As filed with the Securities and Exchange Commission on July 7, 1999
Registration No. 333-75693
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
PRE-EFFECTIVE AMENDMENT NO. 2 TO
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 (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
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. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ----------------------- -------------- ------------------ -------------------- ---------------
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)
- ----------------------- -------------- ------------------ -------------------- ---------------
<S> <C> <C> <C> <C>
notes $1,000,000 100% $1,000,000 $278.00(4)
=====
- ----------------------- -------------- ------------------ -------------------- ---------------
</TABLE>
(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.
(4) Previously Paid.
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>
The 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 __________ __, ____)
$------------
Student Loan Asset-Backed Notes
Series ____
Union Financial Services-1, Inc.
Issuer
We are offering our notes in the following _____ classes:
Original Proceeds
Principal Interest Final Legal Price to Underwriting to
Class Amount Rate Maturity Public Discount Issuer(1)
----- ------ ---- -------- ------ -------- ------
________-____ $ $
________-____ $ $
________-____ $ $
________-____ $ $
________-____ $ $
________-____ $ $
Total
- --------------------
(1) Before deducting expenses estimated to be $__________
The notes:
o will be secured by a revolving pool of student loans
o will be rated _____ by ___________ and _________________.
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.
The underwriters named below are offering the notes subject to approval
of certain legal matters by their counsel. The notes will be delivered in
book-entry form only on or about ______ __, ____.
PaineWebber Incorporated
[insert other names]
----------, ---
3
<PAGE>
You should consider carefully the "Risk Factors" beginning on page __
of this prospectus supplement and on page __ of the prospectus.
The notes are obligations of our company payable solely from the collateral
described in this prospectus supplement and in the prospectus. [The [series__]
[class__] notes are insured as to timely payments of principal and interest by
[Note Insurer]]. This prospectus supplement may be used to offer and sell the
notes only if accompanied by the prospectus.
4
<PAGE>
[inside front cover page]
Table of Contents
Prospectus Supplement
Page
Summary................................................................S-3
Risk Factors...........................................................S-6
The Sellers............................................................S-7
[Previously Issued Notes...............................................S-8]
Credit Enhancement....................................................S-10
Use of Proceeds.......................................................S-13
Characteristics of Our Student Loans..................................S-14
Information Relating to the Guarantee Agencies........................S-20
Ratio of Earnings to Fixed Charges....................................S-21
Special Note Regarding Forward Looking Statements.....................S-21
Plan of Distribution..................................................S-22
Legal Matters.........................................................S-22
Prospectus
About This Prospectus................................................... i
Summary of the Offering................................................iii
Risk Factors............................................................ 1
Special Note Regarding Forward Looking Statements....................... 7
Description of the Notes................................................ 8
Security and Sources of Payment for the Notes.......................... 16
Book-Entry Registration................................................ 19
Additional Notes....................................................... 24
Summary of the Indenture Provisions.................................... 24
Description of Credit Enhancement.......................................36
Union Financial Services-1..............................................39
The Student Loan Program of Union Financial Services-1..................41
Description of the Federal Family Education Loan Program................44
Description of the Guarantee Agencies...................................57
Federal Income Tax Consequences........................................ 63
ERISA Considerations................................................... 67
Relationships Among Financing Participants............................. 68
Plan of Distribution................................................... 69
Legal Matters.......................................................... 70
Financial Information.................................................. 70
Ratings................................................................ 70
Incorporation of Documents by Reference;
Where to Find More Information......................................... 71
Appendix I-Global Clearance, Settlement and Tax Documentation
Procedures............................................................I-1
[end of inside front cover]
S-1
<PAGE>
Important Notice About Information Presented in the
Prospectus Supplement and the Accompanying Prospectus
We provide information to you about the notes in two separate documents
that progressively provide more detail. This prospectus supplement describes the
specific terms of the notes. The accompanying prospectus provides general
information, some of which may not apply to the notes. You are urged to read
both the prospectus and this prospectus supplement in full to obtain information
concerning the notes.
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.
Some of the terms used in this prospectus supplement and the
accompanying prospectus are defined under the caption "Glossary of Defined
Terms" beginning on page ___ in the accompanying prospectus.
S-2
<PAGE>
Summary
o The following summary is a very general overview of the terms of the notes
and does not contain all of the information that you need to consider in
making your investment decision.
o Before deciding to purchase the notes, you should consider the more
detailed information appearing elsewhere in this prospectus supplement and
in the prospectus.
o This prospectus supplement contains forward-looking statements that involve
risks and uncertainties. See "Special Note Regarding Forward Looking
Information" in the prospectus.
General
o The notes will be issued pursuant to an indenture of trust and will be
[senior] [subordinate] [junior-subordinate] notes having the rights
described in the prospectus. We will issue the class __-___ and class
___-___ notes in minimum denominations of $_______ or any integral multiple
of $_______ [and we will issue the class ___-___ notes and the class
___-___ notes in minimum denominations of $________ or any integral
multiple of $________.] We will use the proceeds from the sale of the notes
to purchase a portfolio of student loans, to make a deposit to the Reserve
Fund and to pay costs of issuing the notes.
o [We have previously issued other classes of notes and have similarly used
the proceeds we received to purchase student loans. All of those student
loans previously acquired, along with the student loans we purchase with]
[The] proceeds of the notes being offered by this prospectus supplement,
are pledged to a trustee to secure repayment of all of the notes issued
under the indenture. The exact composition of this common pool of
collateral will change over time as loans are repaid and new loans are
added.
o The sole source of funds for payment of all of the notes issued under the
indenture is the student loans and investments that we pledge to the
trustee and the payments that we receive on those student loans and
investments.
Interest rates
[Fixed rate notes]
[The class __-__ notes and the class __-__ notes will bear interest at the
following rates per annum:
class ______ - ___%
class ______ - ___%]
[Auction rate certificate notes]
Initial
Initial Rate
Initial Auction Adjustment
Rate Date Date
-------- -------- ----------
class __-__
class __-__
[For each auction period, the interest rate for the class ___-___ notes and
the class ___-___ notes will equal the lower of:
o the rate determined pursuant to the auction procedures described in
the accompanying prospectus under "Description of Notes - Auction rate
certificate notes;" and
o a maximum auction rate equal to the greater of the rate of interest on
certain United States treasury securities, plus a margin that will range
from 1.20% to 1.75% depending upon the ratings assigned to the auction
rate certificate notes.
S-3
<PAGE>
[The period between auctions for the class __-__ notes and class __-__
notes will be __ days. We may change the length of the auction period for any
class of auction rate certificate notes as described in the prospectus under the
heading "Description of the Notes-Auction rate certificate notes."]
[LIBOR rate notes]
- ----------------------------------------------
Initial Initial Initial
Interest LIBOR Rate Interest
Payment Based Period
Date Rate
-------- -------- --------
class __-__
class __-__
For each subsequent interest period, the class ___-___ notes and class ___-___
notes will bear interest at:
o [one month] [three month] [six month] LIBOR rate plus _____%, subject to
an interest rate cap. See "Description of the Notes - LIBOR rate notes"
in the prospectus.
Interest payments.
[o Following each interest accrual period, we will pay the holders of the
fixed rate class ___-___ notes and class ___-___ notes the interest
rates listed on the cover page. We will calculate interest on the basis
of a [365-day] 360-day year [consisting of twelve 30-day months]. For
the interest payment due ______ __, ____, the interest accrual period
begins on ______ __, ____ and ends on ______, ____. For all other
interest payment dates, the interest accrual period will be the
preceding calendar month.]
[o On the first business day after each auction period, we will pay the
holders of the auction rate certificate class __-__ notes and the
auction rate certificate class __-__ notes the interest accrued on their
notes during the preceding auction period at the applicable interest
rate. We will calculate interest on the basis of a [360-day] [365-day]
year and the actual number of days elapsed during the related auction
period.]
[o On [the first business day of each month, commencing _________ __,
____,] [each _____, ____, ____, ___, ____, ___ and ____, __] we will pay
the holders of the LIBOR rate class __-__ notes and class __-__ notes
the interest accrued on their notes during the preceding interest
accrual period at the applicable interest rate. We will calculate
interest on the basis of a 360-day [365-day] year consisting of twelve
30-day months.]
Principal redemptions
Although no installments of principal are due on the notes, they are subject
to redemption as follows:
o Prior to ______ __, ____, we intend to use most of the principal payments
that we receive on our student loans to purchase additional student loans.
This revolving period may be extended if the rating agencies rating our
notes approve.
S-4
<PAGE>
o [During the revolving period we also intend to use some of the principal
payments and interest payments that we receive on our student loans to
redeem classes of notes that we previously issued pursuant to a redemption
schedule specified for those notes. Unless events occur that we consider
unlikely, we will not redeem any notes being offered by this prospectus
supplement prior to _______ __, ____.]
o After the revolving period, we will use the principal payments and some of
the interest payments that we receive on our student loans to redeem notes
in the order we determine.
o We cannot predict when the notes offered by this prospectus supplement will
be redeemed. However, they will be paid in full by ________ __, ____.
o In addition to mandatory redemption from principal receipts, we have the
option to redeem the notes from excess interest payments or if we determine
that we cannot continue our student loan program. We may also redeem our
notes when the aggregate outstanding principal balance of all of our notes
is 20% or less of the aggregate initial principal balance of all of the
notes issued under the indenture.
o See the discussion under "Description of the Notes" in the prospectus for a
more complete discussion of how we will pay your notes.
Characteristics of our student loan portfolio.
o The portfolio of student loans [that we currently own and] that we expect to
acquire with the proceeds of the notes is described below under
"Characteristics of our Student Loans" in this prospectus supplement.
Servicing of our student loan portfolio.
Servicer: o National Education Loan Network, Inc.
Subservicers: o UNIPAC Service Corporation
o InTuition, Inc.
[Definitive notes]
[The [designate classes] notes will be evidenced by definitive notes
registered in the name or names of the holders of those notes or their nominee.]
Book-entry registration
We expect that the notes will be delivered in book-entry form through the
Same Day Settlement System of the Depository Trust Company.
Federal income tax consequences
Kutak Rock will deliver an opinion that for federal income tax purposes, the
notes will be treated as our indebtedness. You will be required to include in
your income interest on the notes as paid or accrued, in accordance with your
accounting methods and the provisions of the Internal Revenue Code. See "Federal
Income Tax Consequences" in the prospectus.
ERISA considerations
If the notes are treated as indebtedness without substantial equity
features, the notes are eligible for purchase by or on behalf of employee
benefit plans, retirement arrangements, individual retirement accounts and Keogh
Plans, subject to the considerations discussed under "ERISA Considerations" in
the prospectus.
S-5
<PAGE>
Risk Factors
The discussion under the heading "Risk Factors" in the prospectus
describes the risks associated with your investment in the notes. In addition,
you should consider the following factors:
Our assets may not be sufficient to pay our notes
On the date of issuance of the notes, the aggregate principal balance of
the student loans we own and the other assets pledged as collateral for the
notes will be less than the aggregate principal balance of all our notes issued
under the indenture. In addition, the price we pay for additional student loans
that we acquire during the revolving collateral period may exceed the principal
balance of those 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.
The transition to year 2000 may impair our ability to make payments on our notes
We cannot now determine whether the transition to the year 2000 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
servicer, subservicers, trustee, the guarantee agencies guaranteeing our student
loans and the Department of Education all rely heavily on computer programs and
systems for processing transactions related to student loans.
The trustee, and the servicer and subservicers of our loans have assured
us 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 all of its
data systems are year 2000 compliant. However, we cannot determine if these
parties will be adversely affected by the arrival of the year 2000. We cannot
terminate our dependence on the servicer, subservicers, guarantee agencies or
Department of Education. Under the reasonably likely worst case scenario, the
arrival of the year 2000 could delay our receipt of principal and interest
payments on our 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.
<PAGE>
The Sellers
We expect to use the proceeds of the notes being offered by this
prospectus supplement to purchase portfolios of student loans having a principal
balance of approximately $__________ from the parties shown below.
Seller Approximate Balance Sale Date
------ ------------------- --------
$
$
$
____________________ $_______
Total $
Each of the sellers listed above has made representations and warranties
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 be materially incorrect. See "The Student Loan Program of Union
Financial Services-1" in the prospectus.
S-7
<PAGE>
[Previously Issued Notes]
[Information concerning each outstanding series and class of notes that
we have previously issued under the indenture is provided below. The student
loans and other assets pledged to the trustee will serve as collateral for the
outstanding notes and any additional notes that we may issue under the indenture
in the future, as well as the notes being offered by means of this prospectus
supplement.
<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>
We have paid in full all scheduled principal and interest due and
payable on each series of notes specified above. As of ___________________, the
student loans that are in repayment and pledged to the trustee as collateral for
the outstanding notes had delinquencies as follows:
o $___________________ was 30 to 60 days delinquent;
o $___________________ was 61 to 90 days delinquent;
o $___________________ was 91 to 120 days delinquent; and
o $___________________ 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 student loans was $___________________.]
[The following fees are payable annually with respect to the notes
previously issued:
S-8
<PAGE>
<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>
[We have paid in full all fees and expenses due and payable on each
series specified above.]
S-9
<PAGE>
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]
The amount of the note insurance will be [____]% of the aggregate
initial principal amount of the [class __ notes] [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 all of the prior claims under
the policy] [[____]% of the then existing principal amount of the [class __
notes] [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 date the notes are issued in an amount
equal to ____ % of the principal balance of the 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. Money withdrawn
from the Reserve Fund will be 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]
[We have entered into an interest rate swap agreement with [insert name
of the swap counterparty]. The interest rate swap will terminate on the _____
payment date. We will owe the swap counterparty a net swap payment when the
weighted average discount rate on 91 day United States Treasury Bills plus a
specified percentage is greater than % of the three month LIBOR. The swap
counterparty will owe us a net swap receipt when the three month LIBOR is
greater than ____% of the weighted average discount rate on the 91 day United
States Treasury Bills plus a specified percentage. 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 class ___ notes.]
[While the interest rate swap is in effect, it will reduce, but not
eliminate, the risk that the rate of interest on the notes will be determined by
the applicable interest rate cap.]
S-10
<PAGE>
[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 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] [student loans]. The
amount available under the letter of credit on any interest payment date will be
equal to this initial amount minus the sum of all of the prior draws under the
letter of credit to cover any shortfall between in the amounts payable to the
[class __] noteholders [and the class __ noteholders].
We will be required to renew or replace the letter of credit before its
expiration until the [designate class] notes are no longer outstanding. If we do
not renew or replace a letter of credit before the expiration of the then
existing letter of credit, the trustee will draw under the letter of credit an
amount equal to the full amount available under the indenture and will transfer
those funds to a separate trust fund. Thereafter, the [trustee] will be entitled
to withdraw those 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 to [name of issuing bank], 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 the rights of the
Class A noteholders to receive payments. [The rights of the Class C noteholder
to receive payments of interest and principal are subordinated to the 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, distributions from the trust estate
created under the indenture 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, distributions from the trust estate created under the indenture
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-Subordinate Notes" in the prospectus.
S-11
<PAGE>
[Surety bonds]
[We will obtain a surety bond in the amount of $________ with respect to
the notes in favor of the trustee solely on behalf of the holders of the [class
__] notes. The surety bond will provide for coverage of timely payment of all
interest and ultimate payment of all principal due on the related class ___
notes. We will pay $________ to the issuer of the surety bond.]
[Description of the issuer of surety bond to be provided.]
S-12
<PAGE>
Use of Proceeds
We estimate that the net proceeds from the sale of the notes will be
applied as follows:
We expect that approximately $___________ of the proceeds deposited to
the Acquisition Fund will be used on the issue date to acquire a portfolio of
student loans. See "The Sellers" in this prospectus supplement. [The remaining
proceeds deposited to the Acquisition Fund are expected to be used to acquire
portfolios of student loans in _________, ____.]
S-13
<PAGE>
Characteristics of our
Student Loans
(As of_____________ __, ____ )
[We have previously purchased portfolios of student loans.] The
characteristics of our student loans [pledged to the trustee on the date of this
prospectus supplement and the additional student loans] that we expect to
purchase with the proceeds of the notes offered by this prospectus supplement
are described below. Since the date for purchase of the additional loans to be
acquired with the proceeds of the Series __ notes is other than ______, __, the
characteristics of those loans will vary.]
Composition of our Student Loan Portfolio
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, forbearance or claims)..........................
Weighted average remaining term (months)..........................
Distribution of our the 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%
=============== ==================== ======
S-14
<PAGE>
Distribution of our Student Loans by Interest Rate
Outstanding Percent of Loans
Number of Principal by Outstanding
Interest Rate Loans Balance Balance
------------------- ------------------- ------------------ -----------------
$ %
Total $ 100.00%
=========== ============== ======
Distribution of our 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%
============= ================ ======
Distribution of our 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-15
<PAGE>
Geographic Distribution of our Student Loans
The following chart shows the geographic distribution of our student
loans based on the permanent billing addresses of the borrowers as shown on the
servicer's records:
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
======= ==================== ======
S-17
<PAGE>
Distribution of our 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 our Student Loans by Guarantee Agency
Percent
Outstanding of Loans by
Guarantee Number of Principal Outstanding
Agencies Loans Balance Balance
- ------------------------- ------------------ --------------------- -------------
ACHE
CSLP
ECMC
FISL
GHEAC
HEAF
ICSAC
KHEAA
LOSFA
MDEC
NJOSA
NSLP
OGSLP
OSFA
PHEAA
TGAI
TGSLC
TSAC
USAF
USOE
VSEAA
WHEC
Other *
Total ____________________ $_________________ _______
%
- -----------------------
* Less than 0.01%
S-18
<PAGE>
Abbreviation Full Name of Guarantee Agency
ACHE Kentucky Higher Education Assistance Authority
CSLP Colorado Student Loan Program
ECMC Educational Credit Management Corporation
FISL Federally Insured Student Loan
GHEAC Georgia Higher Education Assistance Corporation
HEAF Higher Education Assistance Foundation
ICSAC Iowa College Student Aid Commission
KHEAA Kentucky Higher Education Assistance Authority
LOSFA Louisiana Office of Student Financial Assistance
MDEC Finance Authority of Maine
NJOSA New Jersey Office of Student Assistance
NSLP Nebraska Student Loan Program
OGSLP Oklahoma Guaranteed Student Loan Program
OSFA Office of Student Financial Assistance, Florida Department
of Education
PHEAA Pennsylvania Higher Education Assistance Authority
TGAI Educational Credit Management Corporation
TGSLC Texas Guaranteed Student Loan Corporation
TSAC Tennessee Student Assistance Corporation
USAF United Student Aid Funds
USOE Department of Education
VSEAA Educational Credit Management Corporation
WHEC Great Lakes Higher Education Guaranty Corporation
S-19
<PAGE>
Distribution of our 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 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 of Education's
authority in the event a guarantee agency is unable to meet its insurance
obligations see "Description of the Guarantee Agencies" in the prospectus.
Of our student loans held in the trust estate approximately
o [__]% are guaranteed by [__], a non-profit corporation ("[__]"),
organized in [__] and guaranteeing student loans since [___], and as
of [_____] had an approximate aggregate principal amount of loans
guaranteed of $[__],
o [__]% are guaranteed by [___], an agency of [___] ("[__]"), organized
in [___] and guaranteeing student loans since [___], and as of [____]
had an approximate aggregate principal amount of loans guaranteed of
$[___],
o [___]% are guaranteed by [___], an agency of [___] ("[__]"), organized
in [___] and guaranteeing student loans since [___], and as of [____]
had an approximate aggregate principal amount of loans guaranteed of
$[___],
o and the remaining [___]% are guaranteed by one of the following
guarantee agencies: [___] and [___].
See "Description of the Guarantee Agencies" in the prospectus for more
detailed information concerning the characteristics of the guarantee agencies.
Presented below is information with respect to each guarantee agency
that we expect to guaranty 10% or more of our student loans as of ________ __,
____. Except as otherwise indicated, we have obtained the information regarding
each guarantee agency from the guarantee agency. We have not independently
verified this information.
[Description of guarantee agency]
S-20
<PAGE>
Ratio of Earnings to Fixed Charges
The following table sets forth the ratio of earnings to fixed charges
for Union Financial Services-1, for each of the following periods.
The ratio of earnings to fixed charges has been computed by dividing
earnings by fixed charges. Earnings consist of income from operations before
income taxes plus fixed charges. Fixed charges consist of interest on all
indebtedness plus amortization of debt issuance costs.
<TABLE>
<CAPTION>
Period from
_____-Month Period Fiscal Year Fiscal Year inception
Ended Ended Ended (February 28,
________, 1999 December 31, 1998 December 31, 1997 1996) to
December 31, 1997
-------------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
Earnings ..... $__________ $35,098,911 $35,283,304 $11,424,421
Fixed Charges ___________ 34,635,520 33,276,502 12,238,247
Ratio......... ____ 1.01 1.06 *
</TABLE>
- --------------------
* For the period from inception (February 28, 1996) to December 31, 1996,
earnings were inadequate to cover fixed charges by a deficiency of
$813,826.
Special Note Regarding Forward Looking Statements
Statements in this prospectus supplement and the prospectus, including
those concerning our expectations as to our ability to purchase eligible student
loans, to structure and to issue competitive securities, our ability to pay our
notes, and certain other information presented in this prospectus supplement and
the prospectus, 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 our actual results to differ from expectations, please see the caption
entitled "Risk Factors" in this prospectus supplement and in the prospectus.
S-22
<PAGE>
Plan of Distribution
Subject to the terms and conditions set forth in the underwriting
agreement dated as of __________, ____, among ourselves and the underwriters
named below, we have agreed to sell to each of the underwriters, and each of the
underwriters has agreed to purchase from us, the principal amount of the notes
set forth opposite its name.
Underwriter class - class - class - class - class - class -
- ----------- --------- --------- -------- --------- --------- -------
Total
We have been advised by the underwriters that they propose to offer the
notes to the public initially at the respective offering prices set forth on the
cover page of this prospectus supplement. Until the distribution of notes is
completed, the rules of the SEC may limit the ability of the underwriters and
selling group members to bid for and purchase the notes. As an exception to
these rules, the underwriters are permitted to engage in transactions that
stabilize the price of the notes. These transactions consist of bids of purchase
for the purpose of pegging, fixing or maintaining the price of the notes.
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 those purchases.
Neither we nor any of 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 notes. In addition, neither we nor
any of the underwriters make any representation that the underwriters will
engage in these transactions or that these transactions, once commenced, will
not be discontinued without notice.
We have been advised by the underwriters that they presently intend to
make a market in the notes; however, they are not obligated to do so. In
addition, any market-making may be discontinued at any time, and an active
public market for the notes may not 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, our affiliates.
The underwriting agreement provides that we will indemnify the
underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, and we have agreed to reimburse the underwriters for the
fees and expenses of their counsel.
S-23
<PAGE>
Legal Matters
Certain legal matters, including certain income tax matters, will be
passed upon for Union Financial Services-1 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 Union Financial Services-1 by
Ballard Spahr Andrews & Ingersoll, LLP, Denver, Colorado.
S-24
<PAGE>
PROSPECTUS
UNION FINANCIAL SERVICES-1, INC.
ISSUER
$
STUDENT LOAN ASSET-BACKED NOTES
We will periodically issue our 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 Union Financial Services-1,
Inc. 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 ___________________, 1999.
<PAGE>
About This Prospectus
This prospectus is part of a registration statement that we filed with
the Securities and Exchange Commission. We may sell our notes in one or more
offerings pursuant to the registration statement 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 the 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.
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.
i
<PAGE>
TABLE OF CONTENTS TO PROSPECTUS
About This Prospectus..........................................................i
Summary of the Offering......................................................iii
Risk Factors...................................................................1
Special Note Regarding Forward Looking Statements..............................7
Description of the Notes.......................................................8
Security and Sources of Payment for the Notes.................................16
Book-Entry Registration.......................................................19
Additional Notes..............................................................24
Summary of the Indenture Provisions...........................................24
Description of Credit Enhancement.............................................36
Union Financial Services-1....................................................39
The Student Loan Program of Union Financial Services-1........................41
Description of the Federal Family Education Loan Program......................44
Description of the Guarantee Agencies.........................................57
Federal Income Tax Consequences...............................................63
ERISA Considerations..........................................................67
Relationships Among Financing Participants....................................68
Plan of Distribution..........................................................69
Legal Matters.................................................................70
Financial Information.........................................................70
Ratings.......................................................................70
Incorporation of Documents by Reference;Where to Find More Information........71
APPENDIX I- Global Clearance, Settlement and Tax Documentation Procedures.I-1
ii
<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.
Overview
We will from time to time sell 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 under the indenture,
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.
Parties
Union Financial Services-1, Inc., a Nevada corporation, is the issuer of the
notes. You may contact us at 1801 California Street, Suite 3920, Denver,
Colorado 80202, or by phone at (303)292-6930.
National Education Loan Network, Inc. will act as the servicer, and UNIPAC
Service Corporation, a Nebraska corporation, and InTuition, Inc., a Florida
corporation, will act as subservicers of our student loans. We may appoint other
entities to act as a servicer or subservicer of our student loans if approved by
the rating agencies rating our notes.
Zions First National Bank, will serve as the trustee under the indenture
governing the issuance of the notes. Zions Bank may be replaced by another
qualified trustee.
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.
Auction rate certificate notes. We may issue classes of notes that bear interest
at a rate determined by auction. The initial interest rate for these auction
rate certificate notes, or the method for determining the initial interest rate,
will be described in the prospectus supplement. The interest rates for the
auction rate certificate notes will be reset at the end of each interest period
pursuant to the auction procedures.
The auction procedures are summarized and an example of an auction is included
under "Description of the Notes-Auction rate certificate notes."
Index rate notes. The interest rate for some of our notes may be determined by
reference to LIBOR or by reference to United States Treasury Securities. These
notes will bear interest at an initial rate described in the prospectus
supplement. Thereafter, the interest rate for LIBOR rate notes will be
determined periodically by reference to the designated LIBOR rate, and the
interest rate for treasury rate notes will be determined periodically 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."
iii
<PAGE>
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 the 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."
Original issue discount notes. We may issue classes of notes at a discount from
the principal amount payable at maturity that pay no interest or interest at a
rate that is below market rates at the time of issuance. The interest paid these
original issue discount notes, if any, and the yield to maturity of the original
issue discount notes, will be described in the prospectus supplement. See
"Description of the Notes Original issue discount notes."
Payments on the notes
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 an indenture of trust.
That trust estate will consist of a revolving pool of student loans, payments
made on the student loans 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. 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.
Use of principal receipts -
The revolving period
We will deposit the net proceeds we receive from the offering of a series of the
notes into the Acquisition Fund to be used to purchase student loans on or
before a specified date. We intend to use principal payments that we receive on
the student loans to purchase additional student loans for a period of time
specified in the prospectus supplement. During this revolving 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 revolving period, unless the
terms of a series of the notes described in the prospectus supplement provide
for payments of principal or redemptions during the revolving period.
The revolving 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.
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. Once the revolving period has ended, we will be required
under the indenture to use the principal payments remaining in the Acquisition
Fund along with the principal payments that we receive on the student loans to
redeem notes.
Optional redemption. We may redeem notes in our sole discretion from interest
payments received on student loans that are not needed to pay interest on the
notes and our expenses. After a date specified in the prospectus supplement, we
may sell the student loans held in the trust estate for not less than their
principal balance plus accrued interest and use the proceeds to redeem the
outstanding notes.
iv
<PAGE>
Extraordinary optional redemption. We may redeem notes in our sole discretion if
we determine that we cannot 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.
Optional purchase. We may purchase all of the notes in our sole discretion when
the aggregate current principal balance of the notes that remain outstanding is
less than or equal to 20% of the initial aggregate principal balance of the
notes on their respective date of original issuance.
Partial redemption. If less than all of the notes of any series are to be
redeemed or purchased, 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. However, we have the option of
redeeming some or all of the Class B notes before all of the Class A notes are
redeemed, and we may redeem some or all of the Class C notes before the Class A
notes and Class B notes are redeemed, if the ratio of our assets to our
liabilities exceeds levels specified in the prospectus supplement. See
"Description of the Notes-Notice and Partial Redemption of Notes" in this
prospectus.
The student
loans we purchase
The student loans that we purchase will have been originated under the Federal
Family Education Loan Program to students enrolled in qualified, accredited
institutions of higher education.
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.
Student loan guarantees
The payment of principal and interest on all of our 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. This
guarantee, 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.
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.
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. The Department of Education is required to pay the
guarantee agency's full insurance obligation to the holders until the
obligations are transferred to a new guarantee agency capable of meeting the
obligations, or until a qualified successor guarantee agency assumes the
obligations. Delays in receiving reimbursement could occur if a guarantee agency
fails to meet its obligations.
Subordinated notes
The rights of the owners of Class B notes to receive payments of principal and
interest will be subordinated to the rights of the owners of the Class A notes
to receive payments of principal and interest. The rights of the owners of Class
C notes to receive payments of principal and interest will be subordinated to
the rights of the owners of the Class B notes and the Class A notes to receive
payments of principal and interest. This subordination is intended to enhance
the likelihood that the owners of the more senior notes will regularly receive
the full amount of scheduled payments of principal and interest due them and to
protect the owners against losses.
v
<PAGE>
Funds
Revenue Fund. We will deposit all funds that we receive with respect to the
student loans in the 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. We will transfer to the Acquisition
Fund principal payments we receive on the student loans. Extra amounts in the
Revenue Fund will be transferred to the Reserve Fund, to the extent of any
deficiency in the Reserve Fund.
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 the notes. We will also acquire
additional student loans during the revolving period with amounts transferred
from the Revenue Fund. After the revolving period, we will redeem notes with all
moneys remaining in the Acquisition Fund.
If moneys in the Revenue Fund are insufficient to pay interest, redeem notes, or
pay expenses, we may fund the remaining insufficiency from transfers from the
Acquisition Fund.
Reserve Fund. When we issue a series of notes, we expect to deposit into the
Reserve Fund an amount specified in the related prospectus supplement. At any
later time, 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.
Operating Fund. When we issue a series of notes, we will deposit into the
Operating Fund an amount specified in the related prospectus supplement. Money
will also be transferred to the Operating Fund from the Revenue Fund from time
to time. These amounts will be applied to pay our administrative costs and will
not secure repayment of the notes.
Credit enhancement
We may establish credit enhancement for a series of notes in the form of
insurance policies or surety 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 risks of defaults or losses, as described in the related prospectus
supplement. See "Description of Credit Enhancement" in this prospectus.
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, then all reports will be provided to those entities which in turn will
provide the reports to their eligible participants. Those participants will then
forward the reports to the beneficial owners of notes. See "Book-Entry
Registration" in this prospectus.
vi
<PAGE>
Risk Factors
You should consider the following factors regarding your purchase of the
notes.
The notes are payable solely from
the trust estate and you will have
no other recourse against us
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 of our affiliates, 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
o on the amount and timing of payments and collections on the student
loans held in the trust estate and interest paid or earnings on the
funds held in the accounts established pursuant to the indenture;
o amounts on deposit in the Reserve Fund and other funds held in the
trust estate; and
o 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.
If we fail to follow these procedures, or if any seller or any other
originator of our student loans fail to follow these procedures, the Department
of Education and the guarantee agencies may refuse to pay claims submitted by
the trustee. If the Department of Education or a guarantee agency refused to pay
a claim, it 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" in this prospectus.
The trustee's use of a shared lender
identification number could impair
our ability to pay principal and
interest when due
1
<PAGE>
Every holder of loans originated under the Federal Family Education Loan
Program is required to obtain a lender identification number from the Department
of Education. The trustee will use the same 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.
The Department of Education regards the trustee as the party primarily
responsible for any liabilities owed to the Department of Education or the
guaranty agencies resulting from the trustee's participation in the Federal
Family Education Loan Program. As a result, if the Department of Education or a
guaranty agency were to determine that the trustee owes a liability on any
student loan included in a trust using the shared lender identification number,
the Department of Education or the 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 offset by the Department of Education or a
guaranty agency 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 those other trusts. As a result, the
payment from the Department of Education received by the trustee under the
lender identification number for that quarter could be less than the amount owed
by the Department of Education on the student loans securing repayment of the
notes for that quarter. If we do not receive payments from the Department of
Education when due, we may not be able to pay principal and interest on the
notes when due.
Other persons may gain a
superior security interest in the
student loans
We expect to perfect the trustee's security interest in the student
loans we purchase with proceeds of the notes by having the trustee's custodian
take possession of the promissory notes relating to those student loans and by
filing financing statements. The custodian will be either a servicer or
subservicer of the student loans. If the custodian acts contrary to our
instructions and releases the promissory notes to someone other than the trustee
or the trustee's agent, then the first priority security interest of the trustee
may be released.
Bankruptcy or insolvency of
our parent or an affiliated company
could result in payment delays
to you
Union Financial Services-1, is a separate subsidiary of our parent
company, Union Financial Services, Inc. If our parent company or another
affiliated company seeks relief under the bankruptcy or related laws, a
bankruptcy court could attempt to consolidate our assets into the bankruptcy
estate of our parent or another affiliated company. If that occurs, you can
expect delays in receiving payments on your notes and even a reduction in
payments on your notes.
2
<PAGE>
We have taken steps to structure our loan purchases from any seller as a
"true sale" under law. A true sale helps to establish that the loans would not
continue to be the property of the seller if the seller becomes bankrupt or
insolvent. If a court disagrees with this position, we could experience delays
in receiving payments on our student loans and you could then expect a delay in
receiving payments on your notes or even a reduction in payments on your notes.
A court could also subject the student loans to a superior tax or government
lien arising before the sale of the student loans to us.
If the seller of student loans to us is a bank and it becomes insolvent,
that seller would become subject to receivership by the Federal Deposit
Insurance Corporation. In that case, the FDIC could treat the transfer of the
student loans to us as a secured loan rather than as a sale. If that were to
happen, we would have only a security interest in the student loans.
Nevertheless, we may experience delays in receiving payments with respect to
those loans. In addition, the FDIC may seek a release of the loans to itself, as
receiver, which would accelerate and prepay the "loan."
The characteristics of the portfolio of
student loans held in the trust estate
will change
We intend to use the principal payments that we receive on our student
loans to purchase additional student loans for the period described in a
prospectus supplement. The prospectus supplement for a series of the notes will
describe the characteristics of our student loan portfolio at that time.
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.
Our cash flow, and our ability to make payments due on our notes will be
reduced to the extent interest is not currently payable on our student loans.
The borrowers on most student loans are not required to make payments during the
period in which they are in school and for certain authorized periods thereafter
as described in the Higher Education Act. The Department of Education will make
all interest payments while payments are deferred under the Higher Education Act
on certain of the student loans. For all other student loans, interest generally
will be capitalized and added to the principal balance of the loans. The trust
estate will consist of student loans for which payments are deferred as well as
student loans for which the borrower is currently required to make payments of
principal and interest. The proportions of the loans in our portfolio for which
payments are deferred and currently in repayment will vary during the period
that the notes are outstanding.
If the payments we receive on our
student loans are different from
the payments that are actually due
we may not be able to pay our notes
For a variety of economic, social and other reasons, we may not receive
all the payments that are actually due on our student loans. 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.
3
<PAGE>
The rate of payments on our student
loans may affect the maturity and
yield of the notes
Our student loans may be prepaid at any time without penalty. If we
receive prepayments on our student loans and are not able to purchase additional
student loans, we will use those amounts to redeem notes, which could shorten
the average life of each class of the notes. Factors affecting prepayment of
loans include general economic conditions, prevailing interest rates and changes
in the borrower's job, including transfers and unemployment. Refinancing
opportunities which may provide more favorable repayment terms, including those
offered under consolidation loan programs like the federal direct consolidation
loan program, also affect prepayment rates. 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.
Scheduled payments with respect to, and the maturities of, our 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 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.
Our student loans are unsecured
and the ability of the guarantee agencies to
honor their guarantees may become impaired
The Higher Education Act requires that all student loans be unsecured.
As a result, the only security for payment of our 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
of Education is obligated to pay the guarantee agency. The Department of
Education may also require a guarantee agency to return its reserve funds to the
Department of Education 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 or delay those payments past their due date.
4
<PAGE>
If the Department of Education 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 of Education is
required to pay the full guaranty claim amount due with respect thereto. See
"Description of the Guarantee Agencies" in this prospectus. However, the
Department of Education's obligation to pay guarantee claims directly in this
fashion is contingent upon the Department of Education making the determination
that a guarantee agency is unable to meet its guarantee obligations. The
Department of Education may not ever make this determination with respect to a
guarantee agency and, even if the Department of Education does make this
determination, payment of the guarantee claims may not be made in a timely
manner.
If we cannot purchase student loans,
we will redeem our notes
We expect to use the proceeds of the notes to acquire portfolios of
student loans and to use principal receipts from our student loans 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 student loan and that we will be able to maintain certain
overall portfolio characteristics in connection with these acquisitions. If the
sellers do not deliver the student loans, or if we are not able to use note
proceeds or principal payments that we receive on our 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.
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 Federal Family Education Loan Program, it may elect not to
reauthorize the Department's ability to provide interest subsidies and federal
insurance for loans. While this failure to reauthorize would not affect the
student loans we then owned, it 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
Federal Family Education Loan Program are subject to annual budgetary
appropriation by Congress. In recent years, federal budget legislation has
contained provisions that restricted payments made under the Federal Family
Education Loan Program 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.
Congressional amendments to the Higher Education Act or other relevant
federal laws, and rules and regulations promulgated by the Secretary of
Education, may 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" in this prospectus.
6
<PAGE>
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. The volume of
student loans made under the Federal Family Education Loan Program and available
to us for purchase may be reduced to the extent loans are made to students under
the Federal Direct Student Loan Program. If the Federal Direct Student Loan
Program expands, our 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 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 Federal Family
Education Loan Program 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 Federal Family Education Loan
Program loans available to purchase and may increase the rate of repayment of
our student loans. See "Description of the Federal Family Education Loan
Program" in this prospectus.
The Class B and Class C
notes are subordinated to
the Class A notes
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 payment to 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 any significant assets or sources of funds other than
from payments with respect to the student loans, the Reserve Fund and other
funds created under the indenture.
We may issue additional notes
secured by the trust estate
We may issue additional notes that are secured by the same trust estate
that is securing your notes pursuant to a supplemental indenture, without the
consent or approval of the owners of any notes then outstanding. 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. However, before issuing additional notes, we must receive written
evidence from each rating agency then rating any outstanding notes that the
rating or ratings will not be reduced or withdrawn as a result of the issuance
of the proposed additional notes. See "Additional Notes" in this prospectus.
7
<PAGE>
Different rates of change in interest rate indexes may affect our cash flow
The interest rates on our notes 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 which are generally based upon the bond equivalent
yield of the 91 day Treasury Bill rate. See "Description of the Federal Family
Education Loan Program" in this prospectus. If there is a decline in the rates
payable on our 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 of the notes, there may not
necessarily be a reduction in the other amounts required to be paid out of the
trust estate, such as administrative expenses, causing interest payments 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.
The notes may be issued only in book-entry form
We expect that each class of notes of any series will be initially
represented by one or more certificates registered in the name of Cede & Co.,
the nominee for The Depository Trust Company, and will not be registered in your
name or the name of your nominee. If we elect to issue definitive notes
registered in the name of the holder in connection with the sale of a class or
series of the notes, we will so state in the related prospectus supplement
unless and until definitive securities are issued, holders of the 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
Depository Trust Company and its participating organizations. See "Book-Entry
Registration" in this prospectus.
The ratings of the notes are not a recommendation
to purchase and may change
It is a condition to our issuance of the notes that they be rated as
indicated in the related prospectus supplement. Ratings are based primarily on
the creditworthiness of the 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 you to purchase, hold or
sell any class of notes inasmuch as the 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 the rating agency's judgment circumstances
so warrant.
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 our 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.
8
<PAGE>
Description of the Notes
The notes of each series will be issued pursuant to the indenture and
related supplemental indenture of trust that we will enter into with the
trustee.
The following description of the notes is only a summary of their
principal terms. It is not complete. You should refer to the provisions of the
indenture and related supplemental indenture for a complete description of the
terms of the notes. Definitions of some of the terms used in this description
can be found in the Glossary of Terms appearing at page ___ of this prospectus.
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.
Auction rate certificate notes
The auction rate certificate notes will have a stated maturity set forth
in the applicable prospectus supplement and will bear interest at the rate per
annum specified in the prospectus supplement through the first auction date. The
interest period for auction rate certificate notes will initially consist of a
number of days set forth in the applicable prospectus supplement. The interest
rate for the auction rate certificate notes will be reset at the interest rate
determined pursuant to the auction procedures described below, but the rate will
not exceed the maximum auction rate per annum set forth in the applicable
prospectus supplement. Interest on the auction rate certificate notes will
accrue daily and will 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. Interest on the auction rate certificate notes will be
payable on the first business day following the expiration of each interest
period for the notes.
Determination of auction rate certificate note interest rate. The
procedures that will be used in determining the interest rates on the auction
rate certificate notes are summarized in the following paragraphs.
The interest rate on each class of auction rate certificate notes will
be determined periodically by means of a "Dutch Auction." In this Dutch Auction,
investors and potential investors submit orders through an eligible
broker-dealer as to the principal amount of auction rate certificate notes they
wish to buy, hold or sell at various interest rates. The broker-dealers submit
their clients' orders to the auction agent. The auction agent processes all
orders submitted by all eligible broker-dealers and determines the interest rate
for the upcoming interest period. The broker-dealers are notified by the auction
agent of the interest rate for the upcoming interest period and are provided
with settlement instructions relating to purchases and sales of auction rate
certificate notes. Auction rate certificate notes will be purchased and sold
between investors and potential investors at a price equal to their
then-outstanding principal balance plus any accrued interest. Bankers Trust
Company has been appointed to serve as initial auction agent for the auction
rate certificate notes and PaineWebber Incorporated has agreed to serve as a
broker-dealer.
9
<PAGE>
In the auction, the following types of orders may be submitted:
o "bid/hold orders" - specify the minimum interest rate that a
current investor is willing to accept in order to continue to
hold auction rate certificate notes for the upcoming interest
period;
o "sell orders" - an order by a current investor to sell a
specified principal amount of auction rate certificate notes,
regardless of the upcoming interest rate; and
o "potential bid orders" - specify the minimum interest rate that a
potential investor, or a current investor wishing to purchase
additional auction rate certificate notes, is willing to accept
in order to buy a specified principal amount of auction rate
certificate notes.
If an existing investor does not submit orders with respect to all its
auction rate certificate notes, the investor will be deemed to have submitted a
hold order at the new interest rate for that portion of the auction rate
certificate notes for which no order was received.
The following example helps illustrate how the auction procedures are
used in determining the interest rate on the auction rate certificate 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% ============== 100 Units at 3.10%
200 Units at 3.12% 400 Units 100 Units at 3.11%
================== 100 Units at 3.14%
600 Units 200 Units at 3.15%
==================
700 Units
The total units under bid/hold orders and sell orders always equal the
issue size (in this case 1000 units).
10
<PAGE>
(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, at the end of which another auction
will be held. Multiple orders at the winning rate are allocated units on a pro
rata basis. Regardless of the results of the auction, the interest rate will not
exceed the maximum auction rate specified in the applicable prospectus
supplement.
The example assumes that a successful auction has occurred, that is,
that all sell orders and all bid/hold orders below the new interest rate were
fulfilled. However, there may be insufficient potential bid orders to purchase
all the auction rate certificate notes offered for sale. In these circumstances,
the interest rate for the upcoming interest period will equal the maximum
auction rate. Also, if all the auction rate certificate notes are subject to
hold orders (i.e., each holder of auction rate certificatenotes wishes to
continue holding its auction rate certificate notes, regardless of the interest
rate), the interest rate for the upcoming interest period will equal the all
hold rate, which is the LIBOR rate for a period comparable to the auction period
less 0.20%.
If a payment default has occurred, the rate will be the non-payment
rate, which is the one-month LIBOR rate plus 1.50%.
Maximum auction rate and interest carry-overs. If the auction rate for a
class of auction rate certificate notes is greater than the applicable maximum
auction rate, then the interest rate applicable to those auction rate
certificate notes will be the applicable maximum auction rate. If that occurs,
the difference between the auction rate and the maximum auction rate will be
carried over for that class of auction rate certificate notes. The carry-over
amount will bear interest calculated at the one-month LIBOR rate, until paid.
The carry-over amount, and interest accrued thereon, for a class of
auction rate certificate notes will be paid by the trustee on the date of
defeasance of the auction rate certificate notes or an interest payment date if
there are sufficient moneys in the Revenue Fund to pay all interest due on the
notes on that interest payment date and in the case of subordinate notes,
payment of the interest carryover on more senior notes. Any carry-over amount,
and any interest accrued on that carry-over amount, due on any auction rate
certificate note which is to be redeemed will be paid to the registered owner on
the redemption date to the extent that moneys are available. Any carry-over
amount, and any interest accrued on that carry-over amount, which is not yet due
and payable on a date on which an auction rate certificate note is to be
redeemed will be canceled and will not be paid.
11
<PAGE>
Changes in auction period. We may, from time to time, change the length
of the auction period for a class of auction rate certificate notes in order to
conform with then current market practice with respect to similar securities or
to accommodate economic and financial factors that may affect or be relevant to
the length of the auction period and the interest rate borne by the auction rate
certificate notes. We will initiate the auction period adjustment by giving
written notice to the trustee, the auction agent, the market agent, each rating
agency and the registered owners of the notes at least 10 days prior to auction
date for the notes. Any adjusted auction period will be at least 7 days but not
more than 366 days. The auction period adjustment will take effect only if
approved by the market agent and if the auction agent receives orders sufficient
to complete the auction for the new auction period at a rate of interest below
the maximum auction rate.
Changes in the auction date. The market agent, with the written consent
of Union Financial Services-1, may specify a different auction date for a class
of auction rate certificate notes 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 for the auction rate certificate notes. If Union
Financial Services-1 consents to the change, the market agent will provide
notice of its determination to specify an earlier auction date in writing at
least 10 days prior to the proposed changed auction date to the trustee, the
auction agent, Union Financial Services-1, each rating agency and the registered
owner.
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. Interest on
the LIBOR rate notes be paid in arrears on each interest payment date. The
interest payment date for the LIBOR rate notes will be the first business day
following the end of the interest period for the notes specified in the
applicable prospectus supplement, unless another date is specified in the
prospectus supplement. The amount of interest payable to registered owners of
LIBOR rate notes for any interest period will be calculated by the trustee on
the basis of a 360-day year for the number of days actually elapsed.
The rate of interest on the LIBOR rate notes for each interest period
will be determined by a calculation agent. Union Financial Services-1, has
initially appointed PaineWebber Incorporated to serve as the calculation agent.
The interest rate will be the LIBOR rate for the interest period for the notes
plus the margin specified in the related prospectus supplement.
The interest rate payable on the LIBOR rate notes cannot exceed the
adjusted student loan rate. The adjusted student loan rate is the percentage
equivalent of a fraction
o The numerator of which is equal to the sum of the expected
interest collections on our student loans and reciprocal payments
we receive on a derivative product, if any, less the sum of the
servicing fee, the administration fee, and reciprocal payments we
make on derivative products, if any, with respect to an interest
period; and
12
<PAGE>
o The denominator of which is the aggregate principal amount of the
notes as of the last day of the interest period.
With respect to any interest period, expected interest collections include
o the amount of interest accrued with respect to the student loans
for the interest period preceding the applicable interest payment
date, whether or not that interest is actually paid,
o all interest subsidy payments and special allowance payments
estimated to have accrued for the interest period preceding the
applicable interest payment date, whether or not actually
received; and
o investment earnings on assets in the trust estate for the
interest period preceding the applicable interest payment date.
If the interest rate for LIBOR rate notes determined by the calculation
agent is greater than the adjusted student loan rate, the difference will be
carried forward and paid when moneys are available in the Revenue Fund. However,
no interest carry-over will be payable unless the aggregate value of our student
loans and other assets in the trust estate exceeds the principal balance of the
outstanding notes issued under the indenture. Any interest carry-over will be
payable on an interest payment date, but only out of funds remaining in the
Revenue Fund after payment of all interest due on the notes, and in the case of
subordinate notes, payment of the interest carryover on more senior notes.
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 will be paid in arrears on each interest
payment date. An interest payment date for the treasury rate notes means the
first business day following the end of the interest period specified in the
applicable prospectus supplement, unless another date is specified in the
prospectus supplement.
The amount of interest payable on the treasury rate notes will generally
be adjusted weekly on the calendar day following each auction of 91-day Treasury
Bills which are direct obligations of the United States with a maturity of 13
weeks. The rate will be calculated by a calculation agent to be the sum of the
bond equivalent yield for auctions of 91-day Treasury Bills on a rate
determination date for an interest period, plus a spread described in the
related prospectus supplement. Interest on the treasury rate notes will be
computed for the actual number of days elapsed on the basis of a year consisting
of 365 or 366 days, as applicable.
The interest rate payable on the treasury rate notes for any interest
period cannot at any time exceed the adjusted student loan rate. The adjusted
student loan rate is the percentage equivalent of a fraction
o The numerator of which is equal to the sum of the expected
interest collections and reciprocal payments that we receive on a
derivative product, if any, less the sum of the servicing fee,
the administration fee, and reciprocal payments we make on any
derivative product, if any, with respect to an interest period;
and
o The denominator of which is the aggregate principal amount of the
notes as of the last day of the interest period.
With respect to any interest period, expected interest collections include
13
<PAGE>
o the amount of interest accrued with respect to the student loans
for the interest period preceding the applicable interest payment
date, whether or not such interest is actually paid,
o all interest subsidy payments and special allowance payments
estimated to have accrued for the interest period preceding the
applicable interest payment date, whether or not actually
received; and
o investment earnings on assets in the trust estate for the
interest period preceding the applicable interest payment date.
If the rate determined by the calculation agent for the treasury rate
notes 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. However, no interest carry-over will be payable
unless the aggregate value of our student loans and other assets included in the
trust estate exceeds the principal balance of our outstanding notes issued under
the indenture. Any interest carry-over will be payable on an interest payment
date, but only out of funds remaining in the Revenue Fund after payment of all
interest due on the notes, and in the case of subordinate notes, payment of the
interest carryover on more senior notes.
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 student loans after the date that accrued
interest is no longer being added to the principal balance of the 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.
Original issue discount notes
Original issue discount notes will have a stated maturity set forth in
the applicable prospectus supplement. The notes will be issued at a discount
from the principal amount payable at maturity. The notes may have a "zero
coupon" and currently pay no interest, or may pay interest at a rate that is
below market rates at the time of issuance. For original issue discount notes,
all or some portion of the interest due will accrue during the life of the note
and be paid only at maturity or upon earlier redemption. Upon redemption or
optional purchase, the amount payable on an original issue discount note will be
determined as described under the heading "Description of the Notes - Redemption
Price." Each holder of an original issue discount note will be required to
include in current income a ratable portion of the original issue discount, even
though the holder may not receive any payment of interest during the period. See
"Federal Income Tax Consequences - Taxation of Interest Income of Registered
Owners" in this prospectus.
14
<PAGE>
Payments of the notes
The principal of the notes due at 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 in connection with a
partial redemption and all interest payments will be made to the registered
owner 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. If interest is not timely paid, it will be paid to the
registered owner of the notes as of the close of business on a special record
date for payment of any of the defaulted interest. A special record date will be
fixed by the trustee whenever moneys become available for payment of the
defaulted interest, and notice of the special record date will be given to the
registered owners of the notes. Payment of principal and interest to a
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. All payments on the notes will be made in United States
dollars.
Revolving period
We intend to use principal payments that we receive on the student loans
to purchase additional student loans for a period of time specified in the
prospectus supplement. During the revolving 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 revolving period, unless the terms of a series
of the notes described in the prospectus supplement provide for principal
payments or redemptions. The revolving period during which we may purchase
additional student loans may be extended with the consent of the rating agencies
providing ratings for our notes or the provider of any credit enhancement for
the notes. The revolving period may also be extended if we file with the trustee
a certificate that the balances on hand may be invested at a rate of return
which, together with other available revenues and cash balances, will produce
sufficient cash flows to permit the timely retirement of the notes, and the
trustee shall have received an approving opinion of counsel.
Mandatory redemption
The notes of a series are subject to mandatory redemption, in whole or
in part, on the first interest payment date after the end of the revolving
period if so provided in the applicable prospectus supplement. Redemptions will
be made from principal payments received on the student loans and other excess
revenues on deposit in the Acquisition Fund. The notes of a series are also
subject to mandatory redemption on the interest payment date specified with
respect to the series in the related prospectus supplement, in an amount equal
to the proceeds from sale of the notes, if any, not previously used to purchase
student loans that are held in the Acquisition Fund. We will not be obligated to
mandatorily redeem notes with funds on deposit in the Acquisition Fund if we
file with the trustee a certificate that the 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, and the trustee shall have received
an approving opinion of counsel. Mandatory redemptions will be made solely from
moneys available for redemption in the Acquisition Fund and only as provided
above in this paragraph. We are not required to provide any direction to the
trustee with respect to a mandatory redemption.
15
<PAGE>
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
The notes of a series are subject to redemption at our sole discretion,
if so provided in the applicable prospectus supplement, from funds received by
the trustee constituting interest on student loans remaining in the Revenue Fund
after all other prior required payments have been made. The notes may be
optionally redeemed in whole or in part, on or after the date set forth in the
prospectus supplement. Any limitations on optional redemptions of the notes of
any series will be described in the prospectus supplement related to that
series. See "Notice and Partial Redemption of Notes" below for a discussion of
the order in which notes will be redeemed.
If so provided in the related prospectus supplement, all remaining
student loans held in the trust estate may be offered for sale by the trustee on
any interest payment date occurring on or after a date specified in the
prospectus supplement. The initial seller of the student loans and unrelated
third parties may offer bids for the student loans. The trustee will accept the
highest bid equal to or in excess of the aggregate principal plus accrued
interest of the student loans as of the end of the collection period immediately
preceding the related interest payment date. The proceeds of the sale will be
used to redeem all outstanding notes.
Extraordinary optional redemption
The notes of a series are also subject to extraordinary optional
redemption, at our sole discretion, if so provided in the prospectus supplement,
from any unallocated and available moneys remaining in the trust estate, on any
interest payment date, if we reasonably determine that we are unable to acquire
additional student loans, that the rate of return on the 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. An extraordinary optional redemption of the notes may be made in
whole or in part. See "Notice and Partial Redemption of Notes" below for a
discussion of the order in which the notes will be redeemed. We expect to
exercise the extraordinary option to redeem notes only if changes are made to
the Higher Education Act or changes occur in the financial markets or student
loan markets that we deem to be materially adverse to the trust estate. In
determining whether to exercise the extraordinary optional redemption provision,
we will consider all of the facts and circumstances that exist at the time,
including 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
our 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 student loans from moneys on deposit in the Acquisition Fund.
16
<PAGE>
Optional purchase
If so provided in the related prospectus supplement, we may purchase or
cause to be purchased, at our sole discretion, all of the notes of a series on
any interest payment date on which the aggregate current principal balance of
the notes is less than or equal to 20% of the initial aggregate principal
balance of the notes on their date of issuance. The purchase will occur on the
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 Union Financial Services-1.
Redemption or purchase price
Upon redemption or optional purchase, the price to be paid to the holder
of a note, other than an original issue discount note, will be an amount equal
to the aggregate current principal balance plus accrued interest. If a Note is
an original issue discount note, the amount payable upon redemption or optional
purchase will be the amortized face amount on the redemption or purchase date.
The amortized face value of an original issue discount note will be equal to the
issue price plus that portion of the difference between the issue price and the
principal amount of the note that has accrued at the yield to the maturity
described in the prospectus supplement by the redemption or purchase date. The
amortized face value of an original issue discount note will never be greater
than its principal amount.
Notice and partial redemption of notes
The trustee will provide 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
auction rate certificate notes designated for redemption or purchase, 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, we will determine the notes of each class of that series to be
redeemed or purchased. Generally, all of the Class A notes will be redeemed
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, we may redeem
Class B notes while Class A notes remain outstanding if after the redemption of
the Class B notes, the aggregate market value of the assets held in the trust
estate will equal the percentage of all Class A notes then outstanding under the
indenture that is specified in a prospectus supplement. Similarly, we may redeem
Class C notes while Class A notes and Class B notes remain outstanding if after
the redemption of the Class C notes, the aggregate market value of the assets
held in the trust estate will equal the percentage of all Class A notes and
Class B notes then outstanding under the indenture that is specified in a
prospectus supplement.
17
<PAGE>
Security and Sources of Payment for the Notes
General
The notes are limited obligations of Union Financial Services-1, secured
by and payable solely from the trust estate. The following assets serve as
security for the notes:
o revenues, consisting of all principal and interest payments,
proceeds, charges and other income received by the trustee or
Union Financial Services-1, on account of any student loan,
including interest benefit payments and any special allowance
payments with respect to any student loan, and investment income
from all funds created under the indenture and any proceeds from
the sale or other disposition of the student loans;
o all moneys and investments held in the funds created under the
indenture; and
o 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 may include rights that provide credit
enhancement (for example, the right to draw under any letter of credit or note
insurance) as described in this prospectus and in the related prospectus
supplement.
Flow of funds
The following funds will be created by the trustee under the indenture
for the benefit of the registered owners:
o Revenue Fund
o Acquisition Fund
o Reserve Fund
An Operating Fund was established separately by Union Financial
Services-1, and does not constitute security for the notes under the indenture.
Neither the trustee nor the registered owners have any right, title or interest
in the Operating Fund.
All funds received with respect to the student loans are initially
deposited in the Revenue Fund and allocated between principal and interest. The
principal portion is subsequently transferred to the Acquisition Fund.
Acquisition Fund; Purchase and sale of student loans
We will deposit proceeds from the sale of any notes into the Acquisition
Fund. Money may also be transferred to the Acquisition Fund from the Revenue
Fund. 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.
18
<PAGE>
Money on deposit in the Acquisition Fund will be used [to pay costs of
issuance of the notes,] to redeem notes in accordance with the provisions of any
supplemental indenture, and to acquire student loans. See "Description of the
Notes - Revolving Period." If we determine that money held in the Acquisition
Fund cannot be used to purchase additional student loans, then we may redeem
notes in accordance with any supplemental indenture. See "Description of the
Notes - Mandatory Redemption."
If on any note payment date the money on deposit in the Revenue Fund is
not sufficient to make payments of principal and interest due on the notes, then
the amount of the deficiency will be transferred from money available in the
Acquisition Fund.
The trustee will be the legal owner of the student loans pledged to the
trust estate and will have a security interest in the student loans for and on
behalf of the registered owners. The student loans will be held in the name of
the trustee for the account of Union Financial Services-1, but for the benefit
of the registered owners.
Revenue Fund
The trustee will deposit into the Revenue Fund all revenues derived from
student loans, from money or assets on deposit in the Acquisition Fund or the
Reserve Fund, from reciprocal payments on derivative products and any other
amounts as we may direct.
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:
o on a parity basis, to pay interest due on any Class A notes and
any derivative payment that is due and secured on a parity with
the Class A notes;
o on a parity basis, to pay the principal of or premium, if any,
due on any Class A notes;
o on a parity basis, to pay interest due on any Class B notes and
any derivative payment that is due and secured on a parity with
the Class B notes;
o on a parity basis, to pay the principal of or premium, if any,
due on any Class B notes;
o on a parity basis, to pay interest due on Class C notes and to
make any derivative payment due and secured on a parity with the
Class C notes;
o on a parity basis, to pay the principal of or premium, if any,
due on any Class C notes;
o to the Reserve Fund the amount, if any, described under the
heading "Reserve Fund" below;
o at the option of Union Financial Services-1, to the Acquisition
Fund; and
o to Union Financial Services-1 at its option and to the extent
permitted under the indenture.
19
<PAGE>
We may transfer moneys in the Revenue Fund to the Operating Fund,
subject to the limitation described under the heading "Operating Fund" below.
Reserve Fund
Upon the sale of each class of notes, the trustee will deposit to the
Reserve Fund the amount, if any, specified in each supplemental indenture. On
each note payment date, to the extent money in the Revenue Fund is not
sufficient to make payment of the principal and interest then due on the notes,
the amount of the deficiency shall be paid directly from the Reserve Fund, after
any transfers from the Acquisition Fund.
If the Reserve Fund is used as described above, the trustee will restore
the Reserve Fund to the level specified in a prospectus supplement by transfers
from the Revenue Fund. If the full amount required to restore the Reserve Fund
to the required level is not available in the Revenue Fund on the next 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 required
level for any reason, the trustee, at the direction of Union Financial
Services-1, will transfer the excess to the Acquisition Fund.
Operating Fund
The trustee will deposit to the Operating Fund the amount, if any,
specified in each prospectus supplement. The Operating Fund is a special fund
created and used to pay program expenses of Union Financial Services-1.
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 Union Financial Services-1. However, the amount so
transferred in any one fiscal year may not exceed the amount budgeted by Union
Financial Services-1 for that fiscal year, and may not exceed the amount
designated in the cash flows provided to each rating agency.
Transfers to Union Financial Services-1
Transfers from the Revenue Fund may be made to Union Financial
Services-1 if the balance in the Reserve Fund exceeds the required level
specified in a prospectus supplement. Additionally, transfers may be made to
Union Financial Services-1 only if immediately after taking into account the
transfer, the aggregate market value of the assets in the trust estate will be
equal to a percentage of the unpaid principal amount of the notes outstanding
that is acceptable to each rating agency then rating the notes, as evidenced by
a confirmation of their ratings.
Investment of funds held by trustee
Upon our order, the trustee will invest amounts credited to any fund
established under the indenture in investment securities described in the
indenture. In the absence of an order from us, 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.
20
<PAGE>
The trustee is not 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 is to comply with our investment instructions in a
non-negligent manner.
Book-Entry Registration
Depository Trust Company, 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. 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 to the prospectus supplement, each in the
aggregate principal amount of such class, and is to be deposited with Depository
Trust Company.
Depository Trust Company 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. Depository Trust Company holds securities that its
participants deposit. Depository Trust Company 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. Depository Trust Company 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 Depository Trust Company 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. The rules applicable to Depository Trust Company and its
participants are on file with the Securities and Exchange Commission.
Purchases of the notes under the Depository Trust Company system must be
made by or through direct participants, which are to receive a credit for the
notes on Depository Trust Company's records. The ownership interest of each
actual purchaser of each series of notes, or beneficial owner, is in turn to be
recorded on the direct and indirect participants' records. Beneficial owners
shall not receive written confirmation from Depository Trust Company 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.
21
<PAGE>
To facilitate subsequent transfers, all notes deposited by participants
with Depository Trust Company are registered in the name of Depository Trust
Company's partnership nominee, Cede & Co. The deposit of such notes with
Depository Trust Company and their registration in the name of Cede & Co. effect
no change in beneficial ownership. Depository Trust Company has no knowledge of
the actual beneficial owners of notes; Depository Trust Company'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 Depository Trust
Company 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, Depository Trust Company's
practice is to determine by lot the amount of the interest of each Direct
Participant in such class to be redeemed.
Neither Depository Trust Company nor Cede & Co. will consent or vote
with respect to the notes of any series. Under its usual procedures, Depository
Trust Company mails an omnibus proxy to Union Financial Services-1, or the
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.
Principal and interest payments on the notes are to be made to
Depository Trust Company. Depository Trust Company's practice is to credit
direct participant's accounts on the due date in accordance with their
respective holdings shown on Depository Trust Company's records unless
Depository Trust Company 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 the participant and not of Depository
Trust Company, the trustee or Union Financial Services-1, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of principal and interest to Depository Trust Company is the
responsibility of Union Financial Services-1, or the trustee. Disbursement of
such payments to direct participants shall be the responsibility of Depository
Trust Company, and disbursement of such payments to the beneficial owners shall
be the responsibility of direct and indirect participants.
Depository Trust Company may discontinue providing its services as
securities depository with respect to the notes of any series at any time by
giving reasonable notice to Union Financial Services-1 or the trustee. In the
event that a successor securities depository is not obtained, note certificates
are required to be printed and delivered.
Cedelbank, Societe Anonyme is incorporated under the laws of Luxembourg
as a professional depository. Cedelbank holds securities for its participating
organizations and facilitates the clearance and settlement of securities
transactions between Cedelbank participants through electronic book-entry
changes in accounts of Cedelbank participants, thereby eliminating the need for
physical movement of certificates. Transactions may be settled in Cedelbank in
any of 28 currencies, including United States dollars. Cedelbank provides to its
Cedelbank participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedelbank interfaces with domestic markets
in several countries. As a professional depository, Cedelbank is subject to
regulation by the Luxembourg Monetary Institute. Cedelbank 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 Cedelbank is also available
to others, such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Cedelbank participant,
either directly or indirectly.
22
<PAGE>
The Euroclear System was created in 1968 to hold securities for
participants of Euroclear 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 Depository
Trust Company described above. Euroclear is operated by the Brussels, Belgium
office of Morgan Guaranty Trust Company of New York under contract with
Euroclear Clearance Systems S.C., a Belgian cooperative corporation. 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,
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. 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.
Distributions with respect to notes held through Cedelbank or Euroclear
will be credited to the cash accounts of Cedelbank participants or Euroclear
participants in accordance with the relevant system's rules and procedures, to
the extent received by its depositary. Those distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. Cedelbank 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 Cedelbank 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 depository Trust Company.
23
<PAGE>
Noteholders may hold their notes in the United States through Depository
Trust Company or in Europe through Cedelbank or Euroclear 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 Depository Trust Company. Cedelbank and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Cedelbank'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 Depository Trust Company.
Citibank, N.A. will act as depositary for Cedelbank and Morgan Guaranty Trust
Company of New York will act as depositary for Euroclear.
Transfers between participants will occur in accordance with Depository
Trust Company Rules. Transfers between Cedelbank 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
Cedelbank 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 Depository Trust Company settlement date. Such credits or any
transactions in such securities settled during such processing will be reported
to the relevant Euroclear or Cedelbank participants on such business day. Cash
received in Cedelbank or Euroclear as a result of sales of securities by or
through a Cedelbank participant or Euroclear participant to a participant will
be received with value on the Depository Trust Company settlement date but will
be available in the relevant Cedelbank or Euroclear cash account only as of the
business day following settlement in Depository Trust Company.
Cross-market transfers between persons holding directly or indirectly
through Depository Trust Company, on the one hand, and directly or indirectly
through Cedelbank participants or Euroclear participants, on the other, will be
effected in Depository Trust Company in accordance with Depository Trust Company
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
Depository Trust Company, and making or receiving payment in accordance with
normal procedures for same-day funds settlement applicable to Depository Trust
Company. Cedelbank participants and Euroclear participants may not deliver
instructions to the depositaries.
Depository Trust Company has advised Union Financial Services-1 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
Depository Trust Company the notes are credited.
24
<PAGE>
Although Depository Trust Company, Cedelbank and Euroclear have agreed
to the foregoing procedures in order to facilitate transfers of interests in the
notes among participants of Depository Trust Company, Cedelbank and Euroclear,
they are under no obligation to perform or continue to perform such procedures
and such procedures may be discontinued at any time.
Depository Trust Company management is aware that some computer
applications, systems, and the like for processing dates that are dependent upon
calendar dates, including dates before, on, and after January 1, 2000, may
encounter "Year 2000 problems." Depository Trust Company has informed its
participants and other members of the financial community 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
Depository Trust Company, continue to function appropriately. This program
includes a technical assessment and a remediation plan, each of which is
complete. Additionally, Depository Trust Company's plan includes a testing
phase, which is expected to be completed within appropriate time frames.
However, Depository Trust Company'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 Depository
Trust Company licenses software and hardware, and third party vendors on whom
Depository Trust Company relies for information or the provision of services,
including telecommunication and electrical utility service providers, among
others. Depository Trust Company has informed its participants and the financial
industry that it is contacting, and will continue to contact, third party
vendors from whom Depository Trust Company acquires services to:
o impress upon them the importance of such services being Year 2000
compliant; and
o determine the extent of their efforts for Year 2000 remediation
and, as appropriate, testing of their services. In addition,
Depository Trust Company is in the process of developing such
contingency plans as it deems appropriate.
According to Depository Trust Company, the information set forth in the
preceding two paragraphs about Depository Trust Company has been provided to its
participants and the financial industry by Depository Trust Company for
informational purposes only and is not intended to serve as a representation,
warranty or contract modification of any kind.
Neither Union Financial Services-1, the sellers, the servicer, the
subservicers, the trustee nor the underwriters will have any responsibility or
obligation to any Depository Trust Company participants, Cedelbank participants
or Euroclear participants or the persons for whom they act as nominees with
respect to
o the accuracy of any records maintained by Depository Trust
Company, Cedelbank or Euroclear or any participant,
o the payment by Depository Trust Company, Cedelbank 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,
25
<PAGE>
o the delivery by any Depository Trust Company participant,
Cedelbank 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
o any other action taken by Depository Trust Company as the senior
noteholder.
Union Financial Services-1 may decide to discontinue use of the system
of book entry transfers through Depository Trust Company or a successor
securities depository. In that event, note certificates are to be printed and
delivered.
Additional Notes
We may, upon complying with the provisions of the indenture, issue from
time to time additional notes secured by the trust estate on a parity with or
subordinate to either the Class A notes, the Class B notes or the Class C notes,
if any, then outstanding. In addition, we may enter into any derivative product
we deem necessary or desirable with respect to any or all of the notes. We may
take those actions without the approval of the holders of any outstanding notes.
We will not issue additional notes unless the following conditions have
been satisfied:
o Union Financial Services-1 and the trustee have entered
into a supplemental indenture providing the terms and
forms of the additional notes.
o The trustee has 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 has 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 under the indenture to establish any
additional funds or accounts which it deems necessary or convenient in
connection with the issuance and delivery of any additional notes.
Summary of the Indenture Provisions
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 that series as indicated in a prospectus
supplement. The following is a summary of some of the provisions of the
indenture. This summary is not comprehensive and reference should be made to the
indenture for a full and complete statement of its provisions.
26
<PAGE>
Parity and priority of lien
The provisions of the indenture are generally for the equal benefit,
protection and security of the registered owners of all of the notes. However,
the Class A notes have priority over the Class B notes with respect to payments
of principal and interest, and the Class B notes have priority over the Class C
notes with respect to payments of principal and interest.
Sale of student loans held in trust estate
Student loans may be sold, or otherwise disposed of by the trustee free
from the lien of the indenture.
Prior to any sale we will provide an order to the trustee stating the
sale price and directing that student loans be sold or otherwise disposed of and
delivered. We will also deliver to the trustee a certificate signed by an
authorized representative of Union Financial Services-1 to the effect that:
o the disposition price is equal to or in excess of the principal
amount of the student loans (plus accrued interest) or equal to
or in excess of the purchase price paid by for such student loans
(less principal payments received with respect to such student
loan); or
o the disposition price is lower than the principal amount of the
student loans (plus accrued interest), and
o Union Financial Services-1 reasonably believes that
the revenues expected to be received, after giving
effect to the disposition, would be at least equal
to the revenues expected to be received assuming no
such sale or other disposition occurred, or
o Union Financial Services-1 remains able to pay debt
service on the notes and make payment on any other
obligations under the indenture on a timely basis,
after giving effect to the disposition, whereas it
would not have been able to do so on a timely basis
if it had not sold or disposed of the student loans
at such discounted amount, or
o the aggregate market value of the trust estate,
after giving effect to the disposition, will be at
least equal to 100% of the aggregate principal
amount of the notes and other obligations
outstanding under the indenture plus accrued
interest, or
o the amount for which the student loans are being
sold or disposed of is equal to the purchase price
paid by Union Financial Services-1 for such student
loans (less principal amounts received with respect
to such student loans).
27
<PAGE>
Segregation of funds; Priority of lien
We will not commingle the funds created under the indenture with funds,
proceeds or investment of funds relating to other issues or series of notes
issued by us, except to the extent such commingling is required by the trustee
for ease in administration of its duties and responsibilities. Should the
trustee require this permitted commingling, it will 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 money, student loans and other assets pledged
under the indenture are and will be owned by Union Financial Services-1 free and
clear of any pledge, lien, charge or encumbrance, except as otherwise expressly
provided in the indenture. Except as otherwise provided in the indenture, Union
Financial Services-1
o will not create or voluntarily permit to be created any debt,
lien or charge on the student loans which would be on a parity
with, subordinate to, or prior to the lien of the indenture;
o will not take any action or fail to take any action that would
result in the lien of the indenture or the priority of that lien
for the obligations thereby secured being lost or impaired; and
o 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
student loans.
Derivative products; Reciprocal payments; Derivative payments
We are authorized under the indenture to enter into a derivative
product, defined to mean a written contract under which we become obligated to
pay to a counterparty on specified payments dates certain amounts in exchange
for the counterparty's obligation to make payments to us on specified payment
dates in specified amounts. Our obligation to make payments in connection with a
derivative product may be secured by a pledge of and lien on the trust estate.
We will not enter into a derivative product unless the trustee has received a
confirmation from each rating agency providing a rating for our notes that the
derivative product will not adversely affect the rating on any of the notes.
If any payment to a counterparty 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 the payment to the counterparty until the first date on which
sufficient funds are available to make the payment or until the next note
payment date, whichever is earlier.
Representations and warranties of Union Financial Services-1
28
<PAGE>
We represent and warrant in the indenture that:
o we are 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 under the Indenture,
o all necessary corporate action 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 of the notes and
any derivative product are and will be valid and enforceable
special limited obligations of Union Financial Services-1 secured
by and payable solely from the trust estate.
Further covenants
We will file financing statements and continuation statements in any
jurisdiction necessary to perfect and maintain the security interest we have
granted under the indenture.
Upon written request of the trustee, we will permit 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 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 examination unless requested in
writing to do so by the registered owners of 51% of the principal amount of the
notes, and unless those registered owners have offered the trustee security and
indemnity satisfactory to it against any costs, expenses and liabilities which
might be incurred in making any examination.
We will cause an annual audit to be made by an independent auditing firm
of national reputation and file one copy of the audit with the trustee and each
rating agency within 150 days of the close of each fiscal year. The trustee is
not obligated to review or otherwise analyze those audits.
On or before the fifteenth day of each month, we will provide to the
trustee for the trustee to forward to each registered owner, a statement setting
forth information with respect to the notes and student loans as of the ending
of the preceding month, including the following:
o the amount of principal payments made with respect to each class of
notes during the preceding month
o the amount of interest payments made with respect to each class of
notes during the preceding month
o the principal balance of financial student loans as of the close of
business on the last day of the preceding month
o the aggregate outstanding principal amount of the notes of each class
o the interest rate for the applicable class of notes with respect to
each interest payment
o the number and principal amount of student loans that are delinquent
or for which claims have been filed with a guarantee agency
o 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.
29
<PAGE>
A copy of these reports may be obtained by any noteholder by a written
request to the trustee.
Enforcement of servicing agreement
We will diligently enforce all terms, covenants and conditions of all
servicing agreements, including the prompt payment of all amounts due to the
servicer under the servicing agreements. We will not permit the release of the
obligations of any servicer under any servicing agreement except in conjunction
with permitted amendments or modifications and will not waive any default by the
servicer under the servicing agreement without the written consent of the
trustee. We will 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 of the notes.
Additional covenants with
respect to the Higher Education Act
We will verify that the trustee is, or replace the trustee with, an
eligible lender under the Higher Education Act, and will acquire or cause to be
acquired student loans only from an eligible lender.
We are responsible, directly or through our agent, for each of the
following actions with respect to the Higher Education Act:
o Dealing with the Secretary of Education with respect to the
rights, benefits and obligations under the certificates of
insurance and the contract of insurance, and dealing with the
guarantee agencies with respect to the rights, benefits and
obligations under the guarantee agreements with respect to the
student loans;
o Causing to be diligently enforced, and causing to be taken all
reasonable steps necessary or appropriate for the enforcement of
all terms, covenants and conditions of all student loans and
agreements in connection with the student loans, including the
prompt payment of all principal and interest payments and all
other amounts due under the student loans;
o Causing the student loans to be serviced by entering into a
servicing agreement with the servicer for the collection of
payments made for, and the administration of the accounts of, the
student loans;
o Complying with, and causing all of its officers, directors,
employees and agents to comply, with the provisions of the Higher
Education Act and any regulations or rulings under the Act, with
respect to the student loans; and
o Causing the benefits of the guarantee agreements, the interest
subsidy payments and the special allowance payments to flow to
the trustee.
30
<PAGE>
Continued existence; Successor
We will preserve and keep in full force and effect our existence, rights
and franchises as a Nevada corporation. We will not sell or otherwise dispose of
all or substantially all of our assets, consolidate with or merge into another
corporation or entity, or permit one or more other corporations or entities to
consolidate with or merge with us. These restrictions do not apply to a transfer
of student loans that is made in connection with a discharge of the indenture or
to a transaction where the transferee or the surviving or resulting corporation
or entity, if other than Union Financial Services-1, 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
Union Financial Services-1 under the indenture.
Events of default
For purposes of the indenture, each of the following events are defined
as events of default:
o default in the due and punctual payment of any interest on any of
the Class A notes when due or failure to make any payment due
under any other senior obligations under the indenture 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 Class B notes when due or failure to make
any payment due under any other subordinate obligations under the
indenture 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 Class C notes when
due or failure to make any payment due under any other
junior-subordinate obligations under the indenture when due;
o default by Union Financial Services-1 in the performance or
observance of any other of the covenants, agreements or
conditions 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 Union Financial
Services-1; and
o the occurrence of an event of bankruptcy.
Remedies on default
Possession of trust estate. Upon the happening of any event of default,
the trustee may take possession of any portion of the trust estate that may be
in the custody of others, and all property comprising the trust estate, and may
hold, use, operate, manage and control those assets. The trustee may also, in
the name of Union Financial Services-1 or otherwise, conduct the business of
Union Financial Services-1 and collect and receive all charges, income and
revenues of the trust estate. After deducting all expenses incurred and all
other proper outlays authorized in the indenture, 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 will apply the
rest and residue of the money received by the trustee as follows:
31
<PAGE>
1. if the principal of none of the obligations under the indenture
shall have become due,
o first, to the payment of the interest in default on the
Class A notes and to the payment of all derivative
payments secured on a parity with the Class A notes then
due, in order of the maturity of the interest or
derivative payment installments, with interest on the
overdue installments, which payments will be made ratably
to the parties entitled to the payments without
discrimination or preference,
o second, to the payment of the interest in default on the
Class B notes and to the payment of all derivative
payments secured on a parity with the Class B notes then
due, in order of the maturity of the interest or
derivative payment installments, with interest on the
overdue installments, which payments will be made ratably
to the parties entitled to the payments without
discrimination or preference and,
o third, to the payment of the interest in default on the
Class C notes and to the payment of all derivative
payments secured on a parity with the Class C notes, if
any, then due, in order of the maturity of the interest or
derivative payment installments, with interest on the
overdue installments, which payments will be made ratably
to the parties entitled to the payments without
discrimination or preference, except as may be provided in
a supplemental indenture; and
2. if the principal of any of the obligations under the indenture
shall have become due by declaration of acceleration or otherwise,
o first, to the payment of the interest in default on the
Class A notes and all derivative payments secured on a
parity with the Class A notes then due, in the order of
the maturity of the interest or derivative payment
installments, with interest on overdue installments,
o second, to the payment of the principal of all Class A
notes then due and all derivative payments secured on a
parity with the Class A notes, which payments will be made
ratably to the parties entitled to the payments without
discrimination or preference,
o third, to the payment of the interest in default on the
Class B notes and all derivative payments secured on a
parity with the Class B notes then due, in the order of
the maturity of the interest or derivative payment
installments, with interest on overdue installments,
o fourth, to the payment of the principal of all Class B
notes then due and all derivative payments secured on a
parity with the Class B notes, which payments will be made
ratably to the parties entitled to the payments without
discrimination or preference,
32
<PAGE>
o fifth, to the payment of the interest in default on the
Class C notes and all company derivative payments secured
on a parity with such Class C notes then due, in the order
of the maturity of the interest or derivative payment
installments, with interest on overdue installments, and
o sixth, to the payment of the principal of all Class C
notes then due and any derivative payment on a parity with
the Class C notes which payments will be made ratably to
the parties entitled to the payments without
discrimination or preference, except as may be provided in
a supplemental indenture.
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 the trustee may sell the trust estate to the highest bidder in
accordance with the requirements of applicable law. In addition, the trustee may
proceed to protect and enforce the rights of the trustee or the registered
owners in the 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 is required to take any of these
actions if requested to do so in writing by the registered owners of at least
51% of the principal amount of the highest priority obligations outstanding
under the indenture.
Appointment of receiver. If an event of default occurs, and all of the
outstanding obligations under the indenture have been declared due and payable,
and if any judicial proceedings are commenced to enforce any right of the
trustee or of the registered owners under the indenture, then as a matter of
right, the trustee shall be entitled to the appointment of a receiver for the
trust estate.
Accelerated maturity. If an event of default occurs, the trustee may
declare, or upon the written direction by the registered owners of at least 51%
of the principal amount of the highest priority obligations then outstanding
under the indenture shall declare, the principal of all obligations issued under
the indenture, and then outstanding, and the interest thereon, immediately due
and payable. A declaration of acceleration upon the occurrence of a default
other than a default in making payments when due requires the consent of 100% of
the registered owners of the highest priority obligations then outstanding.
Direction of trustee. If an event of default occurs, the registered
owners of at least 51% of the principal amount of the highest priority
obligations then outstanding under the indenture shall have the right to direct
and control the trustee with respect to any proceedings for any sale of any or
all of the trust estate, or for the appointment of a receiver. The registered
owners may not cause the trustee to take any proceedings which in the trustee's
opinion would be unjustly prejudicial to non-assenting registered owners of
obligations outstanding under the indenture.
33
<PAGE>
Right to enforce in trustee. No registered owner of any obligation
issued under the indenture shall have any right as a registered owner to
institute any suit, action or proceedings for the enforcement of the provisions
of the indenture or for the appointment of a receiver or for any other remedy
under the indenture. All rights of action under the indenture are vested
exclusively in the trustee, unless and until the trustee fails to institute an
action or suit after the registered owners
o have given to the trustee written notice of a default under the
indenture, and of the continuance thereof,
o shall have made written request upon the trustee and the trustee shall
have been afforded reasonable opportunity to institute an action, suit
or proceeding in its own name, and
o the trustee shall have been offered reasonable indemnity and security
satisfactory to it against the costs, expenses, and liabilities to be
incurred on an action, suit or proceeding in its own name.
Waivers of events of default. The trustee may in its discretion waive
any event of default under the indenture and rescind any declaration of
acceleration of the obligations due under the indenture. The trustee will waive
an event of default upon the written request of the registered owners of at
least a majority of the principal amount of the highest priority obligations
then outstanding under the indenture. A waiver of any event of default in the
payment of the principal or interest due on any obligation issued under the
indenture may not be made unless prior to the waiver or rescission, provision
shall have been made for payment of all arrears of interest or all arrears of
payments of principal, and all expenses of the trustee in connection with such
default. A waiver or rescission of one default will not affect any subsequent or
other default, or impair any rights or remedies consequent to any subsequent or
other default.
The trustee
Acceptance of trust. The trustee has accepted the trusts imposed upon it
by the indenture, and will perform those trusts, but only upon and subject to
the following terms and conditions:
o The trustee undertakes to perform only those duties as are
specifically set forth in the
indenture.
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.
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, will 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 for the reimbursement of all expenses
to which it may be put and to protect it against liability
arising from any action taken by the trustee.
34
<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. The trustee will
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 will be
paid by Union Financial Services-1.
Indemnification of trustee. The trustee is generally under no obligation
or duty to perform any act at the request of registered owners or to institute
or defend any suit to protect the rights of the registered owners under the
indenture unless properly indemnified and provided with security to its
satisfaction. The trustee is not required to take notice of any event under the
indenture unless and until it shall have been specifically notified in writing
of the event of default by the registered owners or an authorized representative
of Union Financial Services-1.
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, without assurance of reimbursement or indemnity. In
that case the trustee will be reimbursed or indemnified by the registered owners
requesting that action, if any, or Union Financial Services-1 in all other
cases, for all fees, costs and expenses, liabilities, outlays and counsel fees
and other reasonable disbursements properly incurred. If Union Financial
Services-1 or the registered owners, as appropriate, 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 and interest
thereon from the Revenue Fund.
Union Financial Services-1 will 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.
Compensation of trustee. Union Financial Services-1 will pay to the
trustee compensation for all services rendered by it under the indenture, and
also all of its reasonable expenses, charges, and other disbursements. The
trustee may not change the amount of its annual compensation without giving
Union Financial Services-1 at least 90 days' written notice prior to the
beginning of a fiscal year.
Resignation of trustee. The trustee may resign and be discharged from
the trust created by the indenture by giving to Union Financial Services-1
notice in writing specifying the date on which such resignation is to take
effect. A resignation will 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.
35
<PAGE>
Removal of trustee. The trustee may be removed
o at any time by the registered owners of a majority of the principal
amount of the highest priority obligations then outstanding under the
indenture,
o by Union Financial Services-1 for cause or upon the sale or other
disposition of the trustee or its trust functions or
o by Union Financial Services-1 without cause so long as no event of
default exists or has existed within the last 30 days.
In the event a trustee is removed, removal shall not become effective until
o a successor trustee shall have been appointed, and
o the successor trustee has accepted that appointment.
Successor trustee. If the trustee resigns, is dissolved or otherwise is
disqualified to act or is incapable of acting, or in case control of the trustee
is taken over by any public officer or officers, a successor trustee may be
appointed by Union Financial Services-1. In this case Union Financial Services-1
will cause notice of the appointment of a successor trustee to be mailed to the
registered owners at the address of each registered owner appearing on the note
registration books.
Every successor trustee
o will 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,
o have a reported capital and surplus of not less than $50,000,000,
o will be authorized under the law to exercise corporate trust powers,
be subject to supervision or examination by a federal or state
authority, and
o will 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 student loans originated
under the Act.
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.
36
<PAGE>
Supplemental indentures
Supplemental indentures not requiring consent of registered owners.
Union Financial Services-1 and the trustee may, without the consent of or notice
to any of the registered owners of any obligations outstanding under the
indenture, enter into any indentures supplemental to the indenture for any of
the following purposes:
1. to cure any ambiguity or formal defect or omission in the indenture;
2. to grant to or confer upon the trustee for the benefit of the
registered owners any additional benefits, rights, remedies, powers or
authorities;
3. to subject to the indenture additional revenues, properties or
collateral;
4. to modify, amend or supplement the indenture or any indenture
supplemental thereto in such manner as to permit the qualification
under the Trust Indenture Act of 1939 or any similar federal statute
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;
5. to evidence the appointment of a separate or co-trustee or a
co-registrar or transfer agent or the succession of a new trustee
under the indenture;
6. to add provisions to or to amend provisions of the indenture as may,
in the opinion of counsel, be necessary or desirable to assure
implementation of Union Financial Services-1's student loan program in
conformance with the Act;
7. 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 outstanding under the indenture;
8. to make any changes necessary to comply with the Act and the
regulations thereunder or the Internal Revenue Code and the
regulations promulgated thereunder;
9. 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;
10. to make the terms and provisions of the indenture, including the lien
and security interest granted therein, applicable to a derivative
product;
11. to create any additional funds or accounts under the indenture deemed
by the trustee to be necessary or desirable;
37
<PAGE>
12. to amend the indenture to allow for any of the notes to be supported
by a letter of credit or insurance policy or a liquidity agreement,
including amendment to provide for repayment to the provider of the
credit support on a parity with any notes or derivative product and
providing rights to the provider under the indenture, including with
respect to defaults and remedies;
13. to amend the indenture to provide for use of a surety bond or other
financial guaranty instrument in lieu of cash and 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;
14. to make any other change with a confirmation by the rating agencies of
their ratings of the notes; or
15. 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
outstanding under the indenture.
Supplemental indentures requiring consent of registered owners. Any
amendment of the indenture other than those listed above must be approved by the
registered owners of not less than a majority of the principal amount of the
obligations then outstanding under the indenture.
None of the changes described below may be made in a supplemental
indenture without the consent of the registered owners of all obligations then
outstanding,
o an extension of the maturity date of the principal of or the
interest on any obligation, or
o a reduction in the principal amount of any obligation or the rate
of interest thereon, or
o a privilege or priority of any obligation under the indenture
over any other obligation, or
o a reduction in the aggregate principal amount of the obligations
required for consent to such supplemental indenture, or
o the creation of any lien other than a lien ratably securing all
of the obligations at any time outstanding under the indenture.
Trust irrevocable
The trust created by the terms and provisions of the indenture is
irrevocable until 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 registered owners of the notes are paid all the principal of and
interest due on the notes, at the times and in the manner stipulated in the
indenture, and if each counterparty on a derivative product is paid all of
derivative payments then due, then the pledge of the trust estate will thereupon
terminate and be discharged. The trustee will execute and deliver to Union
Financial Services-1 instruments to evidence the discharge and satisfaction, and
the trustee will pay all money held by it under the indenture to the party
entitled to receive it under the indenture.
38
<PAGE>
Notes will be considered to have been paid if money for their payment or
redemption has been set aside and is being held in trust by the trustee. Any
outstanding note will be considered to have been paid if the note is to be
redeemed on any date prior to its stated maturity and notice of redemption has
been given as provided in the indenture and on said date there shall have been
deposited with the trustee either money or governmental obligations the
principal of and the interest on which when due will provide money sufficient to
pay the principal of and interest to become due on the note.
Any derivative payments will be considered to have been paid and the
applicable derivative product terminated when payment of all derivative payments
due and payable to each counterparty under derivative products have been made or
duly provided for to the satisfaction of each counterparty and the respective
derivative product has been terminated.
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 of the credit enhancement, 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, interest rate swaps, or any combination of the foregoing.
The presence of a Reserve Fund and other forms of credit enhancement for
the benefit of any class or series of notes is intended to enhance the
likelihood that noteholders of a class or series will receive the full amount of
principal and interest due on the notes and to decrease the likelihood that such
noteholders will experience losses. 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 unless a guarantee against
losses is described in the related prospectus supplement. 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 the credit enhancement will be exhausted by the claims
of the holders of notes of one or more other series.
Subordinate notes
The notes will be designated Class A notes, Class B notes or Class C
notes in the related prospectus supplement. To the extent specified in the
related prospectus supplement, the rights of the Class B noteholders to receive
distributions on any note payment date will be subordinated to the corresponding
rights of the Class A noteholders, and the rights of the Class C noteholders to
receive distributions on any note payment date will be subordinated to the
corresponding rights of the Class B noteholders. 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, specific 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 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.
39
<PAGE>
Letter of credit
If so specified in the prospectus supplement with respect to a series,
deficiencies in amounts otherwise payable on the notes or certain classes of the
notes will be covered by one or more letters of credit. The bank or financial
institution issuing the letter of credit will be identified in a prospectus
supplement. Under a letter of credit, the issuer will be obligated to honor
draws in an aggregate fixed dollar amount generally equal to a percentage
specified in the related prospectus supplement of the principal balance of the
student loans on a specified date or of the initial aggregate principal balance
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 under
the letter of credit and may otherwise be reduced as described in the related
prospectus supplement. The obligations of the issuer of the letter of credit
will expire at the earlier of the date specified in the related prospectus
supplement or the termination of the trust estate.
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 the notes or certain
classes of the notes will be covered by insurance policies or surety bonds
provided by one or more insurance companies or sureties. The insurance policies
or surety bonds may cover timely distributions of interest and 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.
Reserve Fund
In addition to the Reserve Fund described in this prospectus under
"Security and Sources of Payment for the Notes-Reserve Fund," one or more
reserve funds may be established with respect to a series of the notes. Cash,
eligible investments, a demand note or a combination thereof, in the amounts so
specified in the related prospectus supplement, may be deposited in such reserve
fund. The reserve fund for a series may also be funded over time by depositing
in the reserve fund 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 on those amounts, 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 the notes of that series. 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 rating the notes,
against certain types of losses not covered by insurance policies or other
credit support. Following each interest payment date, amounts in a reserve fund
in excess of any specified reserve fund requirement may be released from the
reserve fund under the conditions specified in the related prospectus supplement
and will not be available for further application by the trustee.
40
<PAGE>
Additional information concerning any reserve fund is to be set forth in
the related prospectus supplement, including the initial balance of the 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.
41
<PAGE>
Union Financial Services-1
Union Financial Services-1, Inc. 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. Union Financial Services-1 is a
wholly-owned subsidiary of Union Financial Services, Inc., a Nevada corporation,
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. Union Financial Services-1 was created as a separate,
limited purpose entity pursuant to Articles of Incorporation that impose
limitations on the nature of its business and a restriction on its ability to
commence a voluntary case or proceeding under any bankruptcy or other insolvency
laws without the prior unanimous affirmative vote of all of its directors. Union
Financial Services-1's Articles of Incorporation also require that it have a
director who qualifies as an "independent director."
Union Financial Services-1 is governed by a board of directors,
which is required by its 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
</TABLE>
- -------------
(*) Each director holds office until the next annual meeting of
shareholders following his or her election until such director's
successors shall have been elected and qualified. Annual Meetings for
Union Financial Services-1 are generally held in March of each year.
42
<PAGE>
Executive management
The board of directors and executive officers described below are
responsible for overall management of Union Financial Services-1. Union
Financial Services-1'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 Union
Financial Services-1. 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., 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 Union
Financial Services-1. Included in his responsibilities are loan purchasing,
marketing of corporate services and coordination of Union Financial Services-1'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. 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 Union Financial Services-1. 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., 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.
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.
Union Financial Services-1's executive officers are elected annually by
the board of directors and serve at the discretion of the board. Union Financial
Services-1's directors hold office until the next annual meeting of stockholders
and until their successors have been duly elected and qualified.
Union Financial Services, Inc. provides certain administrative services
to Union Financial Services-1 in connection with the operation of Union
Financial Services-1's student loan program. Union Financial Services, Inc.
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 Union Financial Services-1's outstanding assets per annum, or such
other amount as may be specified in the related prospectus supplement. Union
Financial Services, Inc. also receives compensation from Union Financial
Services-1 for services provided in connection with structuring, negotiating and
implementing Union Financial Services-1's financing programs. The amount of such
fees paid to Union Financial Services, Inc., if any, in connection with issuance
of a series of the notes will be described in the applicable prospectus
supplement.
The Student Loan Program of Union Financial Services-1
Union Financial Services-1 established its student loan program in order
to effectuate its general corporate purposes.
44
<PAGE>
Loan purchase agreements
Union Financial Services-1 purchases its student loans from "eligible
lenders" under the Higher Education Act pursuant to the terms of student loan
purchase agreements. The student loan purchase agreements identify the portfolio
of student loans to be purchased by Union Financial Services-1 and specify the
purchase price to be paid for those loans. Each seller is obligated under the
student loan purchase agreement to deliver each student loan note and related
documentation to the servicer or subservicer as custodial agent for the trustee,
and to deliver the instruments of transfer for the student loans as Union
Financial Services-1 and its counsel may determine is necessary for a valid
transfer of the loans.
Each seller makes representations, warranties and covenants with respect
to the student loans sold pursuant to its respective student loan purchase
agreement, including the following:
o 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.
o the 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.
o each loan to be sold under the student loan purchase agreement is
either insured or guaranteed.
o the 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.
o the seller, or the lender that originated a loan, has reported
the amount of origination fees, if any, authorized to be
collected with respect to the loan pursuant to Section 438(c) of
the Act to the Secretary for the period in which the fee was
authorized to be collected; and the 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.
At the request of Union Financial Services-1 or the trustee, each seller
is obligated to repurchase any loan purchased by Union Financial Services-1 from
the seller if:
o any representation or warranty made or furnished by the seller in
or pursuant to its respective student loan purchase agreement
shall prove to have been materially incorrect as to the loan;
o 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
the loan to Union Financial Services-1; or
45
<PAGE>
o on account of any wrongful or negligent act or omission of the
seller or its servicing agent that occurred prior to the sale of
a loan to Union Financial Services-1, 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 Union Financial Services-1 or the trustee, the seller is required
to pay to the trustee an amount equal to the then-outstanding principal balance
of the loan, plus the percentage of premium paid by Union Financial Services-1
in connection with the purchase of the loan and interest and special allowance
payments accrued and unpaid with respect to the loan, plus any attorneys' fees,
legal expenses, court costs, servicing fees or other expenses incurred by Union
Financial Services-1, and the trustee in connection with the loan and arising
out of the reasons for the repurchase.
Servicing of student loans
Union Financial Services-1 is required under the Higher Education Act,
the rules and regulations of the guarantee agency and the indenture to use due
diligence in the servicing and collection of 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.
The trustee is acting as "eligible lender" with respect to the student
loans as an accommodation to Union Financial Services-1 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, Union Financial Services-1 or any other party in connection with
the student loans and the documents, agreements, understandings and arrangements
relating to the student loans.
The servicing agreements
We have entered into a servicing agreement with National Education Loan
Network dated as of _____________ which continues until the earlier of
o termination of the indenture,
o early termination after material default by the servicer as
provided for in the servicing agreement, or
o the student loans serviced under the servicing agreement are
paid in full.
National Education Loan Network has entered into subservicing agreements
with UNIPAC Service Corporation, a Nebraska corporation and InTuition, Inc.
under which UNIPAC and InTuition, as subservicers, assume all of the duties of
the servicer under the servicing agreement for the term of the servicing
agreement.
46
<PAGE>
UNIPAC and InTuition will provide data processing and other assistance
in connection with the servicing of our portfolio of student loans as required
by the Higher Education Act and the guarantee agencies. We will cause the
trustee to pay from the Revenue Fund established under the indenture to National
Education Loan Network servicing fees, and National Education Loan Network,
pursuant to the subservicing agreements, pays UNIPAC and InTuition subservicing
fees and certain expenses for the services which UNIPAC and InTuition provide.
In the event National Education Loan Network no longer acts as the primary
servicer of our student loan portfolio, UNIPAC and InTuition have agreed to
service our student loans under the terms of and pursuant to the servicing
agreement.
Under the terms of the subservicing agreements, the subservicers may be
obligated to pay us an amount equal to the outstanding principal balance plus
all accrued interest and other fees due to the date of purchase of a student
loan if the subservicer causes the loan to be denied the benefit of any
applicable guarantee and is unable to cause the reinstatement of the guarantee
within twelve (12) months of denial by the applicable guarantee agency. Upon
payment, the loan shall be subrogated to the subservicer. In the event the
subservicer cures any student loan, we will repurchase the loan an amount equal
to the then outstanding principal balance plus all accrued interest due on the
student loan, less the amount subject to the risk sharing provisions in the
Higher Education Act, whereupon the subrogation rights of the subservicer shall
terminate.
Union Financial Services-1 may designate another servicer with respect
to its student loans. Any servicer, other than National Education Loan Network,
shall be confirmed in writing by each rating agency rating our notes.
National Education Loan Network
National Education Loan Network was formed in 1997 with the purpose of
creating a network of student loan finance industry participants to provide
services to educational institutions, lenders and students across the country.
National Education Loan Network provides a wide array of education loan finance
services, including student loan secondary market operations, administrative
management services and asset finance services. Through its operating
subsidiaries, National Education Loan Network owns and administers over $1
billion in student loans. National Education Loan Network and Union Financial
Services-1 are both subsidiaries of Union Financial Services, Inc.
UNIPAC
UNIPAC began its education loan servicing operations on January 1, 1978,
and provides education loan servicing, time sharing, administration and other
services to lenders, secondary market purchasers and guarantee agencies
throughout the United States. UNIPAC is an operating subsidiary of Union Bank
and Trust Company, 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, which as of May 31, 1999, employed approximately
228 people. In November, 1997, UNIPAC opened a third servicing center in St.
Paul, Minnesota, which, as of May 31, 1999, employed approximately 144 people.
As of May 31, 1999, UNIPAC's servicing volume was approximately $9.2 billion for
its full service and secondary market clients.
UNIPAC's due diligence schedule is conducted through automated letter
generation. Telephone calls are made by an auto-dialer system. All functions are
monitored by an internal quality control system to ensure their performance.
Compliance training is provided on both centralized and unit level basis. In
addition, UNIPAC has distinct compliance and internal auditing departments whose
functions are to advise and coordinate compliance issues. In order to provide
these services, UNIPAC has developed and maintains a computer mainframe and
software system. See "Certain Relationships Among Financing Participants."
47
<PAGE>
InTuition
InTuition has been servicing the education finance industry since 1997.
InTuition has over 200 employees servicing over $2 billion in student loans held
by financial institutions and secondary markets throughout the United States.
InTuition provides a complete line of services from originations and
disbursement processing to collection activities.
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.
The Higher Education Act currently authorizes certain student loans to
be covered under the Federal Family Education Loan Program. The 1998 Amendments
to the Higher Education Act extended the principal provisions of the Federal
Family Education Loan Program 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 Federal Family
Education Loan Program 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 promptly notify 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 specific 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 Federal Family Education Loan Program.
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:
o Stafford Loans,
o Unsubsidized Stafford Loans,
o PLUS Loans and
o Consolidation Loans
48
<PAGE>
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 these various loan types include, where appropriate, their
predecessors
The primary loan under the Federal Family Education Loan Program 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 Federal Family Education Loan Program and other federal
programs to consolidate repayment of the borrower's existing loans. Prior to
July 1, 1994, the Federal Family Education Loan Program 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
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. Subsidized Stafford Loans have
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 the needs tests 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 Federal Family Education Loan Program loan:
(1) is 7% per annum for a loan covering a period of instruction
beginning before January 1,1981;
49
<PAGE>
(2) is 9% per annum for a loan covering a period of instruction
beginning on or before January 1, 1981, but before September 13, 1983;
(3) is 8% per annum for a loan covering a period of instruction
beginning on or after September 13, 1983, but before July 1, 1988;
(4) 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
(5) 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 Federal Family Education Loan Program:
(6) for a loan made prior to July 23, 1992 is the applicable
interest rate on the previous loan or, if the previous loan is not a
Stafford Loan 8% per annum or
(7) 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:
o 7% per annum in the case of a Stafford Loan made to a borrower
who has a loan described in clause (1) above;
o 8% per annum in the case of
o a Stafford Loan made to a borrower who has a loan described in
clause (3) above,
o 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 (4) above,
o 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;
50
<PAGE>
o 9% per annum in the case of a Stafford Loan made to a borrower
who has a loan described in clauses (2) or (5) above or 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
o 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 (4) 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 (2) above, except that the
interest 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 deferment
periods, the formula described in clause (2) 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 interest 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 these loans will not be further amended, either
before or after the rate described in this section becomes effective.
Unsubsidized Federal Stafford Loans
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.
These students are entitled to borrow the difference between the Stafford Loan
maximum and their Subsidized Stafford eligibility through the Unsubsidized
Stafford program. 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 either pay
interest from the time the 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 Federal Family Education Loan Program 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:
51
<PAGE>
o made on or after January 1, 1981, but before October 1, 1981, is
9% per annum;
o made on or after October 1, 1981, but before November 1, 1982, is
14% per annum;
o made on or after November 1, 1982, but before July 1, 1987, is
12% per annum;
o 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);
o 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).
o made on or after July 1, 1994, but before July 1, 1998, is the
same as that for a loan made on or after October 1, 1992, but
before July 1, 1994, except that such rate shall not exceed 9%
per annum; or
o 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.
52
<PAGE>
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 the loan, at a variable interest
rate. In this case, proceeds of the new loan are used to discharge the original
loan.
Federal SLS Loans
General. SLS Loans were limited to graduate or professional students,
independent undergraduate students, and dependent undergraduate students, if the
students' parents were unable to obtain a PLUS Loan and were also unable to
provide the students' expected family contribution. Except for dependent
undergraduate students, eligibility for SLS Loans was determined without regard
to need. 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
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 obtained in an amount sufficient to pay outstanding
principal, unpaid interest and late charges on federally insured or reinsured
student loans incurred under the Federal Family Education Loan Program,
excluding 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:
o have outstanding indebtedness on student loans made under the
Federal Family Education Loan Program and/or certain other
federal student loan programs, and
o be in repayment status or in a grace period, or
o be a defaulted borrower who has made arrangements to repay any
defaulted loan satisfactory to the holder of the defaulted loan.
53
<PAGE>
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" in this
prospectus.
Maximum loan amounts
Each type of loan is subject to limits on 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 needs analysis. Additional limits are described below.
Loan limits for Stafford and Unsubsidized Stafford Loans. 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 the 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 the 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 of
Education is authorized to increase the limits applicable to graduate and
professional students who are pursuing programs which the Secretary of Education
determines to be exceptionally expensive.
54
<PAGE>
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. See "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 the 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 of SLS
Loans 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 the 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 Federal Family Education Loan Program loans to such
student for such academic year, up to the maximum amount of all Federal Family
Education Loan 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".
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 Federal Family Education Loan
Program, 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. After the 1998 Amendments, lenders are required to offer extended
repayment schedules to new borrowers 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 may not be longer than 30 years. For
55
<PAGE>
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. 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 to a lesser rate at
any time before or during the repayment period. 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. Union Financial Services-1
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.
Deferment periods. No principal repayments need be made during certain
periods of deferment prescribed by the Higher Education Act. For loans to a
borrower who first obtained a loan which was disbursed before July 1, 1993,
deferments are available:
o 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;
o during a period not in excess of three years while the borrower
is a volunteer under the Peace Corps Act;
o during a period not in excess of three years while the borrower
is a full-time volunteer under the Domestic Volunteer Act of
1973;
56
<PAGE>
o during a period not exceeding three years while the borrower is
in service, comparable to the service described above as a
full-time volunteer for an organization which is exempt from
taxation under Section 501(c)(3) of the Code;
o during a period not exceeding two years while the borrower is
serving an internship necessary to receive professional
recognition required to begin professional practice or service,
or a qualified internship or residency program;
o 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;
o during a period not to exceed twenty-four months while the
borrower is seeking and unable to find full-time employment;
o 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 Federal Family Education
Loan Program), 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;
o during a period, not in excess of 6 months, while the borrower is
on parental leave; and
o 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, 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
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.
For loans to a borrower who first obtains a loan on or after July 1,
1993, deferments are available:
o 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;
o during a period not exceeding three years while the borrower is
seeking and unable to find full-time employment; and
o 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.
57
<PAGE>
Prior to the 1992 changes, only certain of the deferment periods
described above and the Deferment Period described in clause (viii) with respect
to parent borrowers or a student on whose behalf the parent borrowed were
available to PLUS Loan borrowers, and only certain deferment periods were
available to Consolidation Loan borrowers. Prior to the 1986 changes, PLUS Loan
borrowers were not entitled to certain 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 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 Federal Family Education Loan
Program) 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 in exceptional circumstances such as a local or
national emergency or military mobilization, 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. Forbearance also extends the ten year maximum term.
Interest payments during grace, deferment and forbearance periods. 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 not more frequently than quarterly.
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.
These fees 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.
58
<PAGE>
Lender origination fee. The lender of any loan under the Federal Family
Education Loan Program 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 the 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 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.
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 the 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.
59
<PAGE>
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:
<TABLE>
<CAPTION>
Date of Loans Annualized SAP Rate
<S> <C>
On or after October 1, 1981 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)
- --------------------------------------------------------------------------------------
</TABLE>
(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.
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" in his prospectus.
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% loans with a special allowance formula of the T-Bill Rate plus 3.1%.
60
<PAGE>
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. In addition, the amount of the lender origination fee is
collected by offset to special allowance payments and interest subsidy payments.
Description of the Guarantee Agencies
The 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 Federal Family
Education Loan Program.
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 with 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 Federal Family Education Loan Program regulations and the
guarantee agency's policies and procedures.
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
lo ans 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:
o 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;
61
<PAGE>
o 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;
o the reduction in supplemental preclaims assistance payments from
the Secretary of Education; and
o 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 Federal Family Education Loan Program 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 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, may be further changed in a manner that may adversely
affect the ability of a guarantee agency to meet its guarantee obligations.
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.
62
<PAGE>
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
our student loans will be set forth in the prospectus supplement.
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 Federal Family Education Loan Program 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.
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
o 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,
o 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,
o 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,
o expanded the Secretary of Education's authority to terminate such
contracts and to seize guarantee agencies' reserves, and
o mandated the additional recall of guarantee agency reserve funds.
63
<PAGE>
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.
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:
64
<PAGE>
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. guarantee payments on such
loans,
o the original principal amount of such loans that have been fully
repaid, and
o 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.
65
<PAGE>
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).
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:
o that completed loan applications be processed,
o a determination of whether an applicant is an eligible borrower
attending an eligible institution under the Higher Education Act
be made,
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 and;
o 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
Federal Family Education Loan Program 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.
66
<PAGE>
The loan terms are generally the same under the direct loan program as
under the Federal Family Education Loan Program, 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 Federal Family Education Loan Program, 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 Federal Family Education
Loan Program loans, how many students will seek loans under the direct loan
program instead of the Federal Family Education Loan Program. In addition, it is
impossible to predict whether future legislation will eliminate, limit or expand
the direct loan program or the Federal Family Education Loan Program.
Other guarantee agencies
Although Union Financial Services-1 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, Union Financial
Services-1, Inc. may acquire student loans under the indenture which are
guaranteed by other guarantee agencies with the approval of the rating agencies.
67
<PAGE>
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 Union Financial Services-1. 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 Union
Financial Services-1, Inc., Kutak Rock has rendered, with respect to any notes
previously issued, and will render, with respect to the Additional notes, its
opinion to Union Financial Services-1 to the effect that the notes, issued or to
be issued, as the case may be, should be treated as debt of Union Financial
Services-1, rather than as an interest in the 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 prospectus
constitutes a sale of the 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 Union Financial Services-1 as a corporate entity,
the transaction were treated as creating a partnership among the registered
owners, the servicer and Union Financial Services-1 which has purchased the
underlying student loans, the resulting partnership would not be subject to
federal income tax. Rather, the servicer, Union Financial Services-1 and each
registered owner would be taxed individually on their respective distributive
shares of the partnership's income, gain, loss, deductions and credits. The
amount and timing of items of income and deduction of the registered owner could
differ if the notes were held to constitute partnership interests, rather than
indebtedness.
If, alternatively, it were determined that this transaction created an
entity other than Union Financial Services-1 which was classified as a
corporation or a publicly traded partnership taxable as a corporation and
treated as having purchased the student loans, the trust would be subject to
federal income tax at corporate income tax rates on the income it derives from
the 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 Union Financial Services-1. However, as noted above, Union
Financial Services-1 has been advised that the notes should be treated as debt
of Union Financial Services-1 for federal income tax purposes.
68
<PAGE>
Characterization of the notes as indebtedness
Union Financial Services-1 and the registered owners express in the
indenture their intent that, for federal income tax purposes, the notes will be
indebtedness of Union Financial Services-1 secured by the student loans. Union
Financial Services-1 and the registered owners, by accepting the notes, have
agreed to treat the notes as indebtedness of Union Financial Services-1 for
federal income tax purposes. Union Financial Services-1 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.
Union Financial Services-1 believes that it has retained the
preponderance of the primary benefits and burdens associated with ownership of
the student loans and should, thus, be treated as the owner of the 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 student loans,
the Service could further assert that the entity created pursuant to the
indenture, as the owner of the 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. The legislative history of the original issue discount
provisions indicates that the calculation and accrual of original issue discount
should be based on the prepayment assumptions used by the parties in pricing the
transaction.
69
<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. Union Financial Services-1 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 Class B notes may not be qualified stated interest because such
payments are not unconditional and that the Class B 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,
Union Financial Services-1 believes, based on the advice of counsel, that it
will retain ownership of the 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 student loans for federal income tax purposes instead of Union Financial
Services-1 (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.
70
<PAGE>
Union Financial Services-1 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 student loans (and not as an association taxable as a
corporation), then Union Financial Services-1 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
Union Financial Services-1 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.
71
<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 Union Financial Services-1,
Inc. 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.
71
<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 Union Financial Services-1, Inc. 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 Union Financial
Services-1 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
Union Financial Services-1, Inc. 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.
Relationships Among Financing Participants
Union Financial Services-1, Inc. is a wholly owned subsidiary of Union
Financial Services, Inc. Union Financial Services, Inc. is a privately held
corporation whose minority owners include employees of Union Bank and Trust
Company and certain relatives of such employees.
National Education Loan Network, Inc. acts a servicer for the student
loans purchased by Union Financial Services-1. National Education Loan Network
is also a subsidiary of Union Financial Services, Inc.
National Education Loan Network has engaged UNIPAC Service Corporation
and InTuition, Inc,. to act as subservicers for the student loan portfolio of
Union Financial Services-1. UNIPAC is an operating subsidiary of Union Bank and
Trust Company, Lincoln, Nebraska. The parent company of Union Bank and Trust
Company also control 50% of the voting power of the outstanding stock of
InTuition.
Union Bank and Trust Company is one of the largest originators of
student loans. Union Financial Services-1 expects to purchase loans from Union
Bank and Trust Company. Union Financial Services-1 also expects to purchase
student loans from other entities that are direct or indirect subsidiaries of
Union Financial Services, Inc., including NHELP-I, Inc. and NEBHELP, Inc.
73
<PAGE>
Plan of Distribution
Union Financial Services-1 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, Union Financial Services-1 may sell such notes, directly
or through agents, through a competitive bidding process described in the
applicable prospectus supplement. Union Financial Services-1 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 Union Financial Services-1 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 those dealers may receive compensation in the form of discounts, concessions
or commissions from the underwriters or commissions from the purchasers for whom
they may act as agents. Underwriters, dealers and agents that participate in the
distribution of the notes may be deemed to be underwriters and any discounts or
commissions received by them from Union Financial Services-1 and any profit on
the resale of the notes by them may be deemed to be underwriting discounts and
commissions under the Securities Act. The underwriters will be identified, and
any compensation received from Union Financial Services-1 will be described, in
the applicable prospectus supplement.
Under agreements which may be entered into by Union Financial
Services-1, the underwriters and agents who participate in the distribution of
the notes may be entitled to indemnification by Union Financial Services-1
against 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, Union Financial Services-1
will authorize underwriters or other persons acting as Union Financial
Services-1's agents to solicit offers by certain institutions to purchase the
notes from Union Financial Services-1 pursuant to contracts providing for
payment and delivery on a future date. Institutions with which these 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 the institutions must be approved by Union Financial
Services-1. The obligation of any purchaser under any contract will be subject
to the condition that the purchaser of the notes shall not be prohibited by law
from purchasing such notes. The underwriters and other agents will not have
responsibility in respect of the validity or performance of these 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.
74
<PAGE>
Legal Matters
Certain legal matters will be passed upon by Ballard Spahr Andrews &
Ingersoll, LLP, Denver, Colorado as counsel and by Kutak Rock, Denver, Colorado
as note counsel and as special tax counsel to Union Financial Services-1. Other
counsel, if any, passing upon legal matters for Union Financial Services-1 or
any placement agent or underwriter will be identified in the related prospectus
supplement.
Financial Information
Union Financial Services-1 has determined that its financial statements
are not material to the offering made hereby. Union Financial Services-1 will
not engage in any activities other than as described herein. Accordingly,
financial statements with respect to Union Financial Services-1 are not included
in this prospectus.
Ratings
It is a condition to the issuance of the notes that 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). the specific
ratings for class of notes 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 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.
Incorporation of Documents by Reference;
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. The SEC allows us to 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:
o Annual Report on Form 10-K for the fiscal year ended December 31,
1998,
o The Quarterly Report on Form 10-Q for [the most recent calendar
quarter], and
o All periodic reporting documents we file with the SEC after the
date of this prospectus and before all of the notes have been
issued.
75
<PAGE>
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.
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.
76
<PAGE>
Glossary of Terms
Some of the terms used in this prospectus are defined below. The
indenture contains the definition of other terms used in this prospectus and
reference is made to the indenture for those definitions.
"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.
"All Hold Rate" means the applicable LIBOR-based rate less 0.20%. The
applicable all hold rate shall not 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 Rate Certificate Note Interest Rate" means each variable rate
of interest per annum borne by an auction rate certificate note for each auction
period and determined in accordance with the provisions of the indenture.
However, in the event of a payment default, the auction rate certificate note
interest rate will be one-month LIBOR plus 1.50%, but not more than the
applicable maximum auction rate.
"Auction" means the implementation of the registered owners 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 agreement.
"Auction Date" means, with respect to any class of auction rate
certificate notes, the date specified in the related prospectus supplement, and
thereafter, the business day immediately preceding the first day of each auction
period for each respective class, other than:
(a) each auction period commencing after the ownership of the
applicable auction rate certificate 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.
77
<PAGE>
"Auction Period" means the interest period applicable to the auction
rate certificate 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.
"Action Rate" means the rate of interest per annum that results from
implementation of the registered owners and is determined as described in the
indenture.
"Authorized Officer" shall mean, when used with reference to Union
Financial Services-1, its Chairman, President, Vice President or Secretary, or
any other officer or board member authorized in writing by the board of
directors to act on behalf of Union Financial Services-1.
"Authorized Representative" shall mean, when used with reference to
Union Financial Services-1, (a) an authorized officer or (b) any affiliate
organization or other entity authorized by the board of directors to act on
Union Financial Services-1's behalf.
"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.
"Carry-Over Amount" means, with respect to the auction rate certificate
notes, the excess, if any, of (a) the amount of interest on an auction rate
certificate note that would have accrued with respect to the related interest
period at the applicable auction rate over (b) the amount of interest on such
auction rate certificate note actually accrued with respect to such auction rate
certificate note with respect to such interest period based on the applicable
maximum auction rate without regard to the last two clauses of the definition
thereof together with the unreduced portion of any such excess from prior
interest periods; provided that any reference to "principal" or "interest" in
the indenture and the auction rate certificate notes shall not include within
the meanings of such words any carry-over amount or any interest accrued on any
carry-over amount.
78
<PAGE>
"Certificate of Insurance" shall mean any certificate evidencing a
student loan is insured pursuant to a contract of insurance.
"Class A Notes" shall mean Union Financial Services-1's student loan
asset-backed notes issued pursuant to the indenture and designated as Class A.
"Class B Notes" shall mean Union Financial Services-1's student loan
asset-backed notes issued pursuant to the indenture and designated as Class B.
Class B notes shall be subordinate to the Class A notes.
"Class C Notes" shall mean Union Financial Services-1's student loan
asset-backed notes issued pursuant to the indenture and designated as Class C.
Class C notes shall be subordinate to the Class A notes and the Class B notes.
"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.
"Contract of Insurance" shall mean the contract of insurance between an
eligible lender and the Secretary.
"Derivative Payment" shall mean a payment required to be made by or on
behalf of Union Financial Services-1 due to a reciprocal payor pursuant to a
derivative product.
"Derivative Payment Date" shall mean, with respect to a derivative
product, any date specified in the derivative product on which both or either of
Union Financial Services-1 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
Union Financial Services-1 and a reciprocal payor, which provides that Union
Financial Services-1'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 Union Financial Services-1 is obligated to pay
(whether on a net payment basis or otherwise) on one or more scheduled
and specified derivative payment dates, Union Financial Services-1
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 Union Financial Services-1, reciprocal payments on one or more
scheduled and specified derivative payment dates in the amounts set
forth in the derivative product;
(b) for which Union Financial Services-1's obligation to make
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 Union Financial
Services-1's outstanding notes and which derivative payments may be
equal in priority with any priority classification of Union Financial
Services-1's outstanding notes; and
79
<PAGE>
(c) under which reciprocal payments are to be made directly to
the trustee for deposit into the Revenue Fund.
"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 loans made under the Act.
"Event of Bankruptcy" shall mean (a) Union Financial Services-1 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 Union Financial Services-1 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.
"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
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.
"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 student 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 student loan allowed by the terms of the Act with
respect to such student loan at the time it was originated and the coverage of
such student loan by the federal reimbursement contracts, providing, among other
things, for reimbursement to the guaranty agency for payments made by it on
defaulted student loans insured or guaranteed by the guaranty agency of at least
the minimum reimbursement allowed by the Act with respect to a particular
student 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.
80
<PAGE>
"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).
"Hold Order" has the meaning set forth under "Description of the
Notes-Auction Rate Certificate Notes."
"Indenture" shall mean the indenture of Trust dated as of ________ _,
____, including all supplements and amendments thereto.
"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 Union Financial Services-1, Inc., the
trustee and the initial auction agent, including any amendment thereof or
supplement thereto.
"Initial Interest Payment Date" shall mean the date specified in the
related prospectus supplement.
"Initial Interest Period" means, as to the LIBOR rate notes, 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" means, as to auction rate certificate notes, the period
commencing on the date of issuance and continuing through the day immediately
preceding the Initial Rate Adjustment Date for such auction rate certificate
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.
"Insurance" or "Insured" or "Insuring" means, with respect to student
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 student loan.
"Interest Benefit Payment" shall mean an interest payment on student
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.
"Interest Period" means, with respect to the auction rate
certificatenotes, 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. The term "interest period" with respect to the LIBOR rate
notes and Treasury rate notes has the meaning described under the heading
"Description of the Notes - LIBOR Rate Notes" and "-Treasury Rate Notes."
81
<PAGE>
"Interest Rate Adjustment Date" means the date on which an auction rate
certificate note interest rate is effective, and means, with respect to the
auction rate certificatenotes, the date of commencement of each auction period.
"Interest Rate Determination Date" means, with respect to the auction
rate certificatenotes, 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.
"Investment Agreement" shall mean any investment agreement approved by
the rating agencies.
"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 Class C notes and any
derivative product, the priority of payment of which is equal with that of any
series or subseries of Class C notes.
"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.
"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 auction rate certificate notes which, when taken together with the
interest rate on the auction rate certificate notes for the one-year period
ending on the final day of the proposed auction period, would result in the
average interest rate on the auction rate certificate notes 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 auction
rate certificate notes 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 auction rate certificate notes 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 auction rate certificate
notes is less than the lowest category of "A"). If the auction rate
certificate notes have not been outstanding for at least such one-year period
then for any portion of such period during which such auction rate certificate
notes were not outstanding, the interest rates on the auction rate certificate
notes 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 registered owners, 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.
82
<PAGE>
"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 Union Financial Services-1's notes or other
obligations issued under the indenture.
"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 Telerate Page 3750 as of
approximately 11:00 a.m., London time, on the interest rate determination date.
If such rate does not appear on Telerate Page 3750, 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
the calculation agent, and in a principal amount of not less than U.S.
$1,000,000 and that is representative for a single transaction in such market at
such time. The calculation agent 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 major banks
in New York, New York selected by the calculation agent 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. If the banks selected are not
quoting as mentioned in this definition, 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.
"Obligations" shall mean senior obligations, subordinate obligations and
junior-subordinate obligations.
"Participant" means a member of, or participant in, the depository.
"Program" shall mean Union Financial Services-1's program for the
financing and the purchase of student loans, as the same may be modified from
time to time.
83
<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 Union Financial Services-1, Inc.
incurred in connection with the preparation of legal opinions and other
authorized reports or statements attributable to the notes and the student
loans; (g) transfer fees, purchase premiums and loan origination fees on student
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 Union
Financial Services-1, Inc.'s maintenance and operation of its program as a
direct consequence of the indenture, the notes or the student loans, including
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 of
directors.
"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 Union Financial
Services-1, Inc. 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 Union Financial Services-1 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, Union Financial Services-1 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.
"Recoveries of Principal" shall mean all amounts received by the trustee
from or on account of any student 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 student loan and any payments
representing such principal from the guarantee or insurance of any student 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.
"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.
84
<PAGE>
"Revenue" or "Revenues" shall mean all recoveries of principal,
payments, proceeds, charges and other income received by the trustee or Union
Financial Services-1 from or on account of any student loan (including
scheduled, delinquent and advance payments of and any insurance proceeds with
respect to, interest, including interest benefit payments, on any student loan
and any special allowance payment received by Union Financial Services-1 with
respect to any student loan) and all interest earned or gain realized from the
investment of amounts in any fund or account and all payments received by Union
Financial Services-1 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) Union Financial
Services-1, Inc. 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.
"Seller" shall mean an eligible lender from which Union Financial
Services-1 is purchasing or has purchased or agreed to purchase student loans
pursuant to a student loan purchase agreement between Union Financial Services-1
and the eligible lender.
"Sell Order" has the meaning set forth under "Description of the
Notes-Auction Rate Certificate Notes."
"Senior Notes" shall mean all notes secured on a senior priority to the
subordinate obligations and the junior-subordinate obligations.
"Senior Obligations" shall mean Class A notes and any derivative
product, the priority of payment of which is equal with that of senior notes.
"Servicer" shall mean, collectively, National Education Loan Network,
Inc., UNIPAC Service Corporation, InTuition, Inc. and any other additional
Servicer or successor servicer selected by Union Financial Services-1.
"Servicing Agreement" shall mean the servicing agreements with any
servicer relating to student loans held by the trustee on behalf of Union
Financial Services-1, 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.
"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 Class B notes and any derivative
product, the priority of payment of which is equal with that of Class B notes.
"Substitute Auction Agent" means the Person with whom Union Financial
Services-1 and the trustee enter into a substitute auction agent agreement.
85
<PAGE>
"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 Union Financial Services-1 to perform the duties of
the auction agent under the indenture.
"Supplemental Indenture" shall mean an agreement supplemental to the
indenture executed pursuant to the indenture.
"Telerate Page 3750" means the display page so designated on the Dow
Jones Telerate Service (or such other page as may replace that page on that
service) for the purpose of displaying comparable rates or prices.
"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.
86
<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 Depository Trust Company 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 Depository Trust Company 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 Depository Trust
Company 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
Depository Trust Company in the name of Cede & Co. as nominee of
Depository Trust Company 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 Depository Trust
Company Participants.
Investors electing to hold their Global Securities through
Depository Trust Company 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.
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.
87
<PAGE>
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 Depository Trust Company Participants. Secondary
market trading between Depository Trust Company 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 Depository Trust Company Seller and Cedel Bank or
Euroclear Purchaser. When Global Securities are to be transferred from
the account of a Depository Trust Company 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 Depository Trust Company
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.
88
<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, Depository Trust Company 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 Depository
Trust Company seller on the settlement date. Thus, to the Depository
Trust Company Participants a cross-market transaction will settle no
differently than a trade between two Depository Trust Company
Participants.
Trading between Cedel Bank or Euroclear Seller and Depository
Trust Company 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 Depository Trust Company 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
Depository Trust Company 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.
Finally, day traders that use Cedel Bank or Euroclear and that
purchase Global Securities from Depository Trust Company 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
Depository Trust Company 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
89
<PAGE>
(c) staggering the value dates for the buy and sell sides
of the trade so that the value date for the purchase from the
Depository Trust Company 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 Depository Trust Company 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).
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.
90
<PAGE>
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.
91
<PAGE>
[outside back cover page]
$-----------
Union Financial
Services-1, Inc.
Issuer
Student Loan Asset-Backed notes
Series ____
----------
P R O S P E C T U S S U P P L E M E N T
----------
PaineWebber Incorporated
Underwriter
---------- --,----
You should rely only on the information contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering notes in any state where the offer is not permitted.
We represent the accuracy of the information in this prospectus
supplement and prospectus only as of the dates of their respective covers.
Until __________ __, ____, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus supplement and prospectus. This is in addition to the
dealers' obligation to deliver a prospectus supplement and prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
[end of outside back cover page]
<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 was filed as an exhibit to the
Registrant's Registration Statement on Form S-3 (File No.
333-08929) in October, 1996, and is hereby incorporated by
reference.
4.1 Form of Indenture of Trust by and between Registrant and Zions
First National Bank, a national banking association, was
previously filed as an Exhibit to this Registration Statement
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)*
<PAGE>
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.
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 Servicing Agreement dated as of July 1, 1999, by and between the
Registrant and National Education Loan Network, Inc.**
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 was included on the original signature page of
this 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.
**Filed herewith.
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 of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(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 July 7, 1999.
UNION FINANCIAL SERVICES-1, INC.,
a Nevada corporation
By /s/ Stephen F. Butterfield
-----------------------------------
Stephen F. Butterfield, President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
------------ ---------- ----------
Chairman of the Board July 7, 1999
- ----*---------------------- (Principal Executive Officer)
Michael S. Dunlap
/s/ Stephen F. Butterfield President and Director July 7, 1999
- --------------------------- Stephen F. Butterfield
/s/ Ronald W. Page Vice-President, Secretary, July 7, 1999
- --------------------------- Treasurer and Director
Ronald W. Page (Principal Financial and
Accounting Officer)
Director July 7, 1999
- ----*----------------------
Ross Wilcox
Director July 7, 1999
- ----*----------------------
Dr. Paul Hoff
* Stephen F. Butterfield and Ronald W. Page by signing their respective names
hereto, sign this document on behalf of Messrs. Dunlap, Wilcox and Dr. Hoff,
indicated above, pursuant to a power of attorney duly executed by such persons
and previously filed with the Securities and Exchange Commission with this
Registration Statement.
<PAGE>
UNION FINANCIAL SERVICES-1, INC.
REGISTRATION STATEMENT ON FORM S-3
EXHIBIT LIST
Exhibit No. Description
10.2 Servicing Agreement between Registrant and National Education
Loan Network, Inc.
25.1 Statement of Eligibility of Zions First National Bank, Trustee on
Form T-1
SERVICING AGREEMENT
THIS SERVICING AGREEMENT (the "Agreement") entered into and effective as
of the 1st day of July, 1999, by and between National Education Loan Network,
Inc., a Nevada corporation ("NelNet") and UNION FINANCIAL SERVICES-1, Inc., a
Nevada corporation ("UFS-1").
WHEREAS, UNIPAC Service Corporation and InTuition, Inc. (collectively,
"Servicer"), as subservicing agent, are in the business of servicing loans which
are made and guaranteed in accordance with the provisions of the Higher
Education Act of 1965, as amended (the "Education Act") (references hereinafter
to the "Education Act" include rules and regulations promulgated thereunder as
in effect from time to time); and
WHEREAS, Servicer has developed and/or has available to it the systems
and services to enable it to process and service Education Loans in accordance
with the Education Act, and those guarantee agencies as are satisfactory to
Servicer ("Guarantor(s)"); and
WHEREAS, Servicer has developed and/or has available to it the systems
and services to enable it to process and service Education Loans in accordance
with the Rules and Regulations (the "Regulations") promulgated by Guarantor
(references hereinafter to the "Regulations" include Rules and Regulations
promulgated thereunder as in effect from time to time); and
WHEREAS, UFS-1 acquires student loans made and guaranteed under the
Education Act ("Education Loans"); and
WHEREAS, UFS-1 desires to retain NelNet to cause InTuition, Inc. to
process and service UFS-1's Education Loans, which are acquired from InTuition
Holdings, Inc. in the future, and for InTuition, Inc. to act as subservicer
under the terms of that certain Loan Servicing Agreement between NelNet and
InTuition, Inc., dated as of July 1, 1999 (the "InTuition Servicing Agreement"),
and UFS-1 desires to retain NelNet to cause UNIPAC Service Corporation to
process and service UFS-1's Education Loans and for UNIPAC Service Corporation
to act as subservicer under the terms of that certain UNIPAC Service Corporation
Guaranteed Student Loan Program Servicing Agreement between NelNet and UNIPAC
Service Corporation, dated as of July 1, 1999 (the "UNIPAC Servicing
Agreement"); and
NOW THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties agree as follows:
1. Definitions. Capitalized terms which are not otherwise defined in
this Agreement shall have the meanings ascribed thereto in that certain Second
Amended and Restated Indenture of Trust dated as of November 1, 1996, between
Zions First National Bank, as successor Trustee, and UFS-1.
<PAGE>
2. Term.
2.1 The term of the Agreement shall continue until the earlier of (i)
termination of the Indenture, (ii) early termination after material default by
Servicer as provided for in Section 16 of this Agreement, and (iii) the
Education Loans serviced under this Agreement are paid in full.
2.2 Upon the termination of this Agreement, NelNet shall turn over to
UFS-1 all Education Loan files complete with all information contained therein
and all current computer information on the Education Loans under service
pursuant to this Agreement in such form or fashion as UFS-1 shall reasonably
specify. NelNet and UFS-1 specifically agree that the format used to transfer
UFS-1's data contains confidential and proprietary trade secret information
which is the exclusive property of NelNet and/or Servicer. NelNet makes no claim
to the specific data contained in any printout given to UFS-1 and recognizes
that said data is the exclusive property of UFS-1. NelNet and UFS-1 agree,
however, that all aspects of the underlying computer program, algorithms,
methods of processing, specific design and layout, report format, and the unique
processing techniques and interactions of the various aspects of NelNet's and/or
Servicer's computer program are trade secrets of, proprietary to, and owned
exclusively by NelNet and/or Servicer. At such deconversion, a minimum fee of
$12.00 per account plus any other reasonable expenses incurred in connection
with the transfer of such files and other information shall be paid by UFS-1;
provided however, that in the event deconversion results from early termination
of this Agreement under Section 16 hereof due to the breach by NelNet, UFS-1
shall pay only the actual expenses incurred in connection with the transfer of
such files and other information. The confidentiality provisions of this
paragraph shall survive any termination or expiration of this Agreement.
3. Delivery of Completed Education Loans for Servicing and Collection.
Subject to Servicer's scheduling requirements, UFS-1 may from time to time
deliver or cause to be delivered to Servicers Education Loans with respect to
which loan processing has been completed and loan proceeds have been fully
disbursed to the student/parent borrowers prior to the date of delivery
("Completed Education Loans") to be serviced pursuant to the terms of this
Agreement. UFS-1 shall transmit to Servicer all such loan documentation as
required by Servicer to enable it to service the Completed Education Loans as
provided herein.
4. Servicing of Completed Education Loans. Upon acceptance of any
Completed Education Loan into Servicer's computer system and after the sale date
(if applicable) of the Completed Education Loan to UFS-1, NelNet shall cause
Servicer to service such Education Loan in accordance with the Education Act,
the Regulations, and in accordance with the provisions of this Agreement,
including the following:
(a) Servicer shall take all steps necessary to maintain the Insurance on
Education Loans in full force at all times.
(b) Servicer shall prepare and mail directly to the student/parent
borrower all required statements, notices, disclosures and demands.
2
<PAGE>
(c) Servicer shall retain records of contacts, follow-ups, collection
efforts and correspondence regarding each Education Loan.
(d) Servicer shall provide accounting for all transactions related to
individual Education Loans, including, but not limited to, accounting for all
payments of principal and interest upon such Education Loans.
(e) Servicer shall process all deferments and forbearances.
(f) Servicer shall process all address changes and update address
changes accordingly.
(g) Servicer shall retain all documents received by NelNet pertaining to
each Education Loan, including the original promissory note with respect to each
Education Loan.
(h) When necessary and allowable by the Education Act, Servicer shall
take all steps necessary to file a claim for loss with Guarantor, and shall be
responsible for all communication and contact with that agency necessary or
appropriate to accomplish the same.
(i) Servicer shall provide a Lender's Manifest of Education Loans on all
new accounts, accounts paid in full or converted to repayment, and provide any
other information required by Guarantor.
(j) Servicer shall provide such other services as Servicer customarily
provides and deems appropriate.
(k) NelNet and UFS-1 agree that upon delivery of the original promissory
notes relating to the Education Loans to the Servicer as Custodian pursuant to
the Custodian Agreement, that each shall and does relinquish all power and
control over such promissory notes, subject to responsibilities of NelNet under
this Agreement.
5. Additional Servicing Activities. At UFS-1's request NelNet agrees to
cause Servicer to perform additional servicing activities not required under the
terms of this Agreement for those Education Loans transferred to Servicer as
Completed Education Loans which have not been previously serviced in accordance
with the Education Act and Regulations, and which require additional servicing
activity to attempt to maintain or reinstate the loans' principal and interest
guarantee from the Guarantor Cure Procedures"). NelNet shall cause Servicer,
utilizing Cure Procedures approved by the Guarantor, to use Servicer's best
efforts to cure all defects caused by UFS-1. NelNet makes no representation or
warranty that the guarantee on each Education Loan will be reinstated regardless
of Servicer following the Cure Procedures as approved by the Guarantor. UFS-1
agrees to pay NelNet those fees for Cure Services described in Schedule A under
the topic entitled "Additional Servicing Activity".
6. Portfolios Subject to Rejection by NelNet. UFS-1 acknowledges that
certain loan portfolio types pose a risk of financial hardship for Servicer to
service under this Agreement. NelNet may in its discretion, prior to placing
such loans in the Servicer's system, reject certain loans or loan portfolios
("Rejected Loans"). NelNet shall provide UFS-1 with reasonable advance notice as
to any Rejected Loans which NelNet declines to place on Servicer's system.
NelNet shall have no right to reject or decline loans after the loans are
transferred to the Servicer's system.
3
<PAGE>
7. Reports to UFS-1. On or before the 15th day of each month, unless
some other time is provided herein, NelNet shall cause Servicer to prepare and
deliver to UFS-1 and the Trustee (upon Trustee's request), or to such other
person as UFS-1 may designate, the following reports with respect to activity
during the preceding month:
(a) As of the last day of each month, an unaudited statement, in
reasonable detail, of all transactions during that month on Completed Education
Loans serviced by Servicer for UFS-1;
(b) Processing Status Report (daily);
(c) Check Register (daily);
(d) Posting Ledger (daily/monthly);
(e) Statistical Report (monthly);
(f) Loan Ledger/Alpha Report (monthly);
(g) Guarantor Manifest (monthly);
(h) Delinquency Report (daily/monthly);
(i) Claims Activity Report (monthly).
UFS-1 shall receive at no cost one copy of each of the foregoing
reports. NelNet will cause Servicer to provide extra copies at the request of
UFS-1. UFS-1 shall reimburse NelNet for the cost in producing such extra copies.
8. Interest Computation. NelNet shall cause Servicer to provide on a
quarterly basis statistical data for the computation of interest and special
allowance billable to the U.S. Department of Education for UFS-1's Education
Loans. Data will be computed commencing with the date Education Loans appear on
the records of Servicer.
9. Service Fee to NelNet. UFS-1 shall pay to NelNet, on or before the
15th day of each month, or within fifteen (15) days of billing statement (which
may be sent either by NelNet or Servicer), for and in consideration of the
services performed by NelNet and Servicer hereunder for the preceding month, the
fee provided for in Schedule A of this Agreement ("Servicing Fee"). The
Servicing Fee shall be subject to change every twelve (12) months. Such change
shall not result in an increase that will exceed three and one-fifth percent
(3.2%) cumulatively for any twelve (12) month period. In addition, these fees
are subject to renegotiation every three years, subject to the renegotiated fees
meeting approval of the Rating Agencies. In the event the parties cannot agree
to new fees for each three year period, then either party may terminate this
Agreement upon 90 days written notice to the other. In the event Servicing Fees
are not paid within thirty (30) days of the billing statement, UFS-1 agrees
NelNet will have the following rights to (a) impose a late charge of one and
one-half percent (1 1/2%) per month against the entire outstanding balance of
the past due Servicing Fee including any prior late charge; and (b) terminate
services without notice if nonpayment persists for sixty (60) days from billing
or more. The Servicing Fee and related charges shall be paid only from the Trust
Estate and only to the extent moneys are available in the Revenue Fund as
provided for under the terms of the Indenture.
4
<PAGE>
The parties agree that should Servicer be required to make material
changes to its current servicing practices or servicing system due to changes to
the Education Act, Regulations, and/or business environment, or to other costs
beyond NelNet's control, including but not limited to postal fees, NelNet may
renegotiate the Servicing Fees with UFS-1 to reasonably reflect those increased
costs at any time during the term of this Agreement.
10. Loan Payments. Student/parent borrowers will make all loan payments
to a third party lockbox established by Servicer. All cash receipts will be
remitted once a week to the Trustee.
11. Disclosure of Information. All data, information, records,
correspondence, reports or other documentation received by NelNet or Servicer
pursuant to this Agreement from UFS-1 or the school which the student attended
or from the student/parent borrower, or prepared and maintained by NelNet or
Servicer in the course of its activities under this Agreement shall be released
or divulged only to UFS-1 and the Trustee, or with respect to information or
documents relating to a particular student/parent borrower, to that
student/parent borrower, or to such other parties as NelNet or Servicer may be
directed in writing by UFS-1 or such student/parent borrower.
12. Intellectual Property Protection. Notwithstanding anything in this
Agreement to the contrary, it is the express intention of the parties to this
Agreement that all right, title and interest of whatever nature in NelNet's
and/or Servicer's user manuals, training materials, all computer programs,
routines, structures, layout, report formats, together with all subsequent
versions, enhancements and supplements to said programs, all copyright rights
(including both source and object code) and all oral or written information
relating to NelNet's and/or Servicer's programs conveyed in confidence by NelNet
or Servicer to UFS-1 pursuant to this Agreement which is not generally known to
the public and which give NelNet or Servicer an advantage over its competitors
who do not know or use such information (hereinafter collectively referred to as
"Trade Secrets"), and all other forms of intellectual property of whatever
nature is and shall remain the sole and exclusive property of NelNet and/or
Servicer.
13. Inquiries. NelNet shall answer or shall cause Servicer to answer all
inquiries received by it pertaining to Education Loans, school status or
refunds, and UFS-1 shall cooperate to the extent necessary to gather the
information needed to answer such inquiries. Such inquiries may be referred to
the school which the Student Borrower attended or is attending, if necessary.
Neither NelNet nor Servicer shall have any responsibility for any disputes
between student/parent borrowers and schools regarding tuition, registration,
attendance, or quality of education/training.
14. Agent Authorization. UFS-1 hereby authorizes NelNet and Servicer to
act on behalf of and as UFS-1's agent in the servicing of UFS-1's Education
Loans. Such authorization will include but not be limited to all correspondence
and liaison necessary with Guarantor regarding UFS-1's Education Loans,
assignment of claims to Guarantor and any/or all other communications,
correspondence, signatures or other acts appropriate to service UFS-1's
Education Loans in accordance with the Education Act and/or Regulations.
5
<PAGE>
15. Liability of NelNet and Servicer. NelNet and Servicer assume no
responsibility or liability for failure of UFS-1 to exercise reasonable care or
due diligence and the results thereof, in making or servicing an Education Loan
prior to placing of the Education Loan on Servicer's system and prior to the
date UFS-1 holds ownership of the Education Loan. NelNet and Servicer also
assume no liability for the failure of any student/parent borrower to repay his
or her loan, nor the failure of the United States government to pay any
principal, interest, subsidy or special allowance, nor for the failure of
Guarantor to make payment of any principal and/or interest on any of UFS-1's
Education Loans. NelNet and Servicer shall not be responsible for consequences
of unreasonable acts of any Guarantor. In the event Servicer shall take any
action or fail to take any action which causes any Education Loan in UFS-1's
portfolio to be denied the benefit of any applicable guarantee, NelNet and
Servicer shall have a reasonable time to cause the benefits of the guarantee to
be reinstated. If the guarantee is not reinstated within twelve (12) months of
denial by Guarantor, NelNet shall cause Servicer to pay UFS-1 an amount equal to
the outstanding principal balance plus all accrued interest and other fees due
on the Education Loan to the date of purchase, less the amount subject to UFS-1
Risk Sharing under the Education Act and Regulations, and thereupon Servicer
shall be subrogated to all rights of UFS-1 respecting the applicable Education
Loan, including without limitation the right to collect on the Education Loan,
the right to federal subsidies, and agency authorization to litigate in
accordance with the Subrogation Agreement with Servicer. In such event, UFS-1
agrees to perform such further acts as shall be necessary or appropriate to
subrogate the Education Loan to Servicer. For any subrogated Education Loan for
which the guarantee is fully reinstated by Guarantor, UFS-1 shall pay Servicer
an amount equal to the then outstanding principle balance plus all accrued
interest due thereon, less the amount subject to UFS-1 Risk Sharing under the
Education Act and Regulations, whereupon the subrogation rights of Servicer
shall terminate. In such event, NelNet agrees to cause Servicer to perform such
further acts as shall be necessary or appropriate to reconvey the Education Loan
to UFS-1. It is hereby acknowledged that NelNet shall not be performing any of
the servicing activities described in this Agreement, and that Servicer shall be
responsible for performance of all such servicing duties. As such, NelNet shall
have no liability of any nature whatsoever arising out of or in connection with
this Agreement for any negligent or wrongful act or omission on the part of
Servicer; provided, however, that NelNet hereby assigns, transfers and sets over
unto UFS-1 all of NelNet's rights and remedies against Servicer as they pertain
to UFS-1's Education Loans.
6
<PAGE>
16. Termination Option. If at any time during the term of this Agreement
either party refuses or fails to perform in a material fashion any portion of
this Agreement, and fails or refuses to correct said action or lack of action
within thirty (30) days after receipt of written notice, the other party may,
upon thirty (30) days written notice, terminate this Agreement. Without limiting
the generality of the foregoing sentence, the following shall be deemed as
failure or refusal to perform in a material fashion: (i) failure by Servicer to
make deposits to the Trustee of payments received with respect to the Education
Loans, (ii) failure to perform or observe in any material respect any covenants
or agreements contained herein, or (iii) becoming subject to an insolvency or
receivership proceeding.
17. Indemnification. UFS-1 shall indemnify and hold NelNet and/or
Servicer harmless from and against all claims, liabilities, losses, damages,
costs and expenses (including reasonable attorney's fees) asserted against or
incurred by NelNet and/or Servicer as a result of NelNet and/or Servicer
complying with any instruction or directive by UFS-1 and NelNet and/or Servicer
shall in like manner indemnify UFS-1 for any miscompliance with any such
instruction or directive by NelNet. UFS-1 shall further indemnify and hold
NelNet and/or Servicer harmless from and against all claims, liabilities,
losses, damages, costs and expenses (including reasonable attorney's fees)
asserted against or incurred by NelNet and/or Servicer as a result of actions
not the fault of or not caused by a negligent act of NelNet and/or Servicer, and
their respective agents or employees, including all claims, liabilities, losses,
damages and costs caused by or the fault of UFS-1, a prior holder, owner or
UFS-1, a prior servicer or any other party connected in any manner to the loan
or loans resulting in the claim, liability, loss, damage or cost.
18. Statute of Limitations. Any action for the breach of any provisions
of this Agreement shall be commenced within one (1) year after the Education
Loan leaves the Servicer's servicing system.
19. Governing Law. This Agreement is executed and delivered within the
State of Colorado, and the parties hereto agree that it shall be construed,
interpreted and applied in accordance with the laws of that State, and that the
courts and authorities within the State of Colorado shall have sole jurisdiction
and venue over all controversies which may arise with respect to the execution,
interpretation and compliance with this Agreement.
20. Changes In Writing. This Agreement, including this provision hereof,
shall not be modified or changed in any manner except only by a writing signed
by all parties hereto.
21. Severability. In the event a court of competent jurisdiction finds
any of the provisions of this Agreement to be so overly broad as to be
unenforceable or invalid for any other reason, it is the parties' intent that
such invalid provisions be reduced in scope or eliminated by the court, but only
to the extent deemed necessary by the court to render the provisions of this
Agreement reasonable and enforceable.
22. Persons Bound. This Agreement shall be binding upon and inure to the
benefit of the parties hereto, their legal representatives, heirs, successors
and assigns.
23. Assignment. This Agreement shall not be assigned by either party
without the prior written consent of the other party which consent shall not be
unreasonably withheld; provided, however, that UFS-1 may assign this Agreement
to the Trustee subject to the terms of Section 32 hereof, and NelNet may assign
this Agreement to Servicer.
7
<PAGE>
24. Mutual Release. Each of the parties to this Agreement releases the
other party from any and all claims, or causes of the other arising from any
event or transaction occurring prior to the execution of this Agreement. This
release is an independent covenant between the parties, and will survive any
termination of this Agreement.
25. Titles. The titles used in this Agreement are intended for
convenience and reference only. They are not intended and shall not be construed
to be a substantive part of this Agreement or in any other way to affect the
validity, construction or effect of any of the provisions of this Agreement.
26. Waiver. The waiver or failure of either party to exercise in any respect any
right provided for herein shall not be deemed a waiver of any further right
hereunder.
27. Continuity of Loan Servicing.
27.1 UFS-1 hereby agrees that it will ensure that all Education Loans
acquired, held, or sold by UFS-1 under the Act and subject to this Agreement
will remain with the Servicer for the full term of this Agreement.
27.2 In the event UFS-1 desires to sell any of its Education Loans,
UFS-1 will first attempt to sell the Education Loans to an eligible lender
maintaining an agreement with Servicer, in order for the sale to cause no
disruption in service, or change in Servicer for the Borrower. Should UFS-1
decide to sell its Education Loans to an eligible lender or holder which does
not maintain an agreement with Servicer and does not plan to have the Education
Loans serviced by Servicer, NelNet is hereby granted the right to arrange for
the purchase of such Education Loans by an eligible lender or holder maintaining
an agreement with Servicer. Such purchase must be arranged within thirty (30)
days following the notice by UFS-1 if its intent to sell such Education Loans,
which notice must include sufficient information with respect to the Education
Loans to be sold. NelNet has the right to arrange for the sale of such Education
Loans, provided NelNet is able to arrange for the sale of the Education Loans
offering the same terms secured by UFS-1 in its efforts to sell such Education
Loans, subject to the continuing servicing rights granted to Servicer.
27.3 Sections 27.1 and 27.2 do not apply in the event of NelNet's breach
or default hereunder, or with respect to a sale of the Education Loan to a
holder of other loans for the same borrower.
27.4 The intent of this Section 27 is to assure that every Education
Loan will remain with Servicer for servicing for the life of the loan.
28. Removal Fee. Should UFS-1 remove any of its Education Loans from the
Servicer system prior to a scheduled termination or breach of this Agreement,
UFS-1 agrees to pay to NelNet a removal fee of Fifteen Dollars ($15.00) per loan
transferred off the Servicer computer system, this removal fee shall be in
addition to those charges described in Section 2.2 of this Agreement, and in
addition to damages arising from a breach of Section 27 hereof.
8
<PAGE>
29. Force Majeure. The foregoing provisions of this Agreement are
subject to the following limitation: If by reason of a force majeure NelNet
and/or Servicer is unable in whole or in part to carry out any agreement on its
part herein contained, NelNet and Servicer shall not be deemed in default during
the continuance of such inability. The term "force majeure" as used herein shall
mean, without limitation, the following: acts of God, strikes, lockouts, or
other industrial disturbances; acts of public enemies; order or restraint of any
kind of the government of the United States of America or of the State of
Colorado or City of Aurora or any of their departments, agencies or officials,
or any civil or military authority; insurrections; riots; landslides;
earthquakes; fires; storms; droughts; floods; explosions; breakage or accident
to machinery, equipment, transmission pipes or canals; or any other cause or
event not reasonably within the control of NelNet and/or Servicer.
30. Hiring. UFS-1 agrees that during the term of this Agreement and any
extensions or renewals thereof, and for one year thereafter, UFS-1 shall not
solicit for hire, or knowingly allow its employees to solicit for hire, any
employees of NelNet and Servicer without the prior written consent of NelNet or
Servicer, respectively.
31. Entire Agreement. This is the entire and exclusive statement of the
agreement between the parties, which supersedes and merges all prior proposals,
understandings and all other agreements oral and written, between the parties
relating to this Agreement.
32. Trustee as Third Party Beneficiary. This Agreement has been made and
entered into not only for the benefit of NelNet and UFS-1 but also for the
benefit of the Trustee in connection with the financing of Eligible Loans, and
upon assignment by UFS-1 to the Trustee, its provisions may be enforced not only
by the parties to this Agreement but by the Trustee. The foregoing creates a
permissive right on behalf of the Trustee and the Trustee shall be under no
duties or obligations hereunder.
This Agreement shall inure to the benefit of the Trustee and its
successors and assigns. Without limiting the generality of the foregoing, all
representations, covenants and agreements in this Agreement which expressly
confer rights upon the Trustee shall be for the benefit of and run directly to,
the Trustee, and the Trustee shall be entitled to rely on and enforce such
representations, covenants and agreements to the same extent as if it were a
party hereto. The foregoing creates a permissive right on behalf of the Trustee,
and the Trustee shall be under no duties or obligations hereunder.
9
<PAGE>
If there is an Event of Default under the Indenture and the Trustee
forecloses on its security interest on the Education Loans, then the Trustee
shall assume all duties and obligations of UFS-1 hereunder, in accordance with
and subject to the Acknowledgment and Agreement re: Servicing Agreement among
the parties hereto dated of even date herewith.
10
<PAGE>
[REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
11
<PAGE>
IN WITNESS WHEREFORE, the parties hereto have executed this Agreement as of the
date first written above.
NATIONAL EDUCATION LOAN NETWORK, INC., UNION FINANCIAL SERVICES, INC.-1
a Nevada corporation
By: /s/ Don Bouc By: /s/ Ronald W. Page
------------------------- ------------------------------
Name: Don Bouc Name: Ronald W. Page
(Please print) (Please print)
Title: President Title: Vice President
12
<PAGE>
SCHEDULE "A"
A. Loan Origination Fee (Where Applicable).
Six Dollars ($6.00) per loan for Stafford, SLS and PLUS loan. Fifty-five
Dollars ($55.00) per loan for Consolidated loans (if applicable). In
addition, reimbursement for costs in the event a credit evaluation of
the borrower is to be performed by NelNet.
B. Conversion Fee.
Five Dollars ($5.00) per account acquired by UFS and added to the NelNet
Servicing System during the period of time the borrower is in school.
For periods of time other than when the borrower is in school, the feel
will be Ten Dollars ($10.00) per account. There shall be no charge for
loans already on the UNIPAC full servicing system.
Notwithstanding the foregoing, should any portfolio present an
"Extraordinary Conversion", requiring additional conversion services
materially beyond that customarily provided for a normal acquisition of
Education Loans, then UFS agrees to pay a conversion fee mutually agreed
to between UFS and NelNet.
For purposes of this Agreement, whether a portfolio presents an
Extraordinary Conversion shall be determined after the data analysis and
file review, have been conducted of the portfolio by NelNet. Factors to
consider in determining whether a portfolio presents an Extraordinary
Conversion are as follows:
1. Unprocessed data.
2. Degree to which the conversion may be automated versus manual.
3. Integrity of the documentation. Are the files complete? Does the data
match the file content?
4. UFS adherence to its obligations and delivery schedules.
5. Presence of backlogged processing in the portfolio.
6. Whether prior servicing had substantial noncompliance with the
Education Act and Regulations.
7. Condition of the hard copy file documentation.
After consideration of the foregoing factors, UFS and NelNet agree to
come to mutual agreement at the beginning and once again at the end of
the conversion of a particular portfolio as to whether they need to
negotiate a mutually agreeable conversion fee.
C. Internal Transfers. Transfers from one customer identification number to
a different customer identification number will be One Dollar and Fifty
Cents ($1.50) per account transferred.
<PAGE>
D. Monthly Servicing Fee - GSL (Stafford) Loans in School Status.
.90% annualized
E. Monthly Servicing Fee - GSL (Stafford, PLUS, SLS) Loans in Other Than
School Status.
1.25% annualized
F. Consolidated Loans.
0.60% annualized
G. Billing for Servicing Fees.
The full monthly servicing fee shall be paid commencing with the
calendar month an account is disbursed on or converted to the NelNet
system.
H. Additional Servicing Activity.
Thirty-five Dollars ($35.00) per Education Loan referred for such cure
services, plus ten percent (10%) of all sums made eligible for
reinstatement of guarantee (including principal, interest and special
allowance) as a result of successful performance of the Cure Procedures
required by Guarantor. (This fee shall not apply to loans that have lost
their guarantee due to an error or omission of NelNet.)
I. Minimum Monthly Fee.
There will be a minimum monthly fee of Seven Hundred and Fifty Dollars
($750.00) per month.
J. Removal Fee. Loans transferred off the NelNet Servicing System prior to
termination of this Agreement will be assessed a fee of Fifteen Dollars
($15.00) per account.
K. Deconversion Fee. Loans transferred off the NelNet Servicing System on
or after termination of this Agreement will be assessed a fee of Twelve
Dollars ($12.00) per account.
L. Reconciliation of Guarantee Billing.
Eighty cents ($.80) per account for the first disbursement.
M. PLUS (or Other Loan) Loan Credit Checks. Fees for obtaining a credit
bureau report and evaluation will be Two Dollars and Fifty Cents ($2.50)
per loan application. An additional fee of Fifty Cents ($.50) will be
charged for those applications in which written authorization must first
be obtained prior to pulling a credit bureau report.
<PAGE>
N. Other Services
For services requested by UFS that are beyond the scope of those
described in this Agreement, the fees shall be assessed as follow:
(1) Supplies Cost Plus 15%
(2) Training $40.00 per hour
(3) Programming $70.00 per hour
(4) Consulting $80.00 per hour
Projects and services of this type shall be provided only after request
by UFS and after time and total cost estimate is provided by NelNet.
O. Legal Opinions
Cost plus five percent (5%).
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) X
ZIONS FIRST NATIONAL BANK
(Exact name of trustee as specified in its charter)
A U.S. National Banking Association 87-0189025
(I.R.S. employer
identification number)
One South Main, Salt Lake City, Utah 84111
(Address of principal executive offices) (Zip Code)
Zions First National Bank
10 East South Temple, 5th Floor
Salt Lake City, Utah 84133
Attn: Robert A. Goodman (801) 524-4632
(Name, address and telephone number of agent for service)
Union Financial Services-1, Inc.
Nevada 86-0817755
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1801 California Street, Suite 3920
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
$1,000,000 Taxable Student Loan Asset-Backed Notes
(Title of Indenture Securities)
<PAGE>
ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE
TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO
WHICH IT IS SUBJECT.
Comptroller of Currency, Washington, D.C.
Federal Deposit Insurance Corporation, Washington, D.C.
The Board of Governors of the Federal Reserve System,
Washington, D.C.
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
The trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF
THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION.
No such affiliation exists with the trustee.
ITEMS 3-15. Not applicable.
ITEM 16. LIST OF EXHIBITS.
List below all exhibits filed as a part of this Statement of
Eligibilty.
*1. A copy of the Articles of Association of the Trustee now
in effect.
*2. A copy of the Certificate of authority of the trustee to
commence business dated December 30, 1957, and issued by
the Comptroller of the Currency.
*3. A copy of the authorization of the Trustee to exercise
corporate trust powers dated July 16, 1973, and issued by
the Comptroller of the Currency.
*4. A copy of the existing Bylaws of the Trustee.
5. Not applicable.
*6. The consent of the Trustee required by Section 321(b) of
the Act.
7. A copy of the latest report of condition of the Trustee
published pursuant to law or the requirements of its
supervising or examining authority.
8. Not applicable.
9. Not applicable.
* Incorporated by reference to Zions First National Bank's Form T-1 Eligibility
Statement, File No. 333-08929, filed on January 9, 1998.
<PAGE>
Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the
trustee, Zions First National Bank, a national banking association organized and
existing under the laws of the United States of America, has duly caused this
Statement of Eligibility to be signed on its behalf by the undersigned,
thereunto duly authorized, all in Salt Lake City, State of Utah, on the 3rd day
of June 1999.
ZIONS FIRST NATIONAL BANK, TRUSTEE
By:/s/ Dale M. Gibbons
----------------------------
Chief Financial Officer
and Secretary
<PAGE>
Zions First National Bank Call Date: 03/31/99 State #: FFIEC 031
One South Main Street VendorID: D Cert #:02270 RC-1
Salt Lake City, UT 84111 Transit #: 12400005
Transmitted to EDS as 0011517 on 04/29/99 at 12:14:40 CST
Consolidated Report of Condition for insured Commercial
and State-Chartered Savings Banks for March 31, 1999
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
<TABLE>
<CAPTION>
Schedule RC - Balance Sheet
Dollar Amounts in Thousands
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
1. Cash and balances due from depository institutions (from Schedule RC-A):
a. Noninterest-bearing balances and currency and coin (1) 272,576
b. Interest-bearing balances (2) 17,912
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A) 910,239
b. Available-for-sale securities (from Schedule RC-B, column D) 346,141
3. Federal funds sold and securities purchased under agreements to resell 367,446
4. Loans and lease financing receivables:
a. Loans and leases, net of unearned income (from Schedule RC-C) 3,646,408
b. LESS: Allowance for loan and lease losses 61,894
c. LESS: Allocated transfer risk reserve 0
d. Loans and leases, net of unearned income, allowance and reserve
(item 4.a minus 4.b and 4.c) 3,584,514
5. Trading assets (from Schedule RC-D) 221,127
6. Premises and fixed assets (including capitalized leases) 61,967
7. Other real estate owned (from Schedule RC-M) 1,059
8. Investments in unconsolidated subsidiaries and associated companies (from
Schedule RC-M) 7,397
9. Customers' liability to this bank on acceptances outstanding 601
10. Intangible assets (from Schedule RC-M) 21,045
11. Other assets (from Schedule RC-F) 465,997
12. Total assets (sum of items 1 through 11) 6,278,021
- -------
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
</TABLE>
<PAGE>
Zions First National Bank Call Date: 03/31/99 State #: FFIEC 031
One South Main Street VendorID: D Cert #:02270 RC-1
Salt Lake City, UT 84111 Transit #: 12400005
Transmitted to EDS as 0011517 on 04/29/99 at 12:14:40 CST
<TABLE>
<CAPTION>
Schedule RC - Continued
Dollar Amounts in Thousands
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
13. Deposits:
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E,
part I) 3,649,015
(1) Noninterest-bearing (1) 895,872
(2) Interest-bearing 2,753,143
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from
Schedule RC-E, part II) 188,475
(1) Noninterest-bearing 0
(2) Interest-bearing 188,475
14. Federal funds purchased and securities sold under agreements to repurchase 1,034,724
15. a. Demand notes issued to the U.S. Treasury 0
b. Trading liabilities (from Schedule RC-D) 247,249
16. Other borrowed money (includes mortgage indebtedness and obligations
under capitalized leases):
a. With a remaining maturity of one year or less 201,777
b. With a remaining maturity of more than one year through three years 19,337
c. With a remaining maturity of more than three years 36,690
17. Not applicable
18. Bank's liability on acceptances executed and outstanding 601
19. Subordinated notes and debentures (2) 200,000
20. Other liabilities (from Schedule RC-G) 290,374
21. Total liabilities (sum of items 13 through 20) 5,868,242
22. Not applicable
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus 0
24. Common stock 15,000
25. Surplus (exclude all surplus related to preferred stock) 59,602
26. a. Undivided profits and capital reserves 340,120
b. Net unrealized holding gains (losses) on available-for-sale securities (4,943)
c. Accumulated net gains (losses) on cash flow hedges 0
27. Cumulative foreign currency translation adjustments 0
28. Total equity capital (sum of items 23 through 27) 409,779
29. Total liabilities and equity capital (sum of items 21 and 28) 6,278,021
</TABLE>
- ----------
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
(2) Includes limited-life preferred stock and related surplus.
<PAGE>
Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the
trustee, Zions First National Bank, a national banking association organized and
existing under the laws of the United States of America, has duly caused this
Statement of Eligibility to be signed on its behalf by the undersigned,
thereunto duly authorized, all in Salt Lake City, State of Utah, on the 3rd day
of June 1999.
ZIONS FIRST NATIONAL BANK, TRUSTEE
By:/s/ Dale M. Gibbons
----------------------------
Chief Financial Officer
and Secretary
