations, it may authorize and
execute a Supplemental Indenture with one or more successor Trustees, under
which the administration of certain of the Obligations would be separated from
the administration of the other Obligations.
50
<PAGE>
Section 7.22. SURVIVAL OF TRUSTEE'S RIGHTS TO RECEIVE COMPENSATION,
REIMBURSEMENT AND INDEMNIFICATION. The Trustee's rights to receive compensation,
reimbursement and indemnification of money due and owing hereunder at the time
of the Trustee's resignation or removal shall survive the Trustee's resignation
or removal.
Section 7.23. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY; CONFLICTING INTERESTS.
There shall at all times be a Trustee hereunder which shall be eligible to act
as Trustee under TIA Section 310(a)(1) and shall have a combined capital and
surplus of at least $50,000,000. If such corporation publishes reports of
condition at least annually, pursuant to law or the requirements of federal,
state, territorial or District of Columbia supervising or examining authority,
then for the purposes of this Section 7.23, the combined capital and surplus of
such corporation shall be deemed to be its combined capital and surplus as set
forth in its most recent report of condition so published. If at any time the
Trustee shall cease to be eligible in accordance with the provisions of this
Section 7.23, it shall resign immediately in the manner and with the effect
hereinafter specified in this Article VII. Neither the Issuer nor any Person
directly or indirectly controlling or controlled by, or under common control
with, the Issuer shall serve as Trustee.
Section 7.24. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the pendency of any
receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement,
adjustment, composition or other judicial proceeding relative to the Issuer or
any other obligor upon the Notes or the property of the Issuer or of such other
obligor or their creditors, the Trustee (irrespective of whether the principal
of the Notes of any series shall then be due and payable as therein expressed or
by declaration or otherwise and irrespective of whether the Trustee shall have
made any demand on the Issuer for the payment of overdue principal, premium, if
any, or interest) shall be entitled and empowered, by intervention in such
proceeding or otherwise:
(a) to file and prove a claim for the whole amount, or such lesser amount as
may be provided for in the Notes, of principal (and premium, if any) and
interest, if any, owing and unpaid in respect of the Notes and to file
such other papers or documents as may be necessary or advisable in order
to have the claims of the Trustee (including any claim for the
reasonable compensation, expenses, disbursements and advances of the
Trustee and its agents and counsel) and of the Registered Owners allowed
in such judicial proceeding; and
(b) to collect and receive any money or other property payable or
deliverable on any such claims and to distribute the same; and any
custodian, receiver, assignee, trustee, liquidator, sequestrator (or
other similar official) in any such judicial proceeding is hereby
authorized by each Registered Owner of Notes to make such payments to
the Trustee, and if the Trustee shall consent to the making of such
payments directly to the Registered Owners, to pay to the Trustee any
amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee and any predecessor Trustee,
their agents and counsel, and any other amounts due the Trustee or any
predecessor Trustee.
51
<PAGE>
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Registered Owner of
a Note any plan of reorganization, arrangement, adjustment or composition
affecting the Notes or the rights of any Registered Owner thereof, or to
authorize the Trustee to vote in respect of the claim of any Registered Owner of
a Note in any such proceeding.
In any proceedings brought by the Trustee (and also any proceedings
involving the interpretation of any provision of this Indenture to which the
Trustee shall be a party), the Trustee shall be held to represent all the
Registered Owners of the Notes, and it shall not be necessary to make any
Registered Owners of the Notes parties to any such proceedings.
Article VIII
SUPPLEMENTAL INDENTURES
Section 8.01. 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 of any Obligations enter into any indenture or
indentures supplemental to this Indenture for any one or more of the following
purposes:
(a) to cure any ambiguity or formal defect or omission in this 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 may lawfully be granted to or conferred upon the Registered Owners
or the Trustee;
(c) to subject to this Indenture additional revenues, properties or
collateral;
(d) to modify, amend or supplement this Indenture or any indenture
supplemental hereto in such manner as to permit the qualification hereof
and thereof 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 this Indenture or any indenture supplemental hereto
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
hereunder, or any additional or substitute Guaranty Agency or Servicer;
(f) to add such provisions to or to amend such provisions of this Indenture
as may, in Note Counsel's opinion, be necessary or desirable to assure
implementation of the Program in conformance with the 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 Obligations;
52
<PAGE>
(g) to make any change as shall be necessary in order to obtain and maintain
for any of the Notes an investment grade Rating from a nationally
recognized rating service, which changes, in the opinion of the Trustee
are not to the prejudice of the Registered Owner of any of the
Obligations;
(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 Notes pursuant to the provisions of
Section 2.08 of this Indenture, including the creation of appropriate
Funds, Accounts and Subaccounts with respect to such Notes;
(j) to make the terms and provisions of this Indenture, including the lien
and security interest granted herein, applicable to a Derivative
Product, and to modify Section 3.03 hereof with respect to any
particular Derivative Product;
(k) to create any additional Funds or Accounts or Subaccounts under this
Indenture deemed by the Trustee to be necessary or desirable;
(l) to amend the Indenture to allow for any Notes to be supported by a
letter of credit or insurance policy or a liquidity agreement, including
amendments with respect to repayment to such a provider on a parity with
any Notes or Derivative Product and providing rights to such provider
under this Indenture, including with respect to defaults and remedies;
(m) to amend the Indenture to provide for use of a surety bond or other
financial guaranty instrument in lieu of cash and/or Investment
Securities in all or any portion of the Reserve Fund, so long as such
action shall not adversely affect the Ratings on any of the Notes;
(n) to make any other change with a Rating Confirmation; or
(o) to make any other change which, in the judgment of the Trustee is not to
the material prejudice of the Registered Owners of any Obligations;
provided, however, that nothing in this Section shall permit, or be construed as
permitting, any modification of the trusts, powers, rights, duties, remedies,
immunities and privileges of the Trustee without the prior written approval of
the Trustee, which approval shall be evidenced by execution of a Supplemental
Indenture.
Section 8.02. SUPPLEMENTAL INDENTURES REQUIRING CONSENT OF REGISTERED OWNERS.
Exclusive of Supplemental Indentures covered by Section 8.01 hereof and subject
to the terms and provisions contained in this Section, and not otherwise, the
Registered Owners of not less than a majority of the collective aggregate
principal amount of the Obligations then Outstanding shall have the right, from
53
<PAGE>
time to time, to consent to and approve the execution by the Issuer and the
Trustee of such other indenture or indentures supplemental hereto 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 this Indenture or in any Supplemental Indenture;
provided, however, that nothing in this Section shall permit, or be construed as
permitting (a) without the consent of the Registered Owners of all then
Outstanding Obligations, (i) an extension of the maturity date of the principal
of or the interest on any Obligation, or (ii) a reduction in the principal
amount of any Obligation or the rate of interest thereon, or (iii) a privilege
or priority of any Obligation or Obligations over any other Obligation or
Obligations except as otherwise provided herein, or (iv) a reduction in the
aggregate principal amount of the Obligations required for consent to such
Supplemental Indenture, or (v) the creation of any lien other than a lien
ratably securing all of the Obligations at any time Outstanding hereunder except
as otherwise provided herein 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 an Obligation at the
address shown on the registration books or listed in any Derivative Product.
Such notice (which shall be prepared by the Issuer) 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 of not less than a majority of the collective aggregate
principal amount of the Obligations Outstanding at the time of the execution of
any such Supplemental Indenture shall have consented in writing to and approved
the execution thereof as herein provided, no Registered Owner of any Obligation
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 this Section 8.02
permitted and provided, this Indenture shall be and be deemed to be modified and
amended in accordance therewith.
Section 8.03. ADDITIONAL LIMITATION ON MODIFICATION OF INDENTURE. None of the
provisions of this Indenture (including Sections 8.01 and 8.02 hereof) shall
permit an amendment to the provisions of the Indenture which permits the
transfer of all or part of the Financed Eligible Loans originated under the Act
or granting of a security interest therein to any Person other than an Eligible
Lender or the Servicer, unless the Act or Regulations are hereafter modified so
as to permit the same.
Section 8.04. NOTICE OF DEFAULTS. Within 90 days after the occurrence of any
default hereunder with respect to the Notes, the Trustee shall transmit in the
manner and to the extent provided in TIA Section 313(c), notice of such default
hereunder known to the Trustee, unless such default shall have been cured or
waived; provided, however, that, except in the case of a default in the payment
of the principal of (or premium, if any) or interest with respect to any Note,
54
<PAGE>
or in the payment of any sinking fund installment with respect to the Notes, the
Trustee shall be protected in withholding such notice if and so long as an
authorized officer of the Trustee in good faith determine that the withholding
of such notice is in the interest of the Registered Owners of the Notes. For the
purpose of this Section 8.04, the term "default" means any event which is, or
after notice or lapse of time or both would become, an Event of Default with
respect to the Notes.
Section 8.05. CONFORMITY WITH THE TRUST INDENTURE ACT. Every supplemental
indenture executed pursuant to this Article VIII shall conform to the
requirements of the Trust Indenture Act as then in effect.
Article IX
GENERAL PROVISIONS
Section 9.01. NOTICES. Any notice, request or other instrument required by this
Indenture to be signed or executed by the Registered Owners of Obligations may
be executed by the execution of any number of concurrent instruments of similar
tenor, and may be signed or executed by such Registered Owners of Obligations in
person or by agent appointed in writing. As a condition for acting thereunder
the Trustee may demand proof of the execution of any such instrument and of the
fact that any person claiming to be the owner of any of said Obligations is such
owner and may further require the actual deposit of such Obligation or
Obligations with the Trustee. The fact and date of the execution of such
instrument may be proved by the certificate of any officer in any jurisdiction
who by the laws thereof is authorized to take acknowledgments of deeds within
such jurisdiction, that the person signing such instrument acknowledged before
him the execution thereof, or may be proved by any affidavit of a witness to
such execution sworn to before such officer.
The amount of Notes held by any person executing such instrument as a
Registered Owner of Notes and the fact, amount, and numbers of the Notes held by
such person and the date of his holding the same may be proved by a certificate
executed by any responsible trust company, bank, banker, or other depository in
a form approved by the Trustee, showing that at the date therein mentioned such
person had on deposit with such depository the Notes described in such
certificate; provided, however, that at all times the Trustee may require the
actual deposit of such Note or Notes with the Trustee.
All notices, requests and other communications to any party hereunder
shall be in writing (including bank wire, telex, telecopy or facsimile or
similar writing) at the following addresses, and each address shall constitute
each party's respective "Principal Office" for purposes of the Indenture:
55
<PAGE>
If intended for the Issuer:
Union Financial Services-1, Inc.
1801 California Street
Suite 3920
Denver, CO 80202
Attention: Secretary
Telephone: (303) 292-6930
Telecopier: (303) ________
E-Mail: [email protected]
If intended for the Trustee:
Zions First National Bank
717 Seventeenth Street, Suite 301
Denver, Colorado 80202
Attention: Corporate Trust Department
Telephone: (303) 296-6263
Telecopier: (303) 296-6516
E-Mail: [email protected]
Any party may change the address to which subsequent notices to such party are
to be sent, or of its Principal Office, by notice to the others, delivered by
hand or received by telex or telecopier or registered first-class mail, postage
prepaid. Each such notice, request or other communication shall be effective
when delivered by hand or received by telex or telecopier or registered
first-class mail, postage prepaid.
Section 9.02. COVENANTS BIND ISSUER. The covenants, agreements, conditions,
promises, and undertakings in this Indenture shall extend to and be binding upon
the successors and assigns of the Issuer, and all of the covenants hereof shall
bind such successors and assigns, and each of them, jointly and severally. All
the covenants, conditions, and provisions hereof shall be held to be for the
sole and exclusive benefit of the parties hereto and their successors and
assigns and of the Registered Owners from time to time of the Obligations.
No extension of time of payment of any of the Obligations shall operate
to release or discharge the Issuer, it being agreed that the liability of the
Issuer, to the extent permitted by law, shall continue until all of the
Obligations are paid in full, notwithstanding any transfer of Financed Eligible
Loans or extension of time for payment.
Section 9.03. LIEN CREATED. This Indenture shall operate effectually as (a) a
grant of lien on and security interest in, and (b) an assignment of, the Trust
Estate.
Section 9.04. SEVERABILITY OF LIEN. If the lien of this Indenture shall be or
shall ever become ineffectual, invalid, or unenforceable against any part of the
Trust Estate, which is not subject to the lien, because of want of power or
title in the Issuer, the inclusion of any such part shall not in any way affect
or invalidate the pledge and lien hereof against such part of the Trust Estate
as to which the Issuer in fact had the right to pledge.
56
<PAGE>
Section 9.05. CONSENT OF REGISTERED OWNERS BINDS SUCCESSORS. Any request or
consent of the Registered Owner of any Obligations given for any of the purposes
of this Indenture shall bind all future Registered Owners of the same Obligation
or any Obligations issued in exchange therefor or in substitution thereof in
respect of anything done or suffered by the Issuer or the Trustee in pursuance
of such request or consent.
Section 9.06. NONLIABILITY OF DIRECTORS; NO GENERAL OBLIGATION. It is hereby
expressly made a condition of this Indenture that any agreements, covenants, or
representations herein contained or contained in the Notes do not and shall
never constitute or give rise to a personal or pecuniary liability or charge
against the incorporators, officers, employees, agents, or directors of the
Issuer, or against the general credit of the Issuer, and in the event of a
breach of any such agreement, covenant, or representation, no personal or
pecuniary liability or charge payable directly or indirectly from the general
revenues of the Issuer shall arise therefrom. Nothing contained in this Section,
however, shall relieve the Issuer from the observance and performance of the
several covenants and agreements on its part herein contained.
Section 9.07. NONPRESENTMENT OF NOTES OR INTEREST CHECKS. Should any of the
Notes or interest checks not be presented for payment when due, the Trustee
shall retain from any money transferred to it for the purpose of paying the
Notes or interest checks so due, for the benefit of the Registered Owners
thereof, a sum of money sufficient to pay such Notes or interest checks when the
same are presented by the Registered Owners thereof for payment. Such money
shall not be required to be invested. All liability of the Issuer to the
Registered Owners of such Notes or interest checks and all rights of such
Registered Owners against the Issuer under the Notes or interest checks or under
this Indenture shall thereupon cease and determine, and the sole right of such
Registered Owners shall thereafter be against such deposit. If any Note or
interest check shall not be presented for payment within the period of two years
following its payment or redemption date, the Trustee shall return to the Issuer
the money theretofore held by it for payment of such Note or interest check, and
such Note or interest check shall (subject to the defense of any applicable
statute of limitation) thereafter be an unsecured obligation of the Issuer. The
Trustee's responsibility for any such money shall cease upon remittance thereof
to the Issuer.
Section 9.08. SECURITY AGREEMENT. This Indenture constitutes a Financing
Statement and a Security Agreement under the Nevada Uniform Commercial Code.
Section 9.09. LAWS GOVERNING. It is the intent of the parties hereto that this
Indenture shall in all respects be governed by the laws of the State. This
Indenture is subject to the provisions of the TIA that are required to be part
of this Indenture and shall, to the extent applicable, be governed by such
provisions.
Section 9.10. SEVERABILITY. Of any covenant, agreement, waiver, or part thereof
in this Indenture contained be forbidden by any pertinent law or under any
pertinent law be effective to render this Indenture invalid or unenforceable or
to impair the lien hereof, then each such covenant, agreement, waiver, or part
thereof shall itself be and is hereby declared to be wholly ineffective, and
this Indenture shall be construed as if the same were not included herein.
57
<PAGE>
Section 9.11. EXHIBITS. The terms of the Schedules and Exhibits, if any,
attached to this Indenture are incorporated herein in all particulars.
Section 9.12. NON-BUSINESS DAYS. Except as may otherwise be provided herein, if
the date for making payment of any amount hereunder or on any Note, or if the
date for taking any action hereunder, is not a Business Day, then such payment
can be made without accruing further interest or action can be taken on the next
succeeding Business Day, with the same force and effect as if such payment were
made when due or action taken on such required date.
Section 9.13. PARTIES INTERESTED HEREIN. Nothing in this Indenture expressed or
implied is intended or shall be construed to confer upon, or to give to, any
person or entity, other than the Trustee, the paying agent, if any, and the
Registered Owners of the Obligations, any right, remedy or claim under or by
reason of this Indenture or any covenant, condition or stipulation hereof, and
all covenants, stipulations, promises and agreements in this Indenture contained
by and on behalf of the Issuer shall be for the sole and exclusive benefit of
the Trustee, the paying agent, if any, and the Registered Owners of the
Obligations.
Section 9.14. OBLIGATIONS ARE LIMITED OBLIGATIONS. The Notes and the obligations
of the Issuer contained in this Indenture are special, limited obligations of
the Issuer, secured by and payable solely from the Trust Estate herein provided.
The Issuer shall not be obligated to pay the Notes, the interest thereon, or any
other obligation created by or arising from this Indenture from any other
source.
Section 9.15. RECIPROCAL PAYOR RIGHTS. Notwithstanding any provision of this
Indenture, no Reciprocal Payor which shall be in default under any Derivative
Product with the Issuer shall have any of the rights granted to a Reciprocal
Payor or as the Registered Owner of an Obligation hereunder.
Section 9.16. DISCLOSURE OF NAMES AND ADDRESSES OF REGISTERED OWNERS. Registered
Owners of Notes, by receiving and holding the same, agree with the Issuer and
the Trustee that neither the Issuer nor the Trustee nor any Securities
Depository shall be held accountable by reason of the disclosure of any
information as to the names and addresses of the Registered Owners of Notes in
accordance with TIA Section 312, regardless of the source from which such
information was derived, and that the Trustee shall not be held accountable by
reason of mailing any material pursuant to a request made under TIA Section
312(b).
Section 9.17. AGGREGATE PRINCIPAL AMOUNT OF OBLIGATIONS. Whenever in this
Indenture reference is made to the aggregate principal amount of any
Obligations, such phrase shall mean, at any time, the principal amount of any
Notes and the Derivative Value of any Derivative Product.
Section 9.18. FINANCED ELIGIBLE LOANS. The Issuer expects to acquire Eligible
Loans and to transfer Eligible Loans to the Trustee, in accordance with this
Indenture, which Eligible Loans, upon becoming subject to the lien of this
Indenture, constitute Financed Eligible Loans, as defined herein. If for any
reason a Financed Eligible Loan does not constitute an Eligible Loan, or ceases
to constitute an Eligible Loan, such loan shall continue to be subject to the
lien of this Indenture as a Financed Eligible Loan.
58
<PAGE>
Article X
PAYMENT AND CANCELLATION OF NOTES
AND SATISFACTION OF INDENTURE
Section 10.01. TRUST IRREVOCABLE. The trust created by the terms and provisions
of this Indenture is irrevocable until the indebtedness secured hereby (the
Notes and interest thereon) and all Issuer Derivative Payments are fully paid or
provision made for its payment as provided in this Article.
Section 10.02. SATISFACTION OF INDENTURE.
(a) If the Issuer shall pay, or cause to be paid, or there shall otherwise
be paid (i) to the Registered Owners of the Notes, the principal of and
interest on the Notes, at the times and in the manner stipulated in this
Indenture and (ii) to each Reciprocal Payor, all Issuer Derivative
Payments then due, then the pledge of the Trust Estate which is not
pledged hereunder, 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. 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 this Indenture to the party entitled to receive the same
under this 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 and to
each Reciprocal Payor all Reciprocal Payments then due, at the times and
in the manner stipulated in this Indenture and in the Derivative
Product, such Notes and each Reciprocal Payor shall cease to be entitled
to any lien, benefit, or security under this Indenture, and all
covenants, agreements, and obligations of the Issuer to the Registered
Owners thereof and each Reciprocal Payor 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 Section 10.02(a) hereof 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. Any
Outstanding Note 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 10.02(a) hereof if (i) such Note is
to be redeemed on any date prior to its Stated Maturity and (ii) the
Issuer shall have given notice of redemption as provided herein on said
date, there shall have been deposited with the Trustee either money
(fully insured by the Federal Deposit Insurance Issuer or fully
collateralized by Governmental Obligations) in an amount which shall be
sufficient, or Governmental Obligations (including any Governmental
59
<PAGE>
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 Note on and prior to the redemption date or Stated
Maturity thereof, as the case may be. Notwithstanding anything herein to
the contrary, however, no such deposit shall have the effect specified
in this subsection (b) if made during the existence of an Event of
Default, unless made with respect to all of the Notes then Outstanding.
Neither Governmental Obligations nor money deposited with the Trustee
pursuant to this subsection (b) nor principal or interest payments on
any such Governmental Obligations shall be withdrawn or used for any
purpose other than, and shall be held irrevocably in trust in an escrow
account for, the payment of the principal of and interest on such Notes.
Any cash received from such principal of and interest on such
Governmental Obligations deposited with the Trustee, if not needed for
such purpose, shall, to the extent practicable, be reinvested in
Governmental Obligations maturing at times and in amounts sufficient to
pay when due the principal of and interest on such Notes on and prior to
such redemption date or Stated Maturity thereof, as the case may be, and
interest earned from such reinvestments shall be paid over to the
Issuer, as received by the Trustee, free and clear of any trust, lien,
or pledge. 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
Section, "Governmental Obligations" shall mean and include only
non-callable direct obligations of the Department of the Treasury of the
United States of America or portions thereof (including interest or
principal portions thereof), and such Governmental Obligations shall be
of such amounts, maturities, and interest payment dates and 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 herein, 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) Any Issuer Derivative Payments are deemed to have been paid and the
applicable Derivative Product terminated when payment of all Issuer
Derivative Payments due and payable to each Reciprocal Payor under its
respective Derivative Product have been made or duly provided for to the
satisfaction of each Reciprocal Payor and the respective Derivative
Product has been terminated.
(d) In no event shall the Trustee deliver over to the Issuer any Financed
Eligible Loans originated under the Act unless the Issuer is an Eligible
Lender, if the Act or Regulations then in effect require the owner or
holder of such Financed Eligible Loans to be an Eligible Lender.
(e) The provisions of this Section are applicable to the Notes and the Issuer
Derivative Payments.
Section 10.03. CANCELLATION OF PAID NOTES. Any Notes which have been paid or
purchased by the Issuer, mutilated Notes replaced by new Notes, and any
temporary Note for which definitive Notes have been delivered shall (unless
otherwise directed by the Issuer by Issuer Order) forthwith be cancelled by the
Trustee and, except for temporary Notes, returned to the Issuer.
60
<PAGE>
Article XI
TERMINATION
Section 11.01. TERMINATION OF THE TRUST.
(a) The trust created by this Indenture (the "Trust") shall terminate upon
the earlier of (i) the later of (A) payment to the Registered Owners and
to the Trustee of all amounts required to be paid to them pursuant to
this Indenture and any Supplemental Indenture and the disposition of all
property held as part of the Trust Estate or (B) the day following the
date on which all reimbursement obligations to the Reciprocal Payors, if
any, and any other Person as may be provided for in any Supplemental
Indenture have been paid in full, (ii) the expiration of 21 years from
the death of the last survivor of the descendants of Joseph P. Kennedy
(the late ambassador of the United States to the Court of St. James)
living on the date of this Indenture or (iii) subject to Section
11.01(d), upon the occurrence of a Liquidation Event (as hereinafter
defined). The Issuer shall promptly notify the Trustee of any
prospective termination pursuant to this Section 11.01.
(b) Notice of any prospective termination, specifying the Note Payment Date
for payment of the final distribution and requesting the surrender of
the Notes for cancellation, shall be given promptly by the Trustee by
letter to Registered Owners mailed not less than 10 nor more than 15
days preceding the specified Note Payment Date stating (i) the Note
Payment Date upon which final payment of the Notes shall be made, (ii)
the amount of any such final payment, and (iii) the location for
presentation and surrender of the Notes. Payment of the final
distribution which shall be made only upon presentation and surrender of
the Notes at the corporate trust office of the Trustee specified in the
notice.
(c) A "Liquidation Event" shall be deemed to have occurred, subject to
Section 11.01(d), upon Dissolution of the Issuer.
(d) The Issuer shall not voluntarily take any action that would cause it to
be deemed dissolved within the meaning of this Article XI.
In the event of the Dissolution of the Issuer or any action that
would cause the Issuer to cease being deemed a general partner of the
Trust if the Trust were deemed a limited partnership formed under the
Delaware Revised Uniform Limited Partnership Act, and the Issuer's
interest were deemed to represent the sole general partnership interest
in such a partnership, the Trust shall terminate 90 days after the date
of such event and its assets liquidated in accordance with Section
11.01(e) unless both of the following occur:
(i) the Registered Owners representing Registered Owner Approval, as
defined in Section 6.01 hereof, inform the Trustee in writing
before the end of such 90 day period that they disapprove of the
liquidation of the assets of the Trust; and
61
<PAGE>
(ii) the Issuer, the Trustee and the Reciprocal Payors, if any, shall
receive an opinion of counsel to the effect that the continuation
of the Trust shall not cause the Trust to be treated as an
association taxable as a corporation for federal income tax
purposes.
(e) Upon receipt by the Trustee from the Issuer of notice of the occurrence
of a Liquidation Event (as defined in Section 11.01(c)), the Trustee
shall, subject to the direction of the Registered Owners constituting
Registered Owner Approval (provided that, if Registered Owners
constituting Registered Owner Approval shall not have provided such
direction to the Trustee within 30 days of the Trustee having sent a
written request for such direction to the Registered Owners, the Trustee
shall proceed without such direction) sell the remaining assets of the
Trust Estate, if any, at public or private sale, in a commercially
reasonable manner and on commercially reasonable terms. The Issuer
agrees to cooperate with the Trustee to effect any such sale, including
by executing such instruments of conveyance or assignment as shall be
necessary or required by the purchaser. Proceeds of sale, net of
expenses, shall be treated as collections on the assets of the Trust and
shall be deposited into the Revenue Fund. On the next Note Payment Date
the Trustee shall cause to be paid to Registered Owners and the Issuer
amounts distributable on such Note Payment Date pursuant to Article V.
Following the termination of the Trust, all right, title and interest in
and to the Financed Eligible Loans and other property and funds in the
Trust Estate (other than funds on deposit in certain accounts for the
payment of expenses) shall be conveyed and transferred to the Issuer.
Section 11.02. NOTICE. The Trustee shall give notice of termination of the Trust
to the Issuer and each Rating Agency.
Article XII
REPORTING REQUIREMENTS
Section 12.01. ANNUAL STATEMENT AS TO COMPLIANCE. The Servicer will deliver to
each Rating Agency, the Trustee and the Issuer, on or before [March 31] of each
year, beginning with [March 31, 1999], a certificate stating that (a) a review
of the activities of the Servicer during the preceding calendar year and of its
performance under the Servicing Agreement has been made under the supervision of
the officer signing such certificate and (b) to the best of such officers'
knowledge, based on such review, the Servicer has fulfilled all its obligations
under the Servicing Agreement throughout such year, or, there has been a default
in the fulfillment of any such obligation, specifying each such default known to
such officer and the nature and statue thereof.
Section 12.02. ANNUAL INDEPENDENT PUBLIC ACCOUNTANTS' SERVICING REPORT. On or
before [March 31] of each year, beginning [March 31, 1999], the Servicer at its
expense shall cause a firm of independent public accountants which is a member
of the American Institute of Certified Public Accountants to furnish a statement
to each Rating Agency, the Issuer and the Trustee to the effect that such firm
has examined certain documents and records relating to the servicing of the
Financed Eligible Loans (during the preceding fiscal year) under servicing
agreements substantially similar one to another and to the Servicing Agreement
and that, on the basis of such examination, such servicing has been conducted in
compliance with such servicing agreements except for such significant exceptions
or errors in records that, in the opinion of such firm, requires it to report
and which are set forth in such report.
62
<PAGE>
Section 12.03. SERVICER'S CERTIFICATE. Each month, not later than the fifteenth
day of each month, the Servicer shall deliver to the Trustee, a certificate
certified by an officer of the Servicer certifying to the accuracy of the
monthly statement contemplated by Section 12.04.
Section 12.04. STATEMENTS TO REGISTERED OWNERS. On or before the fifteenth day
of each month, the Servicer or the Issuer shall provide to the Trustee (with a
copy to the Rating Agencies) for the Trustee to forward within five days of
receipt to each Registered Owner, a statement setting forth at least the
following information with respect to the preceding month, to the extent
applicable;
(a) the amount of payments with respect to each Series of Notes paid with
respect to principal during the preceding month;
(b) the amount of payments with respect to each Series of Notes paid with
respect to interest during the preceding month;
(c) the amount of the payments allocable to any Registered Owners' Interest
Carryover, if any, together with any remaining outstanding amount of
each thereof;
(d) the principal balance of Financial Eligible Loans as of the close of
business on the last day of the preceding month;
(e) the aggregate outstanding principal amount of the Notes of each Series
as of the close of business on the last day of the preceding month,
after giving effect to payments allocated to principal reported under
clause (a) above;
(f) the interest rate for any Series of variable rate Notes, indicating
such interest rate is calculated;
(g) the amount of the servicing fees allocated to the Servicer as of the
close of business on the last day of the preceding month;
63
<PAGE>
(h) the amount of the Administration Fee, the Auction Agent Fee, Market
Agent Fee, Calculation Agent Fee and the Trustee Fee, if any, allocated
as of the close of business on the last day of the preceding month;
(i) the amount of the recoveries of principal and interest received during
the preceding month relating to Financed Eligible Loans;
(j) the amount of the payment attributable to amounts in the Reserve Fund,
the amount of any other withdrawals from the Reserve Fund and the
balance of the Reserve Fund as of the close of business on the last day
of the preceding month;
(k) the portion, if any, of the payments attributable to amounts on deposit
in the Acquisition Fund;
(l) the aggregate amount, if any, paid by the Trustee to acquire Eligible
Loans from amounts on deposit in the Acquisition Fund during the
preceding month;
(m) the amount remaining in the Acquisition Fund that has not been used to
acquire Eligible Loans and is being transferred to the Revenue Fund;
(n) the aggregate amount, if any, paid for Financed Eligible Loans purchased
from the Trust during the preceding month;
(o) the number and principal amount of Financed Eligible Loans, as of the
close of business on the last day of the preceding month, that are (i)
30 to 60 days delinquent, (ii) 61 to 90 days delinquent, (iii) 91 to 120
days delinquent, (iv) more than 120 days delinquent and (v) for which
claims have been filed with the appropriate Guarantee Agency and which
are awaiting payment; and
(p) the Aggregate Market Value of the Trust Estate and the Outstanding
principal amount of the Notes as of the close of business on the last
day of the preceding month.
Each amount set forth pursuant to paragraph (a), (b), (g) and (h) above
shall be expressed as a dollar amount per Authorized Denomination of a Note. A
copy of the statements referred to above may be obtained by any Registered Owner
by a written request to the Trustee, addressed to its corporate trust office.
64
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this Indenture to be executed
in its corporate name and behalf by its President, and the Trustee, to evidence
its acceptance of the trusts hereby created, has caused this Indenture to be
executed in its corporate name and behalf, all in multiple counterparts, each of
which shall be deemed an original, and the Issuer and the Trustee have caused
this Indenture to be dated as of the date herein above first shown.
UNION FINANCIAL SERVICES-1, INC.
By
Stephen F. Butterfield, President
ZIONS FIRST NATIONAL BANK, as Trustee
By
Vice President
Union Bank and Trust Company (the "Servicer") hereby acknowledges and
accepts the duties and obligations assigned to the Servicer in Article XII
hereof.
UNION BANK AND TRUST COMPANY, as Servicer
By
Name
Title
<PAGE>
EXHIBIT A
ELIGIBLE LOAN ACQUISITION CERTIFICATE
This Eligible Loan Acquisition Certificate is submitted pursuant to the
provisions of Section 5.02 of the Indenture of Trust, dated as of _________ 1,
1999 (the "Indenture"), between Union Financial Services-1, Inc. (the "Issuer")
and Zions First National Bank, as Trustee. All capitalized terms used in this
Certificate and not otherwise defined herein shall have the same meanings given
to such terms in the Indenture. In your capacity as Trustee, you are hereby
authorized and requested to disburse to _________________ (the "Lender") the sum
of $____________ (or, in the case of an exchange, the Eligible Loans listed in
Exhibit A hereto) for the acquisition of Eligible Loans. With respect to the
Eligible Loans so to be acquired, the Issuer hereby certifies as follows:
1. The Eligible Loans to be acquired are those specified in Schedule A
attached hereto (the "Acquired Eligible Loans"). The remaining unpaid principal
amount of each Acquired Eligible Loan is as shown on such Schedule A.
2. The amount to be disbursed pursuant to this Certificate does not
exceed the amount permitted by Section 5.02 of the Indenture (or, if a Financed
Eligible Loan is being sold in exchange for an Acquired Eligible Loan under the
Indenture, the aggregate unpaid principal amount of, and accrued interest on,
such Financed Eligible Loan does not exceed the amount permitted by Section 5.02
of the Indenture).
3. Each Acquired Eligible Loan is an Eligible Loan authorized so to be
acquired by the Indenture.
4. You have been previously, or are herewith, provided with the
following items (the items listed in (a), (b), (c), (d), (f) and (g) have been
received and are being retained, on your behalf, by the Issuer or the Servicer):
(a) a copy of the Student Loan Purchase Agreement between the
Issuer and the Eligible Lender with respect to the Acquired Eligible
Loans;
(b) with respect to each Insured Loan included among the Acquired
Eligible Loans, the Certificate of Insurance relating thereto;
(c) with respect to each Guaranteed Loan included among the
Acquired Eligible Loans, a certified copy of the Guarantee Agreement
relating thereto;
(d) an opinion of counsel to the Issuer specifying each action
necessary to perfect a security interest in all Eligible Loans to be
acquired by the Issuer pursuant to the Student Loan Purchase Agreements
in favor of the Trustee in the manner provided for by the provisions of
20 U.S.C. ss. 1087-2(d)(3) (you are authorized to rely on the advice of
a single blanket opinion of counsel to the Issuer until such time as the
Issuer shall provide any amended opinion to you);
(e) a certificate of an Authorized Representative of the Issuer
to the effect that (i) the Issuer is not in default in the performance
of any of its covenants and agreements made in the Student Loan Purchase
Agreement relating to the Acquired Eligible Loans; (ii) with respect to
all Acquired Eligible Loans which are Insured, Insurance is in effect
with respect thereto, and with respect to all Acquired Eligible Loans
which are Guaranteed, the Guarantee Agreement is in effect with respect
thereto; and (iii) the Issuer is not in default in the performance of
any of its covenants and agreements made in any Contract of Insurance or
the Guarantee Agreement applicable to the Acquired Eligible Loans;
(f) evidence that the promissory notes evidencing the Acquired
Eligible Loans have had stamped thereon or affixed thereto (individually
or by blanket endorsement) a notice specifying that they have been
assigned to the Trustee with all necessary endorsements; and
(g) instruments duly assigning the Acquired Eligible Loans to the
Trustee.
5. The Issuer is not, on the date hereof, in default under the Indenture
or in the performance of any of its covenants and agreements made in the Student
Loan Purchase Agreement relating to the Acquired Eligible Loans, and, to the
best knowledge of the Issuer, the Eligible Lender is not in default under the
Student Loan Purchase Agreement applicable to the Acquired Eligible Loans. The
Issuer is not aware of any default existing on the date hereof under any of the
other documents referred to in paragraph 4 hereof, nor of any circumstances
which would reasonably prevent reliance upon the opinion of counsel referred to
in paragraphs 4(d) hereof.
6. All of the conditions specified in the Student Loan Purchase
Agreement applicable to the Acquired Eligible Loans and the Indenture for the
acquisition of the Acquired Eligible Loans and the disbursement hereby
authorized and requested have been satisfied; provided that the Issuer may waive
the requirement of receiving an opinion of counsel from the counsel to the
Lender.
7. If a Financed Eligible Loan is being sold in exchange for an Acquired
Eligible Loan, the final expected maturity date of such Acquired Eligible Loan
shall be substantially similar to that of the Financed Eligible Loan being sold
and such sale and exchange shall not adversely affect the ability of the Trust
Estate to make timely principal and interest payments on its Obligations.
8. With respect to all Acquired Eligible Loans which are Insured,
Insurance is in effect with respect thereto, and with respect to all Acquired
Eligible Loans which are Guaranteed, the Guarantee Agreement is in effect with
respect thereto.
9. The Issuer is not in default in the performance of any of its
covenants and agreements made in any Contract of Insurance or the Guarantee
Agreement applicable to the Acquired Eligible Loans.
10. The undersigned is authorized to sign and submit this Certificate on
behalf of the Issuer.
11. Eligible Loans are being acquired at a price which permits the
results of the cash flow analyses provided to the Rating Agencies on the Date of
Issuance to be sustained.
<PAGE>
WITNESS my hand this _____ day of ___________.
UNION FINANCIAL SERVICES-1, INC.
By_____________________________
Name ____________________________
Title ___________________________
