As filed with the Securities and Exchange Commission on May 3, 1999
Registration No. 333-75693
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
PRE-EFFECTIVE AMENDMENT NO. 1 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)
--------------------------------------------------------------------
86-0817755
Nevada (I.R.S. Employer
(State or other Identification No.)
jurisdiction of
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 __________ __, ____)
$-----------
UNION FINANCIAL SERVICES-1, INC.
STUDENT LOAN ASSET-BACKED NOTES
SERIES ____-_
We are offering $___________ aggregate principal amount of our Student
Loan Asset-Backed Notes, Series ____. The Series ____ Notes will consist of the
following _____ classes:
<TABLE>
<CAPTION>
Original Proceeds
Principal Interest Final Legal Price to Underwriting to
Amount Rate Maturity Public Discount Issuer
--------- -------- ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Senior Class Notes,
[Fixed][Auction][Index] $ $
Rate
Senior Class Notes,
[Fixed] [Auction] $ $
[Index] Rate
Subordinate Class
Notes, [Fixed] $ $
[Auction][Index] Rate
Subordinate Class
Notes, [Fixed] $ $
[Auction] [Index] Rate
Junior Subordinate
Class Notes, [Fixed] $ $
[Auction] [Index] Rate
Junior Subordinate
Class Notes,[Fixed]
[Auction] [Index] $ $
Rate
Total ---------- --------- ----------- ------------ ----------- ----------
</TABLE>
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 Series _____ Notes are obligations of Union Financial Services-1, Inc.
payable solely from the collateral described herein. [The Series Notes are
insured as to timely payments of principal of an interest on by [Note Insurer]].
The Series _____ Notes are not insured or guaranteed by any government agency or
instrumentality, or by any affiliate of Union Financial Services-1, [by any
insurance company] or by any other person or entity. This Prospectus Supplement
may be used to offer and sell the Series _____ Notes only if accompanied by the
Prospectus.
- --------------------------------------------------------------------------------
You should consider carefully the "Risk Factors" beginning on page __ of
this Prospectus Supplement and on page __ of the Prospectus.
- --------------------------------------------------------------------------------
PaineWebber Incorporated
The date of this Prospectus Supplement is __________, ___ .
3
<PAGE>
[inside front cover page]
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
SUMMARY....................................................................S-3
RISK FACTORS...............................................................S-9
THE SELLERS................................................................S-10
[PREVIOUSLY ISSUED NOTES...................................................S-11
CREDIT ENHANCEMENT.........................................................S-12
USE OF PROCEEDS............................................................S-14
CHARACTERISTICS OF THE FINANCED STUDENT LOANS..............................S-15
INFORMATION RELATING TO THE GUARANTEE AGENCIES.............................S-21
RATIO OF EARNINGS TO FIXED CHARGES.........................................S-22
PLAN OF DISTRIBUTION.......................................................S-23
LEGAL MATTERS..............................................................S-24
PROSPECTUS
Prospectus Supplement.........................................................i
Available Information.........................................................i
Reports to Noteholders...................................................... i
Incorporation of Certain Documents by Reference............................. ii
Special Note Regarding Forward Looking Statements............................ii
Summary of the Offering..................................................... iv
Risk Factors..................................................................1
Description of the Notes..................................................... 7
Security and Sources of Payment for the Notes............................... 15
Book-entry Registration..................................................... 19
Additional Notes........................................................... 23
Summary of Certain Provisions of the Indenture.............................. 23
Description of Credit Enhancement........................................... 35
The Company................................................................. 38
The Company's Student Loan Program.......................................... 39
Description of the Federal Family Education Loan Program.................... 42
Guarantee Agencies......................................................... 52
Federal Income Tax Consequences............................................ 57
ERISA Considerations....................................................... 60
Certain Relationships among Financing Participants......................... 62
Plan of Distribution....................................................... 62
Legal Matters.............................................................. 63
Financial Information...................................................... 63
Ratings.................................................................... 63
Index to and Glossary of Certain Terms..................................... 64
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 Series _____ Notes in two
separate documents that progressively provide more detail: (a) this Prospectus
Supplement, which describes the specific terms of the Series _____ Notes, and
(b) the accompanying Prospectus, which provides general information, some of
which may not apply to the Series _____ Notes. You are urged to read both the
Prospectus and this Prospectus Supplement in full to obtain information
concerning the Series ____ Notes. You may not purchase the Series ____ Notes
unless you have received both the Prospectus and this Prospectus Supplement.
If there is a conflict between this Prospectus Supplement and the
accompanying Prospectus, you should rely on the information in this Prospectus
Supplement.
Cross-references are included in this Prospectus Supplement and the
accompanying Prospectus to captions in the materials where you can find further
discussions about related topics. The table of contents on the preceding page
provides the pages on which these captions are located.
You can find a listing of the pages where capitalized terms used in this
Prospectus Supplement and the accompanying Prospectus are defined under the
caption "Index to and Glossary of Defined Terms" beginning on page ___ in the
accompanying Prospectus. Any capitalized terms that are used but not defined in
this Prospectus Supplement have the meanings assigned in the Prospectus.
S-2
<PAGE>
SUMMARY
The following summary is a very general overview of the terms of the
Series _____ Notes and does not contain all of the information that you need to
consider in making your investment decision. Before deciding to purchase the
Series _____ Notes, you should consider the more detailed information appearing
elsewhere in this Prospectus Supplement and in the Prospectus. This Prospectus
Supplement contains forward-looking statements that involve risks and
uncertainties. See "Special Note Regarding Forward Looking Information" in the
Prospectus.
Securities Offered
The Student Loan Asset-Backed Notes, Series _____, have an aggregate
stated principal balance of $_____ and consist of the following classes:
. $ Senior Class ____ A-__
Notes, [Fixed] [Auction]
[Index] Rate [Certificate]
Notes;
[. $ Senior Class ____ A-__
Notes, [Fixed] [Auction]
[Index] Rate ;][Certificate]
Notes;]
. $ Subordinate Class ____
B-__ Notes [Fixed]
[Auction]
[Index] Rate ;[Certificate]
Notes;
[. $ Subordinate Class ____
B-__ Notes [Fixed]
[Auction]
[Index] Rate ;][Certificate]
Notes;]
[. $ Junior Subordinate
Class ____ C-__ Notes
[Fixed] [Auction] [Index]
Rate ;][Certificate] Notes;]
[. $ Junior Subordinate
Class ____ C-__ Notes,
[Fixed] [Auction] [Index]
Rate.] [Certificate] Notes.]
Designations
. The Class ____A-_ Notes and
the Class ____A-_ Notes are
referred to collectively herein as
the "Class ____ A Notes."
[. The Class ____ [A-] [B-]
[C-]Notes are referred to
collectively herein as the
"Fixed Rate Notes."]
[. The Class ____A-__ Notes,
Class ____B-__ Notes and Class
____C-_ Notes are referred to
collectively herein as the "ARC Notes."]
[. The Class ____A-__ Notes,
Class ____B-_ Notes, and
Class ___C-__ Notes are
referred to collectively
herein as the "Index Rate
Notes."]
Issue Date
------------- --, -----.
Denominations
We will issue the Class __ [Fixed] [Auction] [Index] Rate [Certificate]
Notes in minimum denominations of [$__________] [or any integral multiple
thereof] [ and in $__________ increments above such amount] [and the Class __
[Fixed] [Auction] [Index] Rate [Certificate] Notes will be issued in minimum
denominations of [$__________] [or any integral multiple thereof] [and in
$__________ increments above such amount].
Interest Rates
[Fixed Rate Notes]
[The Fixed Rate Notes will bear interest at the following rates per
annum:
Class ______ %
Class ______ %]
[ARC Notes]
[The ARC Notes will bear interest as set forth below:]
[Class _______ ARC Notes
Auction Period - for periods
beginning _______ __, ____,
initially, __ days.
S-3
<PAGE>
"Initial Auction Date " _______ __, ____.
"Initial Rate" Initial Rate - ____%.
"Initial Rate Adjustment Date" _______ __, ____.]
[Class _______ ARC Notes
" Auction Period " for periods beginning _______ __, ____,
initially, __ days. " Initial Auction Date " _______ __, ____.
" Initial Rate " ____%.
" Initial Rate Adjustment Date " _______ __, ____.]
[For each Auction Period, the interest
rate for a class of ARC Notes
will equal the lower of:
o the rate determined pursuant to the auction procedures described
in the accompanying Prospectus under Description of Notes -
ARC Notes;" and
o a "Maximum Auction Rate," generally equal to the greater of the
rate of interest on certain United States Treasury Securities,
plus a margin that will range from 1.20% to 1.75% depending
upon the ratings assigned to the Notes.
[We may change the length of the Auction Period for any class of ARC Notes
as described in the Prospectus under the heading " Description of the Notes-ARC
Notes."]
[LIBOR Rate Notes]
[The LIBOR Rate Notes will bear interest as set forth below:]
[Class _____ LIBOR Rate Notes
" Initial Interest Payment Date " __________________________.
" Initial LIBOR - Based Rate " _________________.]- __% Interest
Period - initially __ month[s].
[Class _____ LIBOR Rate Notes
" Initial Interest Payment Date " __________________________.
" Initial LIBOR - Based Rate " _________________.]- __% Interest
Period - initially __ month[s].
[For each subsequent Interest Period, the LIBOR Rate Notes will bear
interest at the lower of:
o [one month] [three month] [six month] LIBOR Rate plus _____%; or
o the Adjusted Student Loan Rate, which is calculated by deducting
servicing fees, administrative fees and any payment due on a
derivative contract from estimated revenues on the financed
student loans and dividing that amount by the principal balance
of the outstanding Notes.
[We may change the length of the Interest Period for the LIBOR Rate Notes
as described in the accompanying Prospectus under the heading "Description of
the Notes-LIBOR Rate Notes."]
[Treasury Rate Notes]
[The Treasury Rate Notes will bear interest as set forth below:]
[Class ___ __ Treasury Rate Notes
" Initial Interest Payment Date " means-__________________________.
" Initial T-Bill Rate - _____________________.
Interest Period -______________________
S-4
<PAGE>
[Class ___ __ Treasury Rate Notes
" Initial Interest Payment Date " __________________________.
" Initial T-Bill Rate - ________________________.
Interest Period - ______________________.
[For each Interest Period, the Treasury Rates Notes will bear interest
at the lower of:
o The ___________________ Treasury Bill Rate plus _____%; or
o The Adjusted Student Loan Rate, which is calculated by deducting
servicing fees, administrative fees and any payment due on a
derivative contract from estimated revenues on the financed
student loans and dividing that amount by the principal balance
of the outstanding Notes.]
[Accrual Notes]
The Accrual Notes will not receive payments of interest until [designate
interest accrual date]. Until such time, interest accrued during each interest
period will be capitalized and added to their principal balance. [Beginning
__________ __, ____] [upon the occurrence of [describe event]], the Accrual
Notes will be entitled to receive payments of interest on each [describe
Interest Payment Date.]
[The Accrual Notes will accrue interest as set forth below:
" Accrual Rate " ________________.
" Interest Accrual Date " _____________.
" Interest Payment Date " _____________.]
Distributions on the Series _____ Notes
Interest Payments. On the first business day of each month, commencing
________ _, ____, we will pay the holders of each class of Fixed Rate Notes the
interest accrued on their Notes during the preceding interest accrual period at
the respective interest rates listed on the cover page. Interest will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
For the interest payment due __________, ____, the interest accrual period will
begin on __________, ____ and end on _________, ____. For all other interest
payment dates, the interest accrual period will be the preceding calendar month.
On the first business day after each Auction Period for a class of ARC
Notes, we will pay the holders of the class of Notes the interest accrued on
their ARC Notes during the preceding Auction Period at the applicable interest
rate. Interest will be calculated on the basis of a [360-day] [365-day] year and
the actual number of days elapsed during the related Auction Period.
On [the first business day of each month, commencing _________ __,
____,] [each _____, ____, ____, ___, ____, ___ and ____, __] we will pay the
holders of each class of [LIBOR] [Treasury] Rate Notes the interest accrued on
their Notes during the preceding interest accrual period at the applicable
interest rate. Interest will be calculated on the basis of a 360-day [365-day]
year consisting of twelve 30-day months.
[Add description of Accrual Note Payments, if any.]
Principal Redemptions. Except in certain circumstances that we consider
unlikely to occur, we will not redeem any series or class of our Notes issued
under the Indenture of Trust (regardless of when issued) until
______________________. Commencing in ______________________, to the extent
funds are available in the Acquisition Fund created under the Indenture we will
redeem our [specify class] Notes each month in the amount necessary to reduce
their principal balance to the percentage of their original principal balance
set forth for such month on Exhibit 1:.
[Except in certain circumstances that we consider unlikely to occur, we
will not redeem any other series or class of our Notes (regardless of when
issued) until ______________________. Commencing in ______________________, to
the extent funds are available in the Acquisition Fund we will redeem our Notes
as follows:
o first, the [specify class] Notes each month in the amount needed
to reduce their principal balance to the percentage of their
original principal balance set forth for such month on Exhibit 1;
S-5
<PAGE>
o second, after the [specify class] Notes have been redeemed in
full (which is scheduled to occur on ____ _, ____), the [specify
class] Notes each month in the amount needed to reduce their
principal balance to the percentage of their original principal
balance set forth for such month on Exhibit 1; and
o third, after the [specify class] Notes have been redeemed in full
(which is scheduled to occur on ____ _, ____), the [specify
class] Notes each month in the amount needed to reduce their
principal balance to the percentage of their original principal
balance set forth for such month on Exhibit 1.]
o [Specify principal payments for other classes of Notes]
[Beginning in ____, ____or such later date as approved in writing by the
rating agencies rating our Notes, if funds remain in the Acquisition Fund after
redeeming the [specify class] Notes as described above, we also intend to redeem
our remaining Notes as follows:
o first, all [specify class] ARC Notes(, including classes now or
previously issued and those that may be issued in the future),
will be redeemed in the order that we may determine in our sole
discretion from time to time;
o second, after all [specify class] ARC Notes have been redeemed in
full, all [specify class] Notes(, including those now or
previously issued and those that may be issued in the future),
will be redeemed in the order that we may determine from time to
time in our sole discretion, subject to the limitations described
in the attached Prospectus under "Description of the Notes -
Notice and Partial Redemption of Notes";
o third, the [specify class] Notes, including those now or
previously issued and those that may be issued in the future,
that remain outstanding, in that order, until each such class has
been redeemed in full; and
o fourth, any [specify class] Notes(, including those now or
previously issued and those that may be issued in the future),
that remain outstanding will be redeemed in the order that we may
determine in our sole discretion from time to time.]
We have the option of redeeming some or all of the Class B Notes prior to
redeeming the Class A Notes if the ratio of our assets to the principal balance
of the Class Notes exceeds ___% [See "Description of the Notes - Notice and
Partial Redemption of Notes" in the Prospectus.]
Pool Characteristics
The portfolio of student loans [currently held in the trust estate and]
that we expect to acquire with the proceeds of the Series _____ Notes and to
pledge to the Trustee under the Indenture, which are referred to as the financed
student loans, is described below under "Characteristics of the Financed
Student Loans."
[Servicer and Subservicer
Union Bank and Trust Company, Lincoln, Nebraska will act as servicer for
our student loans. UNIPAC Service Corporation will act as subservicer and
custodian for our student loans. [We also expect that ______________________
will act as a subservicer and custodian for a portfolio of student loans
acquired with the proceeds of the Series _____ Notes.] See "The Student Loan
Program of Union Financial Services-1, Inc." and "Certain Relationships Among
Financing Participants" in the Prospectus.]
S-6
<PAGE>
Indenture
We will issue the Series _____ Notes pursuant to an Indenture of Trust
dated as of ________ _, 19__, between us and Zions First National Bank acting as
Trustee, and a related Series _____ Supplemental Indenture of Trust, which we
refer to collectively as the "Indenture".
The Notes are payable solely from the funds and assets held in the trust
estate created under the terms of the Indenture.
We [have previously issued, and] may issue in the future Notes of other
series which also [are or] will be secured by the student loans held by the
Trustee under the Indenture. All These Notes [are and] will be designated as
Class A Notes, Class B Notes, or Class C Notes under the Indenture.
Mandatory Redemption
The Series _____ Notes are subject to mandatory redemption from moneys
held for that purpose in the Acquisition Fund, as described above under
"Distributions on the Series _____ Notes-Principal Redemptions." [If funds are
not available to redeem the Class ___-_ Notes or the Fixed Rate Notes in
accordance with their paydown schedules, we will no longer be able to use
principal payments received on our student loans to purchase additional student
loans. Rather, we will use all such moneys for mandatory redemption of Notes
until such time as the paydown schedules are met. Such an occurrence will not
constitute an event of default under the Indenture, unless our missed payment
was at a scheduled final maturity.]
The Series __ Notes are also subject to mandatory redemption from
payments that we receive on our financed student loans that we can not use to
purchase additional student loans. See "Description of the Notes - Mandatory
Redemption" in the Prospectus.
Optional Redemption
The ARC Notes are subject to optional redemption at our direction on any
Interest Payment Date for the Class of ARC Notes being redeemed at a redemption
price equal to the principal amount of such Notes plus interest. After
_________, ___, we may sell all of the financial student loans held in the trust
estate and use the proceeds to purchase all of the outstanding Notes. See
"Description of the Notes - Optional Redemption" in the Prospectus for
limitations on our ability to redeem Notes at our option.
Extraordinary Optional Redemption
We may redeem the Class ____A-__ Notes, the Class ____A-__ Notes and the
Class ____B-__ Notes at any time if we determine that we are unable to acquire
additional student loans, that the rate of return on student loans has
materially decreased, or that the costs of administering the trust estate have
placed unreasonable burdens upon our ability to perform our obligations under
the Indenture. If less than all of the Class ____A-__ Notes, the Class ____A-__
Notes and the Class ____B-__ Notes are to be subject to extraordinary optional
redemption, we will determine in our sole discretion the class of Notes to be
redeemed. Class ____A-__ Notes, and Class ____A-__ Notes will be redeemed prior
to redemption of the Class ____B-__ Notes, however.
Optional Purchase
If the aggregate principal balance on all of our Notes that remain remain
outstanding is 20% or less of the initial aggregate principal balance of all our
Notes, we may purchase all of the outstanding Notes at a price equal to the
current value of the Notes plus accrued interest. This will result in our
redeeming of all of the Notes.
Acquisition Fund; Use of Principal Receipts
Approximately $___________ from the proceeds of this offering will be
deposited in the Acquisition Fund on the date the Series _____ Notes are issued.
Those funds will be used to purchase a portfolio of approximately $___________
of student loans on or about that date. [The remaining amounts in Acquisition
Fund will be used to acquire portfolios of student loans on or before ________
__, ___. ] See "Use of Proceeds," "The Sellers" and "Characteristics of the
Financed Student Loans" herein. Proceeds deposited in Acquisition Fund and not
used to purchase student loans on or before ________ __, ____ will be used to
redeem Notes.
S-7
<PAGE>
We will deposit into the Acquisition Fund all principal receipts
received on student loans acquired with the proceeds of the Series _____ Notes.
We will use funds in the Acquisition Fund to acquire additional student loans[,
to provide for mandatory redemption of Notes] and to make certain other payments
and distributions. [If after _______, ____, the principal balance of the Fixed
Rate Notes exceeds the aggregate principal balance of all our student loans that
bear interest at a fixed rate, we will only purchase student loans that bear
interest at a fixed rate unless each rating agency rating our Notes otherwise
approves.] We may purchase additional student loans using funds in the
Acquisition Fund until ___________, ____. This revolving period during which
we may purchase additional loans may be extended with the written approval of
the rating agencies rating of our Notes [or the Surety Bond provider described
below]. At the end of that period we will no longer purchase additional student
loans with principal receipts and we will use those funds to redeem Notes.
[Definitive Notes]
[The [designate Classes] Notes will be evidenced by definitive Notes
registered in the name or names of the holders thereof or their nominee.]
[Registration, Clearing and Settlement]
[You will hold your interest in the Notes in book-entry only form
through the Same Day Settlement System of the Depository Trust Company in the
United States or though Cedelbank, S.A. or Euroclear System in Europe. You will
not be entitled to receive definitive certificates representing your interests
in the Notes, except in limited circumstances.]
Certain Federal Income Tax Consequences
Kutak Rock will deliver an opinion that for federal income tax purposes,
the Series _____ Notes will be treated as indebtedness. The owners of the Series
____ Notes will be required to include in income interest on the Series ____
Notes as paid, or in the case of Notes issued with original issue discount as
accrued, in accordance with their respective accounting methods and the
provisions of the Code. See "Federal Income Tax Consequences" in the Prospectus.
ERISA Considerations
Assuming that the Series ____ Notes should be treated as indebtedness
without substantial equity features, the Series _____ Notes are eligible for
purchase by or on behalf of employee benefit plans, retirement arrangements,
individual retirement accounts and Keogh Plans, subject to certain consideration
discussed under "ERISA Considerations" in the Prospectus.
Ratings
It is a condition to the issuance of the Series _____ Notes that each
class of the Class _____ Notes be rated _____ and _____ by ___________________
and ___________________, respectively, and that the Class _____-_ Notes be rated
no less than "_" and "_" by _________________ and ___________ respectively. See
"Ratings" in the Prospectus.
S-8
<PAGE>
RISK FACTORS
The discussion under the heading "Risk Factors" in the Prospectus
describes the risks associated with your investment in the Series _____ Notes.
In addition, you should consider the following factors:
Principal Balance of Notes Exceeds Aggregate Principal Balance of Student Loans
On the Issue Date, the aggregate principal balance of the Series ____ Notes
[and all other Notes we have issued under the Indenture] will be approximately
___% of the sum of the aggregate principal balance of the student loans we own
and the other assets pledged or to be pledged as collateral for the Notes. We
may also use the principal receipts from our student loans to acquire additional
student loans at a price that exceeds the principal balance of those student
loans.
As a result, if an event of default should occur under the Indenture and
we were required to redeem all of our Notes, our liabilities may exceed our
assets. If this were to occur, we would be unable to repay in full all of the
holders of our Notes. However, the Class A Notes will be redeemed in full before
we redeem any Class B Notes [and the Class B Notes will be redeemed before the
Class C Notes]. In the absence of any such default, excess interest payments
received on the student loans will be used to pay principal on the Notes.
Year 2000 Compliance
The Year 2000 issue arises from the use by software developers of two
digits rather than four to denote year dates in software programs, computer
hardware operating systems and microprocessors -based embedded controls in
automated equipment. As a result, information systems that operate date
sensitive software or automated equipment that contains date sensitive
microprocessors may interpret "00" to signify 1900 rather than 2000, thereby
impairing the ability of the information systems or automated equipment to
correctly calculate, sequence or recognize dates. This could result in serious
malfunctions or even complete failures of affected systems, including an
inability to process transactions, issue securities or checks, or engage in
normal business activities.
We cannot now determine whether the Year 2000 issue will have a material
adverse effect on our business operations. The conduct of our business in
relationship to purchasing loans or administering the loans we own is not
significantly dependent on our own computer programs. However, our loan
servicers, the Trustee, the Guarantee Agencies and the Department of Education
all rely heavily on computer programs and systems for processing transactions
related to student loans.
We have made inquiry of the Trustee, Union Bank and UNIPAC Service
Corporation concerning the Year 2000 issue, and have received assurances that
they are, or are working to become, Year 2000 compliant. We are aware that the
Guarantee Agencies and Department of Education are working to address the Year
2000 issue. The Department of Education has indicated that all of its data
systems are Year 2000 compliant. However, we cannot provide any assurance that
the Department of Education the Guarantee Agencies, the Trustee or the servicer
or subservicer will not be adversely affected by the arrival of the Year 2000.
We cannot influence or control the efforts of third parties to address the Year
2000 issue, nor can we terminate our dependence on the servicer, subservicer,
Guarantee Agencies or Department of Education. Under the reasonably likely worst
case scenario, the Year 2000 issue could delay our receipt of principal and
interest payments on our financed student loans and the receipt of claims
payments from the Guarantee Agencies. If that delay continues for a prolonged
period, we may be unable to make timely payments of principal and interest due
on our Notes.
[Add discussion of other risk factors]
S-9
<PAGE>
THE SELLERS
We expect to use the proceeds of the Series _____ Notes to purchase
portfolios of student loans in the amounts and from the parties shown below.
Seller Approximate Balance Sale Date
-------- ------------------- -------------
$
$
$
- ---------------------- $-------------
Total $
We have entered into a loan sale agreement with each of the sellers
identified above. Each seller has made representations and warranties in its
loan sale agreement with respect to the student loans that we will purchase and
has agreed to repurchase any student loans for which any representation or
warranty is later determined to have been materially incorrect.
S-10
<PAGE>
[PREVIOUSLY ISSUED NOTES]
[Information concerning each outstanding series and class of Notes that
we previously issued and is secured by the trust estate created under the
Indenture is provided below. The financed student loans and other assets pledged
to the Trustee will serve as collateral for the outstanding Notes and any
additional Notes that may be issued under the Indenture in the future, as well
as the Series ____ Notes being offered by means of this Prospectus Supplement
and the attached Prospectus.
<TABLE>
<CAPTION>
Original Outstanding
Principal Principal Amount Interest Maturity
Series Class Date Issued Amount (As of , ) Rate Date
------ ----- ----------- ------ ---------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
[As of the date of this Prospectus Supplement, all payments of scheduled
principal and interest due and payable on each series of Notes specified above
have been paid in full. As of ___________________, the financed student loans
that are in repayment and pledged to the Trustee as collateral for the
outstanding Notes had delinquencies as follows: $___________________ was 30 to
60 days delinquent; $___________________ was 61 to 90 days delinquent;
$___________________ was 91 to 120 days delinquent; and $___________________ was
greater than 120 days delinquent. As of ___________________, there were
$___________________ of our student loans in claim status with a Guarantee
Agency. As of ___________________, the cumulative amount of net losses by
principal balance of the financed student loans was $___________________.]
[The following fees are payable (per annum) with respect to the Notes
previously issued:
<TABLE>
<CAPTION>
Broker Maintenance and
Trustee Servicing Auction Dealer Calculation Agent Operating
Series Fee Fee Agent Fees Fees Fees Expenses
------ --- --- ---------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
[As of the date hereof, all fees and expenses due and payable on each
series specified above have been paid in full.]
S-11
<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] [financed student loans]. The
amount available under the Note Insurance policy on any subsequent Interest
Payment Date will be [the initial amount minus the sum of the prior cumulative
claims under the policy] [[____]% of the then existing principal amount of the
[Class __ ] [Notes] [financed student loans]].
The insurance provider is [name of note insurance provider] [which is a
member of [name of insurance group]. The claims paying ability of the [name of
insurance provider] [name of insurance group] is rated "____" by the [name of
rating agency]]. The address of the insurance provider is [address].]
[Reserve Fund]
[The Reserve Fund is currently funded in an amount equal to __% of the
aggregate principal amount of the Notes that we now have outstanding.] We will
make a deposit to the Reserve Fund on the date the Series ___ Notes
are issued in an amount equal to ____ of the principal balance of the Series
____ Notes. If funds available in the Revenue Fund are not sufficient to make
payments when due, moneys in the Reserve Fund may be used to pay amounts due and
payable to Noteholders. Moneys withdrawn from the Reserve Fund are restored
through transfers from the Revenue Fund or the Acquisition Fund as directed by
us and as available. [We are required to maintain a minimum balance in the
Reserve Fund of $_________.]
[Interest Rate Swap]
We have entered into an interest rate swap agreement with the swap
counterparty identified below. Unless terminated earlier, 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 per annum for direct
obligations of the United States with a maturity of 13 weeks plus a specified
percentage is greater than the London Interbank Offered Rate for deposits in
U.S. dollars having a maturity of three months. The swap counterparty will owe
the Company us a net swap receipt when the calculation described in the
immediately preceding sentence is negative. The amount of a net swap payment or
a net swap receipt is the product of the difference in the rates described above
and the interest rate swap's scheduled notional amount.]
[The scheduled notional amount for any quarterly payment date is set
forth in Exhibit __ to this Prospectus Supplement. We expect the scheduled
notional amount for any quarterly payment date to equal approximately [__]% of
the then outstanding principal balance of the.
Series ___ Notes.]
[While the interest rate swap is in effect, it will reduce, but not
eliminate, the risk that a note rate the rate of interest on the Series ___
Notes will be determined by the applicable interest rate cap.]
[Insert Description of Interest Rate Swap Party]
[Letter of Credit]
S-12
<PAGE>
[We will obtain an irrevocable [standby] [direct pay] letter of credit
from [name of bank]. The Letter of Credit will protect [Class __] Noteholders
against losses on financed student loans to the maximum of the stated amount of
the Letter of Credit. The initial Letter of Credit will expire no earlier than
- ----------.
The initial amount of the Letter of Credit will be [__]% of the aggregate
initial principal amount of the [Class __ Notes] [financed student loans]. The
amount available under the Letter of Credit on any Interest Payment Date will be
equal to this initial amount minus the sum of the prior cumulative draws under
the Letter of Credit to cover any shortfall between in the amounts payable to
the [Class __] Noteholders [and the Class __ Noteholders].
We will be required to renew or replace the Letter of Credit before its
expiration until the [designate Class] Series ____ Notes are no longer
outstanding. If we do not renew or replace a Letter of Credit, the [Trustee],
before the expiration of the then existing Letter of Credit, will draw under the
Letter of Credit an amount equal to the full amount available thereunder 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 therefore, a copy of the Annual Report of [name of
issuing bank] may be obtained [without charge] from [name of issuing bank] at
[address].]
Subordinated Notes
The rights of the Class B Noteholders [and the Class C Noteholders] to
receive payments of interest and principal are subordinated to such rights of
the Class A Noteholders. [The rights of the Class C Noteholder to receive
payments of interest and principal are subordinated to such rights of the Class
A Noteholders and the Class B Noteholders.] This subordination is intended to
enhance the likelihood of regular receipt by the Class A Noteholders [, and
secondarily, the Class B Noteholders,] of the full amount of scheduled monthly
payments of principal and interest due them and to protect the Class A
Noteholders[, and secondarily, the Class B Noteholders,] against losses.
Class A Noteholders have a preferential right to receive, before any
distributions to Class B Noteholders, current distributions from the trust
estate and, if necessary, the right to receive future distributions on our
student loans that would otherwise have been payable to the holders of Class B
Notes. The Class B Notes are then entitled to the available amounts, if any,
remaining in the trust estate. [The Class B Noteholders have a preferential
right to receive, before any distributions to the Class C Noteholders, current
distributions from the trust estate and, if necessary, the right to receive
future distributions on our student loans that otherwise would have been payable
to the holders of the Class C Notes. The Class C Notes are then entitled to the
available amounts, if any, remaining in the trust estate.] See "Description of
Credit Enhancement-Subordinates Notes" in the Prospectus.
[Surety Bonds]
[We will obtain a Surety Bond in the amount of $________ with respect to
the Series __ Notes in favor of the Trustee solely on behalf of the holders of
the Series __ Notes. The Surety Bond will provide for coverage of timely payment
of all interest and ultimate payment of all principal due on the related Series
___ Notes. We will pay $________ to the issuer of the Surety Bond.]
[Description of the issuer of Surety Bond to be provided.]
S-13
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the Series _____
Notes will be applied as follows:
We expect that approximately $___________ of the proceeds deposited to the
Acquisition Fund will be used on the Issue Date to acquire a portfolio of
student loans. See "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-14
<PAGE>
CHARACTERISTICS OF THE
FINANCED STUDENT LOANS*
(As of_____________ __, ____ )
Composition of the [existing Financed Student Loans and additional]
Financed Student Loans expected to be acquired with the proceeds of
Series _____ Notes
Aggregate Outstanding Principal Balance........................... $
Number of Borrowers...............................................
Average Outstanding Principal Balance Per Borrower................ $
Number of Loans...................................................
Average Outstanding Principal Balance Per Loan.................... $
Weighted Average Annual Interest Rate............................. %
Approximate Weighted Average Remaining Term (months) (does not
include school, grace, deferment or forbearance)..................
Weighted Average Remaining Term (months)..........................
Distribution of the Financed Student Loans by Loan Type
Outstanding Percent of Loans
Number of Principal by Outstanding
Loan Types Loans Balance Balance
- ------------------------- ----------------- ------------------- ----------------
Consolidated $ %
PLUS
SLS
Stafford - Subsidized
Stafford - Unsubsidized
Total $ 100.00%
=============== ==================== ======
- --------
* [Includes all financed student loans pledged to the Trustee on the date
of this Prospectus Supplement as well as information concerning the
additional student loans expected to be purchased with the proceeds of
the Series ____ Notes.] Since the additional loans to be acquired with
the proceeds of the Series ____ Notes will be purchased after the date
of this Prospectus Supplement, the characteristics of such loans will
vary.
S-15
<PAGE>
Distribution of the Financed Student Loans by Interest Rate
Outstanding Percent of Loans
Number of Principal by Outstanding
Interest Rate Loans Balance Balance
------------------- ------------------- ------------------ -----------------
$ %
Total $ 100.00%
=========== ============== ======
Distribution of the Financed Student Loans by School Type
Outstanding Percent of Loans
School Number of Principal by Outstanding
Type Loans Balance Balance
---------------- ------------- -------------- --------------
2-Year Institution $ %
4-Year Institution
Proprietry
Unknown
Total $ 100.00%
============= ================ ======
S-16
<PAGE>
Distribution of the Financed Student Loans by Borrower Payment Status
Outstanding Percent of Loans
Borrower Number of Principal by Outstanding
Payment Status Loans Balance Balance
---------------- ------------- -------------- --------------
School $ %
Grace
Deferment
Forbearance
Claim
Repayment
First Year Repayment
Second Year Repayment
Third Year Repayment
More than 3 years
Total $ 100.00%
=========== ===================== ======
S-17
<PAGE>
Geographic Distribution of the Financed Student Loans
Outstanding Percent of
Number of Principal Loans
Location(1) Loans Balance by Outstanding
Balance
------------ ------------- ----------- -------------
Alabama
Alaska
American Samoa
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of
Columbia
Florida
Foreign Country
Georgia
Guam
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Military
(Atlantic)
Military (Europe)
Military (Pacific)
Minnesota
Mississippi
Missouri
Montana
Northern Mariana
Islands
North Carolina
North Dakota
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
Ohio
Oklahoma
Oregon
Pennsylvania
Puerto Rico
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Virginia
Virgin Islands
Vermont
Washington
West Virginia
Wisconsin
Wyoming
Other
------ ------------------ - .--
Total $ 100.00
======= ==================== ======
- ---------------
(1) Based on the permanent billing addresses of the borrowers of the financed
student loans shown on the servicer's records.
S-18
<PAGE>
Distribution of the Financed Student Loans by Date of
Disbursement
Outstanding Percent of Loans
Disbursement Number of Principal by Outstanding
Date Loans Balance Balance
--------------------- ------------ --------------- --------------
Pre-October, 1993 $ %
October 1, 1993 and thereafter
Total $ 100.00%
============ =============== ======
Distribution of the Financed Student Loans by
Guarantee Agency
Percentage of
Outstanding Loans
Guarantee Number of Principal by Outstanding
Agency Loans Balance Balance
---------------- ------------- -------------- --------------
S-19
<PAGE>
Distribution of the Financed Student Loans by Range of Principal Balance
Percent
Outstanding of Loans by
Number of Principal Outstanding
Principal Balance Range Borrowers Balance Balance
---------------------- --------- -------------- ------------
Less than $500 $ %
$500 - $999.00
$1,000 - $1,999.00
$2,000 - $2,999.00
$3,000 - $3,999.00
$4,000 - $5,999.00
$6,000 - $7,999.00
$8,000 - $9,999.00
$10,000 - $14,999.99
$15,000 - $19,999.99
$20,000 or Greater
Total $ 100.00%
============== ================== ======
S-20
<PAGE>
INFORMATION RELATING TO THE GUARANTEE AGENCIES
The payment of principal and interest on all of the student loans held
in the trust estate created under the Indenture which are referred to as the
"financed student loans," will be guaranteed by designated Guarantee Agencies
and will be reinsured by the United States Department of Education. The
guarantee provided by each Guarantee Agency is an obligation solely of that
Guarantee Agency and is not supported by the full faith and credit of the
federal or any state government. However, the Higher Education Act provides that
if the Secretary of Education determines that a Guarantee Agency is unable to
meet its insurance obligations, the Secretary shall assume responsibility for
all functions of the Guarantee Agency under its loan insurance program. For
further information on the Secretary's authority in the event a Guarantee Agency
is unable to meet its insurance obligations see "Description of Guarantee
Agencies" in the Prospectus.
Of the financed 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 is expected to guaranty 10% or more of our financed student loans as of
________ __, ____. Except as otherwise indicated, the information regarding each
Guarantee Agency has been obtained from the Guarantee Agency. We have not
independently verified this information.
[Guarantee Agency]
[Description of Guarantee Agency]
S-21
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges
for Union Financial Services-1, Inc. for each of the periods indicated. The
ratio of earnings to fixed charges has been computed by dividing earnings by
fixed charges. Earnings consist of income from operations before income taxes
plus fixed charges. Fixed charges consist of interest on all indebtedness plus
amortization of debt issuance costs.
Fiscal Year Fiscal Year Period from inception to
Ended Ended
------------- -------------- -----------------------
Earnings ...... $ $ $
Fixed Charges
Ratio..........
S-22
<PAGE>
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement dated as of __________, ____, that we entered into with PaineWebber
Incorporated, we have agreed to sell to the underwriter, and the underwriter has
agreed to purchase, the principal amount of the Series _____ Notes set forth
below.
Underwriter Class A- Class A- Class B- Class B- Class C- Class C-
- ----------- --------- --------- ------- --------- ---------- -------
Total
We have been advised by the underwriter that it proposes to offer the
Series _____ ARC Notes to the public initially at the respective offering prices
set forth on the cover page of this Prospectus Supplement. Until the
distribution of Series _____ ARC Notes is completed, the rules of the Commission
may limit the ability of the underwriter and certain selling group members to
bid for and purchase such Series _____ ARC Notes. As an exception to these
rules, the underwriter is permitted to engage in certain transactions that
stabilize the price of the Series _____ Notes. Such transactions consist of bids
of purchase for the purpose of pegging, fixing or maintaining the price of such
Series _____ Notes.
In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither Union Financial Services-1 nor the underwriter makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the prices of the Series _____ ARC
Notes. In addition, neither Union Financial Services-1 nor the underwriter makes
any representation that the underwriter will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
We have been advised by the underwriter that it proposes to offer the
Fixed Rate Notes from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. We expect to receive
proceeds from the sale of the Fixed Rate Notes of approximately $___________,
plus accrued interest, but before deducting a portion of the expenses we must
pay. In connection with the purchase and sale of the Series _____ Notes, the
underwriter may be deemed to have received compensation in the form of
underwriting discounts and commissions.
We have been advised by the underwriter that it presently intends to
make a market in the Series _____ Notes. However, they are not obligated to do
so, any market-making may be discontinued at any time, and there can be no
assurance that an active public market for the Series _____ Notes will develop.
From time to time the underwriter or its affiliates may perform
investment banking and advisory services for, and may provide general financing
and banking services to, affiliates of Union Financial Services-1.
The Underwriting Agreement provides that we will indemnify the
underwriter against certain civil liabilities, including liabilities under the
Securities Act of 1933, and we have agreed to reimburse the underwriter for the
fees and expenses of its counsel.
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 underwriter by Stroock &
Stroock & Lavan LLP, New York, New York, and for Union Financial Services-1 by
Ballard Spahr Andrews & Ingersoll, LLP, Denver, Colorado.
S-23
<PAGE>
PROSPECTUS
UNION FINANCIAL SERVICES-1, INC.
$
STUDENT LOAN ASSET-BACKED NOTES
We will periodically issue our Student Loan Asset-Backed Notes in one
or more series. The specific terms of the Notes included in each series will be
described in a supplement to this Prospectus.
We will use proceeds from the sale of the Notes to acquire portfolios
of student loans originated by eligible lenders under the Federal Family
Education Loan Program. Those student loans will be pledged to a trust estate
established to secure repayment of the Notes. The Notes will be limited
obligations of 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 ___________________, _____.
<PAGE>
ABOUT THIS PROSPECTUS
This Prospectus is part of a registration statement that we filed with
the Securities and Exchange Commission utilizing a "shelf registration"
procedure. We may sell our Student Loan Asset-Backed Notes in one or more
offerings pursuant to the "shelf registration" procedure up to a total dollar
amount of $----------.
This Prospectus provides you with a general description of the Notes
we may offer. Each time we sell Notes, we will provide a Prospectus Supplement
relating to the series of Notes being offered that will include
o a description of the aggregate principal amount, authorized
denominations and interest rate or rates (or the manner of determining
such rate or rates) of each class of the Notes to be sold
o information concerning the student loans that will be purchased with
the proceeds of the Notes
o information with respect to any Notes that we have previously issued
that are secured by a common pool of assets that secure payment of the
Notes described in the Prospectus Supplement
o information concerning the Guarantee Agencies providing guarantees for
the student loans that will be acquired with Note proceeds
o information with respect to any credit enhancement
o any updates or changes to the information presented in this
Prospectus.
WHERE TO FIND MORE INFORMATION
We are subject to the reporting requirements of the Securities
Exchange Act of 1934 and to comply with those requirements, we file annual,
quarterly and special reports and other information with the SEC. You may read
and copy our registration statement and reports and other information that we
file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains a website at http://www.sec.gov from which our registration statement
and reports are available. Our parent company maintains a web site that provides
information concerning our company at http://www.ufscorp.com.
You should rely only on the information contained in or incorporated
by reference into this Prospectus and any Prospectus Supplement. We have not
authorized anyone else to provide you with different information. We are not
making an offer of the Notes in any state where the offer is not permitted. You
should not assume that the information in this Prospectus or any Prospectus
Supplement is accurate as of any date other than the date appearing on the front
cover of those documents.
REPORTS TO NOTEHOLDERS
Periodic monthly reports concerning the Notes and the security for the
Notes will be provided to the Noteholders. Those reports will not be reviewed by
a certified public accounting firm. If Notes are issued in book-entry form and
registered in the name of Cede & Co., the nominee of The Depository Trust
Company, or Cedelbank, S.A. or the Euroclear System, then all reports will be
provided to those entities which in turn will provide such reports to their
eligible participants. Those participants will then forward such reports to the
beneficial owners of Notes. See "Book Entry Registration" herein.
i
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" into this Prospectus
the information we file with them, which means that we can disclose important
information to you by referring you to the reports we file with the SEC. We
hereby incorporate by reference the following reports:
(i) Annual Report on Form 10-K for the fiscal year ended December 31,
1998, and
(ii) The Quarterly Report on Form 10-Q for the most recent calendar
quarter.
The Annual Report on Form 10-K and the Quarterly Report on Form 10-Q are
available on our parent company's website at HTTP://WWW.UFSCORP.COM. All
periodic reporting documents we file with the SEC after the date of this
Prospectus and before all of the Notes have been issued are incorporated by
reference in this Prospectus and will be a part of this Prospectus from the date
we file those documents. We will provide you, without charge, a copy of any of
the documents incorporated by reference upon written or oral request directed to
Union Financial Services-1, Inc., 1801 California Street, Suite 3920, Denver,
Colorado 80202, Attention: Ronald W. Page, Telephone: (303) 292-6930.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Prospectus and the Prospectus Supplement, including
those concerning our expectations as to our ability to purchase eligible student
loans, to structure and to issue competitive securities, and certain of the
information presented in this Prospectus and the Prospectus Supplement,
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may vary materially
from such expectations. For a discussion of the factors which could cause actual
results to differ from expectations, please see the caption entitled "Risk
Factors" in this Prospectus and in the Prospectus Supplement.
ii
<PAGE>
TABLE OF CONTENTS TO PROSPECTUS
ABOUT THIS PROSPECTUS..........................................................i
WHERE TO FIND MORE INFORMATION.................................................i
REPORTS TO NOTEHOLDERS.........................................................i
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................ii
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS.............................ii
SUMMARY OF THE OFFERING.......................................................iv
RISK FACTORS...................................................................1
DESCRIPTION OF THE NOTES.......................................................7
SECURITY AND SOURCES OF PAYMENT FOR THE NOTES.................................14
BOOK-ENTRY REGISTRATION.......................................................19
ADDITIONAL NOTES..............................................................23
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE................................23
DESCRIPTION OF CREDIT ENHANCEMENT.............................................35
UNION FINANCIAL SERVICES-1, INC...............................................37
THE STUDENT LOAN PROGRAM OF UNION FINANCIAL SERVICES-1, INC...................38
DESCRIPTION OF THE FEDERAL FAMILY EDUCATION LOAN PROGRAM......................41
DESCRIPTION OF THE GUARANTEE AGENCIES.........................................51
FEDERAL INCOME TAX CONSEQUENCES...............................................56
ERISA CONSIDERATIONS..........................................................59
CERTAIN RELATIONSHIPS AMONG FINANCING PARTICIPANTS............................60
PLAN OF DISTRIBUTION..........................................................61
LEGAL MATTERS.................................................................62
FINANCIAL INFORMATION.........................................................62
RATINGS.......................................................................62
APPENDIX I- GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES...II-1
iii
<PAGE>
SUMMARY OF THE OFFERING
The following summary highlights selected information from this Prospectus
but does not contain all of the information you should consider before making an
investment decision. Before deciding to purchase the Notes, you should read the
more detailed information appearing in this Prospectus and in the related
Prospectus Supplement. Capitalized terms used in this Prospectus that are not
defined have the meanings assigned to them in "Index to and Glossary of Certain
Terms."
Overview
We will from time to time offer various classes of our Notes. We will purchase
pools of student loans with the proceeds we receive from these sales. We will
pledge these student loans as collateral for our Notes. Unlike other issuers
that create separate trusts each time they sell securities, all of the Notes we
sell pursuant to this Prospectus and a Prospectus Supplement will be secured by
all student loans that we purchase and pledge as collateral, unless we state
otherwise for a particular series of the Notes in a Prospectus Supplement. The
priority of payments among the various classes of Notes we sell will be
described in the related Prospectus Supplement. These payments will come
principally from amounts received on the student loans.
Securities Offered
Our Student Loan Asset-Backed Notes will be:
o issued in one or more series, and there will be one or more classes of
Notes within each series
o secured by a revolving pool of student loans, referred to as the financed
student loans, and other property held in trust for the benefit of the
owners of the Notes
o designated as Class A Notes, Class B Notes or Class C Notes
o issued pursuant to the terms of the Indenture described below.
Index Rate Notes. The interest rate for some of our Notes may be determined by
reference to the London Interbank Offered Rate ("LIBOR") or by reference to
United States Treasury securities.
o issued pursuant to the terms of the Indenture described below.
Parties
Union Financial Services-1, Inc., a Nevada corporation, is the issuer of the
Notes and is sometimes referred to as "UFS-1." You may contact us at 1801
California Street, Suite 3920, Denver, Colorado 80202, or by phone at
(303)292-6930.
Union Bank and Trust Company will act as the servicer, and UNIPAC Service
Corporation, a Nebraska corporation, will act as subservicer of our financed
student loans. We may appoint other entities to act as a servicer or subservicer
of our financed student loans if approved by the Rating Agencies rating our
Notes. All servicers and subservicers will be identified in the related
Prospectus Supplement. See "Certain Relationships Among Financing Participants."
Zions First National Bank, or such other entity as may be specified in a
Prospectus Supplement, will serve as the "Trustee" under the Indenture.
Interest Rates
The Prospectus Supplement will specify the interest that will be paid on our
Notes. The interest rate may be fixed for the full term of the Notes, or the
interest rate may be subject to periodic adjustment as described below.
ARC Notes. We may issue classes of Notes that bear interest at a rate determined
by auction. The initial interest rate for these ARC Notes will be described in
the Prospectus Supplement. The interest rates for the ARC Notes will be reset at
the end of the initial interest period and each subsequent interest period
pursuant to the Auction Procedures.
The Auction Procedures are summarized and an example of an Auction is included
under "Description of the Notes-ARC Notes."
These Notes will bear interest at an initial rate specified in the Prospectus
Supplement. Thereafter, the interest rate for LIBOR Rate Notes will be
determined from time to time by reference to the rate of interest described as
the LIBOR-Based Rate, and the interest rate for Treasury Rate Notes will be
determined 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."
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Accrual Notes. We may issue one or more classes of Accrual Notes. Accrual Notes
will not be entitled to receive payments of interest during the designated
accrual period. Instead, interest accrued on such Accrual Notes will be
capitalized and added to their principal balance. The rate of interest to be
accrued and the accrual period will be specified in the related Prospectus
Supplement. See "Description of the Notes-Accrual Notes."
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 the Indenture described
below. That trust estate will consist of a revolving pool of student loans and
moneys payable thereon and funds in accounts held by the Trustee under the
Indenture. Interest on the Notes will be paid on the dates specified in the
Prospectus Supplement, which are referred to as "Interest Payment Dates." The
principal balance of the Notes of each series will be payable in full on the
stated maturity date, unless earlier redeemed or repaid as described in this
Prospectus or in the related Prospectus Supplement.
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 financed 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 such payments or redemptions.
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
to use the principal payments remaining in the Acquisition Fund along with the
principal payments that we receive on the financed student loans to redeem
Notes. The redemptions will be made at a price equal to the principal amount of
the Notes to be redeemed plus accrued and unpaid interest.
Optional Redemption. We may redeem Notes in our sole discretion from interest
payments received on financed student loans that are not needed to pay interest
on the Notes and our expenses. Ater a date specified in the Prospectus
Supplement, we may sell the financed students held in the trust estate for not
less than their principal balance plus accrued interest and use the proceeds to
redeem the outstanding Notes.
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 financed student loans has materially decreased, or that the costs of
administering the trust estate have placed unreasonable burdens upon our ability
to perform our obligations under the Indenture.
Optional Purchase. We may purchase all of the Notes in our sole discretion when
the aggregate current principal balance of the Notes 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. See "Description of the
Notes-Optional Purchase" herein.
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Partial Redemption. If less than all of the Notes of any series are to be
redeemed or purchased pursuant to a mandatory redemption, an optional redemption
or an extraordinary optional redemption, we will determine the classes of Notes
that we will redeem. Generally, Class A Notes will be redeemed before Class B
Notes and Class B Notes will be redeemed before Class C Notes. However, we have
the option of redeeming some or all of the Class B Notes before all of the Class
A Notes are redeemed if the ratio of our assets to our liabilities exceeds
levels specified in the Prospectus Supplement. See "Description of the
Notes-Notice and Partial Redemption of Notes" herein.
The Student
Loans We Purchase
The student loans that we purchase will have been originated under the Federal
Family Education Loan Program, referred to as the FFELP, to students enrolled in
qualified accredited institutions of higher education.
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 loan. 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 through the period
that the Notes are outstanding.
Portfolio Characteristics
The characteristics of the portfolio of student loans we expect to acquire with
the proceeds of the Notes of any series, and the characteristics of the existing
portfolio held by the Trustee for us, will be described in the Prospectus
Supplement.
Student Loan Guarantees
The payment of principal and interest on all of our financed student loans will
be guaranteed by designated Guarantee Agencies and will be reinsured by the
United States Department of Education pursuant to the Higher Education Act. 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. See
"Risk Factors-Failure to Comply with Loan Origination and Servicing Procedures
for Student Loans May Result in Loss of Guarantee and other Benefits" and
"Description of the Guarantee Agencies-Federal Insurance and Reimbursement of
Guarantee Agencies" herein.
Student loans originated prior to October 1, 1993 are fully guaranteed as to
principal and accrued interest. Student loans originated after October 1, 1993
are guaranteed as to 98% of principal and accrued interest.
The Higher Education Act provides that if the Secretary of Education determines
that a Guarantee Agency is unable to meet its obligations to holders of loans,
such as the Trustee, then the holders may submit guarantee claims directly to
the Department of Education and the Department of Education is required to pay
to the holders the full insurance obligation of such Guarantee Agency until such
time as the obligations are transferred to a new Guarantee Agency capable of
meeting such obligations, or until a qualified successor Guarantee Agency
assumes such obligations. Delays in receiving reimbursement could occur if a
Guarantee Agency fails to meet its obligations.
Subordinated Notes
The rights of the owners of Class B Notes to receive payments of principal and
interest will be subordinated to such rights of the owners of the Class A Notes.
The rights of the owners of Class C Notes to receive payments of principal and
interest will be subordinated to such rights of the owners of the Class B Notes
and the Class A Notes. This subordination is intended to enhance the likelihood
of regular receipt by the owners of the more senior Notes of the full amount of
scheduled payments of principal and interest due them and to protect such owners
against losses. See "Security and Sources of Payment for the Notes" and "Summary
of Certain Provisions of the Indenture" herein.
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Funds
Revenue Fund. We will deposit in the Revenue Fund all funds that we receive with
respect to the financed student loans. 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 financed 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. See "Security and Sources of Payment for the
Notes-Revenue Fund" herein.
Acquisition Fund. When we issue a series of Notes, we will deposit into the
Acquisition Fund most of the proceeds we receive. These funds will be used to
acquire the student loans identified in the related Prospectus Supplement and
pay certain costs related to the issuance of such Notes. We will also acquire
additional student loans during the revolving period with amounts transferred
from the Revenue Fund. After the revolving period, we 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 will deposit into the Reserve
Fund an amount specified in the related Prospectus Supplement. At any time
thereafter, the amount required to be deposited in the Reserve Fund with respect
to the Notes shall be an amount specified in a Prospectus Supplement.
We will use moneys in the Reserve Fund to pay interest and principal on the
Notes if there are no funds left in the other funds and accounts created under
the Indenture. See "Security and Sources of Payment for the Notes" herein.
Operating Fund. When we issue a series of Notes, we will deposit into the
Operating Fund an amount specified in the related Prospectus Supplement. Moneys
will also be transferred to the Operating Fund from the Revenue Fund from time
to time. Such amounts will be applied to pay 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 certain risks of defaults or losses, as described in the related
Prospectus Supplement. See "Description of Credit Enhancement" herein.
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RISK FACTORS
You should consider the following factors regarding your purchase of the
Notes.
The Notes are payable solely
From the trust estate
We will pay interest and principal on the Notes solely from the funds
and assets held in the trust estate created under the Indenture. No insurance or
guarantee of the Notes will be provided by any government agency or
instrumentality, by any 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 on the
amount and timing of payments and collections on the financed student loans held
in the trust estate, interest paid or earnings on the funds held in the accounts
established pursuant to the Indenture, amounts on deposit in the Reserve Fund
and other funds held in the trust estate and any form of credit enhancement
described in the Prospectus Supplement. You will have no additional recourse
against us or any of our other assets if those sources of funds for repayment of
the Notes are insufficient.
Failure to comply with loan origination and servicing procedures for student
loans may result in loss of guarantee and other benefits
The Higher Education Act and its implementing regulations require
holders of student loans and Guarantee Agencies guaranteeing student loans to
follow specified procedures in making and collecting student loans.
If we fail to follow these procedures, or if any seller or any other
originator of our financed student loans failed to follow the procedures, the
Department of Education and the Guarantee Agencies may refuse to pay claims
submitted by the Trustee. Any such refusal would reduce the revenues of the
trust estate and impair our ability to pay principal and interest on the Notes.
See "Description of the Federal Family Education Loan Program" herein.
Risk of loss from use of shared lender identification number
Every holder of loans originated under the FFELP is required to obtain a
lender identification number from the Department of Education. The Trustee will
use the same 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 to the Department of Education for any liabilities owed to the
Department or the Guaranty Agencies resulting from the Trustee's activities in
the FFELP. As a result, if the Department or a Guaranty Agency were to determine
that the Trustee owes a liability to the Department or such Guaranty Agency on
any student loan included in a trust using the shared lender identification
number, the Department or such Guaranty Agency could attempt to collect that
liability by offset against amounts due the Trustee under the shared lender
identification number, including amounts owed in connection with the trust
securing repayment of the Notes. Any such offset could impair our ability to pay
principal and interest on the Notes when due.
In addition, other trusts using the shared lender identification number
may in a given calendar quarter incur consolidation loan origination fees that
exceed the interest subsidy payments and special allowance payments payable by
the Department of Education on the loans in such other trusts, resulting in the
aggregate payment from the Department received by the Trustee under such lender
identification number for that quarter equaling an amount that is less than the
amount owed by the Department on the student loans in the trust securing
repayment of the Notes for that quarter. If we do not receive payments from the
Department when due it may impair our ability to pay principal and interest on
the Notes when due.
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Risk resulting from allocating student loans among trust estates
We have previously established a trust to secure repayment of other
student loan asset-backed notes that we have issued that is separate from the
trust estate that will secure the Notes described herein, and we may create
additional trusts in the future. In the event that we are not able to purchase
student loans of acceptable quality to fully utilize the funds available in all
of these trusts, we may elect to allocate available student loans to one trust
rather than another. If that were to occur so that funds in the Acquisition Fund
were not used to purchase student loans, we would be required to use those funds
to redeem Notes. See "Description of the Notes-Mandatory Redemption."
Other persons may gain a
superior security interest
in the student loans
We expect to perfect the Trustee's security interest in the financed
student loans 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
financed 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.
One of the Custodians will be UNIPAC, an affiliate of Union Bank. While
we have received a reasoned opinion of counsel that the Trustee has a first
priority security interest in this situation, you should understand that this
position is not entirely free from doubt. Therefore, if Union Bank becomes
insolvent, our perfection in those student loans may be challenged by a receiver
of other creditors of Union Bank. See "Certain Relationships Among Financing
Participants."
Bankruptcy or insolvency
of certain persons could
result in payment delays to you
Union Financial Services-1, Inc. is a separate subsidiary of our parent
company, Union Financial Services, Inc. We believe that our certificate of
incorporation limits our business operations in such a way that it will be
unlikely that our assets will be consolidated by a bankruptcy court with the
assets of our parent or another affiliated company if that other company seeks
relief under the bankruptcy or related laws. If a bankruptcy court does
consolidate our assets into the bankruptcy estate of our parent or another
affiliated company, you could expect delays in receiving payments on your Notes
and even a reduction in payments on your Notes.
We have also 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." See "Risk Factors."
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The characteristics of the portfolio of
financed student loans held in the
trust estate will change
We intend to use the principal payments that we receive on our financed
student loans to purchase additional student loans for the period described in a
Prospectus Supplement. We will attempt to maintain for our portfolio of loans
the aggregate characteristics described in the Prospectus Supplement for a
series of our Notes. However, the actual characteristics of the loans in our
portfolio will change from time to time due to factors such as repayment of the
loans in the normal course of business, sale or purchase of loans or the
occurrence of delinquencies or defaults.
Variability of our revenues
The payments we receive on our financed student loans may be different
from the payments that are actually due, for a variety of economic, social and
other reasons. Failures by borrowers to make timely payments of the principal
and interest due on the loans will affect the revenues of the trust estate,
which may reduce the amounts available to pay principal and interest due on the
Notes.
Maturity and yield of the Notes may be
affected by the rate of payments on the
financed student loans
Our financed student loans may be prepaid at any time without penalty.
If we receive prepayments on our financed 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, such as transfers and
unemployment. Prepayment rates are also affected by refinancing opportunities
which may provide more favorable repayment terms, such as those offered under
consolidation loan programs like the federal direct consolidation loan program.
We do not have sufficient information to be able to estimate the rate of
prepayment with respect to the financed student loans in the trust estate.
Scheduled payments with respect to, and the maturities of, our financed
student loans may be extended as authorized by the Higher Education Act. Also,
periods of forbearance or refinancings through consolidation loans having longer
maturities may lengthen the remaining term of the loans and the average life of
each class of Notes. Any reinvestment risks resulting from a faster or slower
incidence of prepayment of loans will be borne entirely by you.
The rate of principal payments to you on the Notes and the yield to
maturity of the Notes will be directly related to the rate of payments of
principal on our financed student loans. Changes in the rate of prepayments may
significantly affect your actual yield to maturity, even if the average rate of
principal prepayments is consistent with your expectations. In general, the
earlier a prepayment of principal of a loan, the greater the effect on your
yield to maturity. The effect on your yield as a result of principal payments
occurring at a rate higher or lower than the rate anticipated by you during the
period immediately following the issuance of the Notes will not be offset by a
subsequent like reduction, or increase, in the rate of principal payments.
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Our financed 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 financed student loans are the
guarantees provided by the Guarantee Agencies.
A deterioration in the financial status of a Guarantee Agency and its
ability to honor guarantee claims on defaulted student loans could delay or
impair the Guarantee Agency's ability to make claims payments to the Trustee.
The financial condition of a Guarantee Agency can be adversely affected if it
submits a large number of reimbursement claims to the Department of Education,
which results in a reduction of the amount of reimbursement that the Department
is obligated to pay the Guarantee Agency. The Department may also require a
Guarantee Agency to return its reserve funds to the Department upon a finding
that the reserves are unnecessary for the Guarantee Agency to pay its program
expenses or to serve the best interests of the federal student loan program. The
inability of any Guarantee Agency to meet its guarantee obligations could reduce
the amount of principal and interest paid to you as the owner of the Notes or
delay those payments past their due date.
If the Department has determined that a Guarantee Agency is unable to
meet its guarantee obligations, the loan holder may submit claims directly to
the Department of Education and the Department is required to pay the full
guaranty claim amount due with respect thereto. See "Description of the
Guarantee Agencies" herein. However, the Department's obligation to pay
guarantee claims directly in this fashion is contingent upon the Department
making the determination referred to above. The Department may not ever make
such a determination with respect to a Guarantee Agency and , even if such a
determination were made, payment of such guarantee claims may not be made in a
timely manner.
Reliance upon sellers to deliver student
loans
We expect to use the proceeds of the Notes to acquire portfolios of
student loans and to use principal receipts from our financed 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 loan student and that we will be able to maintain certain
overall portfolio characteristics in connection with such acquisitions. If we
are not able to use Note proceeds or principal payments that we receive on our
financed student loans to purchase additional loans that meet our requirements,
we will use those amounts to redeem your Notes.
Each student loan purchase agreement requires the seller to repurchase
its loans if the representations and warranties made by the seller prove not to
be true or if a claim for a loan is denied because of events occurring before
the sale. We cannot be certain, however, that a seller will be financially able
to repurchase loans if called upon to do so.
Congressional actions may affect
our student loan portfolio
The Department of Education's authority to provide interest subsidies
and federal insurance for loans originated under the Higher Education Act
terminates on a date specified in the Higher Education Act. The Higher Education
Act Amendments of 1998 extended the principal provisions of the Federal Family
Education Loan Program to loans made on or before September 30, 2004. While
Congress has consistently extended the effective date of the Higher Education
Act and the FFELP, it may elect not to reauthorize the Department's ability to
provide interest subsidies and Federal insurance for loans. Such a failure of
reauthorization would not affect the financed student loans we then owned, but
would reduce the number of loans available for us to purchase in the future.
Funds for payment of interest subsidies and other payments under the
FFELP are subject to annual budgetary appropriation by Congress. In recent
years, federal budget legislation has contained provisions that restricted
payments made under the FFELP to achieve reductions in federal spending. Future
federal budget legislation may adversely affect expenditures by the Department
of Education, and the financial condition of the Guarantee Agencies.
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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" herein.
Competition created by the Federal
Direct Student Loan Program may
impact our student loan program
In 1992, Congress created the Federal Direct Student Loan Program. Under
this program, the Department of Education makes loans directly to student
borrowers through the educational institutions that they attend. The volume of
student loans made under the FFELP 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, the servicer may
experience increased costs due to reduced economies of scale to the extent the
volume of loans serviced by the servicer is reduced. Those cost increases could
affect the ability of the servicer to satisfy its obligations to service our
financed student loans. Loan volume reductions could further reduce revenues
received by the Guarantee Agencies available to pay claims on defaulted student
loans. The level of competition currently in existence in the secondary market
for loans made under the FFELP could be reduced, resulting in fewer potential
buyers of student loans and lower prices available in the secondary market for
those loans. The Department of Education is implementing a direct consolidation
loan program, which may further reduce the volume of FFELP loans available to
purchase and may increase the rate of repayment of our student loans. See
"Description of the Federal Family Education Loan Program" herein.
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 payments of interest and principal due on the
Class B Notes. Under certain redemption situations, principal on Class B Notes
may be redeemed while Class A Notes remain outstanding and the principal on the
Class C Notes may be redeemed while the Class A Notes and certain of the Class B
Notes remain outstanding. See "Description of the Notes-Notice and Partial
Redemption of Notes." Class B Notes are also subordinated to the Class A Notes
and the Class C Notes are also subordinate to the Class B Notes as to the
direction of remedies upon an event of default. The trust estate will not have,
nor is it permitted or expected to have, any significant assets or sources of
funds other than from payments with respect to the student loans, the Reserve
Fund and other funds created therein.
We may issue additional notes
secured by the trust estate
We may issue additional Notes that are secured by the trust estate
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 such rating or ratings will not be
reduced or withdrawn as a result of the issuance of the proposed additional
Notes. See "Additional Notes" herein.
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Different rates of change in interest rate indexes may affect our cash flow
The interest rate with respect to the Notes of various classes may
fluctuate from one interest period to another in response to changes in LIBOR or
Treasury security rates or as a result of the auction procedures described in
this Prospectus. Our student loans bear interest at the rates described herein
under "Description of the Federal Family Education Loan Program" which are
generally based upon the bond equivalent yield of the 91 day Treasury Bill rate.
If there is a decline in the rates payable on our financed student loans, the
amount of funds representing interest deposited into the Revenue Fund may be
reduced. If the interest rates payable on our Notes do not decline in a similar
manner and time, we may not have sufficient funds to pay interest on the Notes
when it becomes due. Even if there is a similar reduction in the rates
applicable to any series of the Notes, there may not necessarily be a reduction
in the other amounts required to be paid out of such funds, such as certain
administrative expenses, causing payment of such amounts to be deferred to
future periods. Sufficient funds may not be available in future periods to make
up for any shortfalls in the current payments of interest on the Notes or
expenses of the trust estate.
The Notes will be issued only in book-entry form
Unless otherwise specified with respect to a series of the Notes in the
related Prospectus Supplement, each class of Notes of any series will be
initially represented by one or more certificates registered in the name of Cede
& Co., the nominee for The Depository Trust Company, Cedelbank, S.A., or the
Euroclear System, and will not be registered in the names of the holders of the
Notes or their nominees. Because of this, unless and until definitive securities
are issued, holders of such Notes will not be recognized by the Trustee as
"registered owners" as that term is used in the Indenture. Until definitive
securities are issued, holders of the Notes will only be able to exercise the
rights of registered owners indirectly through DTC and its participating
organizations, Cedelbank, S.A., or the Euroclear System. See "Book-Entry
Registration" herein.
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 under the caption "Summary of the Offering-Ratings" 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 purchase, hold or sell any class of Notes inasmuch as
such ratings do not comment as to the market price or suitability for you as an
investor. An additional rating agency may rate the Notes, and that rating may
not be equivalent to the initial rating described in the related Prospectus
Supplement. Ratings may be lowered or withdrawn by any Rating Agency if in such
Rating Agency's judgment circumstances so warrant. See "Ratings."
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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 does do not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the provisions of the Indenture and
related Supplemental Indenture. Definitions of capitalized terms can be found by
referring to the Index and Glossary of Terms.
General
Under the Indenture, we may issue Class A Notes, Class B Notes and Class
C Notes. Class B Notes whenever issued will be subordinate to the Class A Notes,
and the Class C Notes would be subordinate to the Class A Notes and the Class B
Notes.
Fixed Rate Notes
The Fixed Rate Notes will have a stated maturity set forth in the
applicable Prospectus Supplement. The Notes will bear interest from the date and
at the rate per annum specified in the applicable Prospectus Supplement. The
dates on which the holders of Fixed Rate Notes will receive payments of
principal and interest will be specified in the applicable Prospectus
Supplement.
ARC Notes
The ARC Notes will have a stated maturity set forth in the applicable
Prospectus Supplement. ARC Notes will bear interest at the ARC Note Interest
Rate from the date of their issuance at the rate per annum specified in the
Prospectus Supplement through the first Auction Date for such Notes. The
Interest Period for ARC Notes will initially consist of a number of days, set
forth in the applicable Prospectus Supplement. The interest rate for the ARC
Notes will be reset at the interest rate determined pursuant to the Auction
Procedures described below, but in no event will the rate exceed the Maximum
Auction Rate per annum set forth in the applicable Prospectus Supplement.
Interest on the ARC 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 ARC Notes will be
payable on the first business day following the expiration of each respective
Interest Period for such Notes. The date on which a class of ARC Notes is
entitled to receive a payment of interest is referred to as the "Interest
Payment Date" for such Class. Payments will be made to Registered Owners of the
ARC Notes as of the Business Day next preceding the respective Auction Date.
Determination of ARC Note Interest Rate. The following summarizes the
procedures that will be used in determining the interest rates on the ARC Notes.
The interest rate on each class of ARC 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 ARC Notes such investors wish to buy, hold or sell at
various interest rates. The Broker-Dealers submit their clients' orders to the
Auction Agent, who processes all orders submitted by all eligible Broker-Dealers
and determines the interest rate for the upcoming interest period. The
Broker-Dealers are notified by the Auction Agent of the interest rate for the
upcoming interest period and are provided with settlement instructions relating
to purchases and sales of ARC Notes. Bankers Trust Company has been appointed to
serve as Initial Auction Agent for UFS-1 and PaineWebber Incorporated has agreed
to serve as a Broker-Dealer.
In the auction procedures, the following types of orders may be
submitted:
(i) "Bid/Hold Orders" - the minimum interest rate that a
current investor is willing to accept in order to continue
to hold some or all of its ARC Notes for the upcoming
interest period;
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(ii) "Sell Orders" - an order by a current investor to sell a
specified principal amount of ARC Notes, regardless of the
upcoming interest rate; and
(iii) "Potential Bid Orders" - the minimum interest rate that a
potential investor (or a current investor wishing to
purchase additional ARC Notes) is willing to accept in
order to buy a specified principal amount of ARC Notes.
If an existing investor does not submit orders with respect to all its
ARC Notes of the applicable class, the investor will be deemed to have submitted
a Hold Order at the new interest rate for that portion of the ARC Notes for
which no order was received.
In connection with each Auction, ARC Notes will be purchased and sold
between investors and potential investors at a price equal to their
then-outstanding principal balance plus any accrued interest. The following
example helps illustrate how the Auction Procedures are used in determining the
interest rate on the ARC Notes.
(a) Assumptions:
1. Denominations (Units) = $50,000
2. Interest Period = 28 days
3. Principal Amount Outstanding = $50 Million (1000 Units)
(b) Summary of All Orders Received for the Auction
Bid/Hold Orders Sell Orders Potential Bid Orders
- ---------------------------- ------------------- ------------------------------
20 Units at 2.90% 100 Units Sell 40 Units at 2.95%
60 Units at 3.02% 100 Units Sell 60 Units at 3.00%
120 Units at 3.05% 200 Units Sell 100 Units at 3.05%
200 Units at 3.10% ============== 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
Total units under existing Bid/Hold Orders and Sell Orders always equal
issue size (in this case 1000 units).
(c) Auction Agent organizes Orders in Ascending Order
Order Number Cumulative Order Number of Cumulative
Number of Units Total Percent Number Units Total Percent
(Units) (Units)
- ------ ---------- ------------ -------- -------- ---------- ----------- --------
1. 20(W) 20 2.90% 7. 200(W) 600 3.10%
2. 40(W) 60 2.95% 8. 100(W) 700 3.10%
3. 60(W) 120 3.00% 9. 100(W) 800 3.11%
4. 60(W) 180 3.02% 10. 200(W) 1000 3.12%
5. 100(W) 280 3.05% 11. 100(L) 3.14%
6. 120(W) 400 3.05% 12. 200(L) 3.15%
(W) Winning Order (L) Losing Order
Order #10 is the order that clears the market of all available units.
All winning orders are awarded the winning rate (in this case, 3.12%) as the
interest rate for the next Interest Period, at the end of which another auction
will be held. Multiple orders at the winning rate are allocated units on a pro
rata basis. Notwithstanding the results of the Auction, in no event will the
interest rate exceed the Maximum Auction Rate specified in the applicable
Prospectus Supplement.
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The above 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. In certain circumstances, there may be insufficient Potential
Bid Orders to purchase all the ARC Notes offered for sale. In such
circumstances, the interest rate for the upcoming Interest Period will equal the
Maximum Auction Rate. Also, if all the ARC Notes are subject to Hold Orders
(i.e., each holder of ARC Notes wishes to continue holding its ARC Notes,
regardless of the interest rate), the interest rate for the upcoming Interest
Period will equal the All Hold Rate, which is the Applicable LIBOR - Based Rate
less 0.20%.
If a Payment Default shall have occurred, the ARC Note Interest Rate for
the Interest Period commencing on or immediately after such Payment Default, and
for each Interest Period thereafter until such Payment Default is cured, will be
the Non-Payment Rate, which is One-Month LIBOR plus 1.50%.
If the Auction Rate for a class of ARC Notes is greater than the
applicable Maximum Auction Rate, then the ARC Note Interest Rate applicable to
such ARC Notes for an Interest Period will be the applicable Maximum Auction
Rate. If the ARC Note Interest Rate applicable to such ARC Notes for any
Interest Period is the applicable Maximum Auction Rate, the Trustee shall
determine the Carry-over Amount, if any, with respect to such ARC Notes for such
Interest Period. The Carry-over Amount is generally the difference between the
Auction Rate and the Maximum Auction Rate. The Carry-over Amount will bear
interest calculated at a rate equal to One-Month LIBOR from the Interest Payment
Date for the Interest Period with respect to which the Carry-over Amount was
calculated, until paid.
The Carry-over Amount, and interest accrued thereon, for a class of ARC
Notes will be paid by the Trustee on the date of defeasance of any of the ARC
Notes of such class or an Interest Payment Date if and to the extent that on
such Interest Payment Date there are sufficient moneys in the Revenue Fund to
pay all interest due on the Notes on such 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 thereon, on any ARC Note which
is due and payable on an Interest Payment Date, which ARC Note is to be redeemed
(other than by optional redemption) on said Interest Payment Date, shall be paid
to the Registered Owner thereof on said Interest Payment Date to the extent that
moneys are available therefor. Any Carry-over Amount (and any interest accrued
thereon) which is not yet due and payable on said Interest Payment Date shall be
canceled with respect to said ARC Note that is to be redeemed (other than by
optional redemption) on said Interest Payment Date and shall not be paid on any
succeeding Interest Payment Date.
Changes in Auction Period or Periods and Certain Percentages. While any
of the ARC Notes are outstanding, we may, from time to time, change the length
of the applicable Auction Period, in order to conform with then current market
practice with respect to similar securities or to accommodate economic and
financial factors that may affect or be relevant to the length of the Auction
Period and the interest rate borne by the ARC Notes. 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 Securities Depository at
least 10 days prior to the Auction Date for such Auction Period. Any such
adjusted Auction Period shall not be less than 7 days nor more than 366 days.
Changes in the Auction Date. The Market Agent, with the written consent
of UFS-1, may specify an earlier Auction Date than the Auction Date that would
otherwise be determined with respect to an Auction Period in order to conform
with then current market practice with respect to similar securities or to
accommodate economic and financial factors that may affect or be relevant to the
day of the week constituting an Auction Date and the interest rate borne on the
ARC Notes. The Market Agent will deliver a written request for consent to a
change in the length of the Auction Date to UFS-1 at least 14 days prior to the
effective date of such change. If UFS-1 consents to the change, the Market Agent
will provide notice of its determination to specify an earlier Auction Date for
one or more Auction Periods by means of a written notice delivered at least 10
days prior to the proposed changed Auction Date to the Trustee, the Auction
Agent, UFS-1, each Rating Agency and the Securities Depository.
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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 will accrue for each Interest Period and be paid in arrears
on each Interest Payment Date. An "Interest Period" with respect to the LIBOR
Rate Notes that pay interest monthly means the period commencing on the date of
issuance of the LIBOR Rate Notes through and including the date specified in the
related Prospectus Supplement and each period thereafter beginning on the first
day of each calendar month and ending on the last day of such calendar month. An
"Interest Period" for LIBOR Rate Notes that pay interest quarterly means the
period commencing on the date of issuance of the LIBOR Rate Notes through and
including the date specified in the related Prospectus Supplement and each
period thereafter beginning on the first day of a month and ending on the last
day of the specified following month thereafter. Except as otherwise specified
with respect to a series of Notes in the related Prospectus Supplement, an
"Interest Payment Date" for the LIBOR Rate Notes means the first Business Day of
each calendar month, commencing on the date specified in the related Prospectus
Supplement or, with respect to a LIBOR Rate Note payable quarterly, on the
quarterly dates set forth in the related Prospectus Supplement. If any such date
is not a business day, payments of interest will be made on the next succeeding
business day. The amount of interest payable to Registered Owners of LIBOR Rate
Notes for any Interest Period or part thereof shall be calculated by the Trustee
on the basis of a 360-day year for the number of days actually elapsed.
The rate of interest on the LIBOR Rate Notes for each Interest Period,
which is referred to as the "LIBOR-Based Rate," shall be determined by a
calculation agent. UFS-1 has initially appointed PaineWebber Incorporated to
serve as the calculation agent. The LIBOR-Based Rate will be the One-Month
LIBOR, Three-Month LIBOR, Six-Month LIBOR or One-Year LIBOR plus the margin
specified in the related Prospectus Supplement. The interest rate for the LIBOR
Rate Notes will be calculated in the same manner described above if there has
been a Payment Default. The rate per annum at which interest is payable on the
LIBOR Rate Notes for any Interest Period cannot at any time exceed the Adjusted
Student Loan Rate with respect to such Libor Rate Notes. The Adjusted Student
Loan Rate means the product of
(a) the number obtained by dividing 365 (or 366 in the case of a
Leap year) by the actual number of days elapsed in an Interest Period;
and
(b) the percentage equivalent of a fraction
o The numerator of which is equal to the sum of the
Expected Interest Collections and Reciprocal
Payments, if any, less the sum of the servicing
fee, the administration fee, and Reciprocal
Payments, if any, with respect to such Interest
Period; and
o The denominator of which is the aggregate principal
amount of the Notes as of the last day of such
Interest Period.
With respect to any Interest Period, "Expected Interest Collections"
means the sum of,
(a) the amount of interest accrued, with respect to the financed
student loans [for the Collection Period preceding the applicable
Interest Payment Date (whether or not such interest is actually paid)],
(b) all Interest Subsidy Payments and Special Allowance Payments
estimated to have accrued [for the Collection Period preceding the
applicable Interest Payment Date, whether or not actually received]; and
(c) investment earnings [for the Collection Period preceding the
applicable Interest Payment Date].
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If the LIBOR Rate 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 carryover will be
payable unless the aggregate value of our financed student loans and other
assets exceeds the principal balance of the outstanding Notes. Any interest
carryover incurred and unpaid on an Interest Payment Date will be payable on
such 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 accrue for each Interest Period and be
paid in arrears on each Interest Payment Date. An "Interest Period" with respect
to the Treasury Rate Notes that pay interest monthly means the period commencing
on the date of issuance of the Treasury Rate Notes through and including the
date specified in the related Prospectus Supplement and each period thereafter
beginning on the first day of each calendar month and ending on the last day of
such calendar month. An "Interest Period" for Treasury Rate Notes that pay
interest quarterly means the period commencing on the date of issuance of the
Treasury Rate Notes through and including the date specified in the related
Prospectus Supplement and each period thereafter beginning on the first day of a
month and ending on the last day of the specified following month thereafter.
Except as otherwise specified with respect to a series of the Notes in the
related Prospectus Supplement, an "Interest Payment Date" for the Treasury Rate
Notes means the first Business Day of each calendar month, commencing on the
date specified in the related Prospectus Supplement or, with respect to a
Treasury Rate Note payable quarterly, on the quarterly dates set forth in the
related Prospectus Supplement. If any such date is not a business day, payments
of interest will be made on the next succeeding business day.
The amount of interest payable to Registered Owners of Treasury Rate Notes
for any Interest Period or part thereof is the T-Bill Rate. The T-Bill Rate will
generally be adjusted weekly on the calendar day following each auction of
direct obligations of the United States with a maturity of 13 weeks ("91-day
Treasury Bills") and will be calculated by a calculation agent to be the sum of
the Bond Equivalent Yield for auctions of 91-day United States Treasury Bills on
a Rate Determination Date (i.e., the first day of each calendar week on which
the United States Treasury auctions 91-day Treasury Bills, which currently is
the United States Treasury's first business day of each week) for such Interest
Period, plus a spread described in the related Prospectus Supplement. Interest
on the Treasury Rate Notes shall be computed by the Trustee for the actual
number of days elapsed on the basis of a year consisting of 365 or 366 days, as
applicable.
The rate of interest on the Treasury Rate Notes for each Interest Period
will be determined by the calculation agent in the manner described above. If a
payment default occurs, the interest rate for the Treasury Rate Notes will be
the same per annum calculated as if no such payment default had occurred. The
rate per annum at which interest is payable on the Treasury Rate Notes for any
Interest Period cannot at any time exceed the Adjusted Student Loan Rate with
respect to such Treasury Rate Notes. The Adjusted Student Loan Rate means the
product of
(a) the number obtained by dividing 365 (or 366 in the case of a
Leap year) by the actual number of days elapsed in an Interest Period;
and
(b) the percentage equivalent of a fraction
o The numerator of which is equal to the sum of the
Expected Interest Collections and Reciprocal Payments,
if any, less the sum of the Servicing Fee, the
Administration Fee, and Reciprocal Payments, if any,
with respect to such Interest Period; and
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o The denominator of which is the aggregate principal
amount of the Notes as of the last day of such Interest
Period.
With respect to any Interest Period, "Expected Interest Collections" means
the sum of,
(a) the amount of interest accrued, with respect to the financed
student loans [for the Collection Period preceding the applicable
Interest Payment Date (whether or not such interest is actually paid)],
(b) all Interest Subsidy Payments and Special Allowance Payments
estimated to have accrued [for the Collection Period preceding the
applicable Interest Payment Date, whether or not actually received]; and
(c) investment earnings [for the Collection Period preceding the
applicable Interest Payment Date].
If the T-Bill Rate determined by the calculation agent is greater than the
maximum interest rate specified in the Prospectus Supplement, the difference
will be carried forward and paid when moneys are available in the Revenue Fund.
However, no interest basis carryover will be payable unless the aggregate value
of our financed student loans and other assets exceeds the principal balance of
our outstanding Notes. Any interest carryover incurred and unpaid on an Interest
Payment Date will be payable on such 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 financed student loans after the date that
accrued interest is no longer being added to the principal balance of such
Notes. Accrued interest for each Interest Payment Date will be equal to interest
at the applicable interest rate accrued for a specified period (generally the
period between Interest Payment Dates) on the outstanding Note principal balance
thereof immediately prior to such Interest Payment Date.
Payments of the Notes
The principal of the Notes due at 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. Any such interest not timely paid shall be payable to the
Registered Owner at the close of business on a special record date for the
payment of any such 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 the Securities
Depository or its nominee, and to any other Registered Owner owning at least
$1,000,000 principal amount of the Notes upon written request delivered to the
Trustee, will be paid by wire transfer within the United States to the bank
account number filed no later than the record date or special record date with
the Trustee for such purpose. All payments on the Notes will be made in United
States Dollars.
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Revolving Period
We intend to use principal payments that we receive on the financed
student loans to purchase additional student loans for a period of time
specified in the Prospectus Supplement. During 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 such payments or redemptions. 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. 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 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 Redemption
Unless otherwise specified with respect to a series in the related
Prospectus Supplement, the Notes of a series are subject to mandatory
redemption, in whole or in part, on the first Interest Payment Date subsequent
to the end of the revolving period from principal payments received on the
financed student loans and other excess revenues then 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. The redemption price to be paid for the Notes will be the
principal amount thereof plus accrued interest. 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 therefor 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.
See "Notice and Partial Redemption of Notes" below for a discussion of
the order in which Notes of any Series will be redeemed.
Optional Redemption
Unless otherwise specified with respect a series in the related
Prospectus Supplement, the Notes of such series are subject to redemption at our
sole discretion, from funds received by the Trustee constituting interest on
financed student loans remaining in the Revenue Fund after all other prior
required payments have been made from the Revenue Fund. The Notes may be
optionally redeemed in whole or in part, on or after the date set forth in such
Prospectus Supplement at a redemption price equal to the principal amount of the
Notes being redeemed, plus interest accrued, if any, to the date of redemption.
Any limitations on optional redemptions of the Notes of any series will be
described in the Prospectus Supplement related to such series. See "Notice and
Partial Redemption of Notes" below for a discussion of the order in which Notes
will be redeemed.
Rider A
If so provided in the related Prospectus Supplement, all remaining student
loans held in the the trut estate will be offered for sale by the Trustee on any
Interest Payment Date occurring on or after a date specified in such Prospectus
Supplement. The intial 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 interst of such
student loans as of the end of the Collection Period immediately preceding the
related Interest Payemnt Date. The proceeds of such sale will be used to redeem
all outstanding Notes.
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Extraordinary Optional Redemption
Unless otherwise specified with respect to a series in the related
Prospectus Supplement, the Notes of such series are also subject to
extraordinary optional redemption, at our sole discretion, 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 financed student loans has
materially decreased, or that the costs of administering the trust estate have
placed unreasonable burdens upon our ability to perform our obligations under
the Indenture. An extraordinary optional redemption of the Notes may be made in
whole or in part, and any such redemption will be made at a redemption price
equal to the principal amount of the Notes to be redeemed plus accrued interest
to the date of redemption. See "Notice and Partial Redemption of Notes" below
for a discussion of the order in which such Notes will be redeemed. 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 which 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 existing at the time with
respect to any changes to the Higher Education Act which would be materially
adverse to the trust estate such that the Noteholders of any or all series, in
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 financed student loans from moneys on deposit in the
Acquisition Fund.
Optional Purchase
Unless otherwise specified with respect to a series in the related
Prospectus Supplement, we may purchase or cause to be purchased, at our sole
discretion, all of the Notes of such series on any Interest Payment Date on
which the aggregate current principal balance of the Notes shall be less than or
equal to 20% of the initial aggregate principal balance of the Notes on their
respective date of issuance. The purchase will be made at a purchase price equal
to the aggregate current principal balance of such Notes, plus accrued interest
on the Notes through the day preceding the Interest Payment Date on which the
purchase occurs. The purchase shall occur on the related Interest Payment Date
following the date on which funds sufficient to pay the purchase price are
deposited with the Trustee. All Notes which are purchased shall be canceled by
the Trustee and be disposed of in a manner satisfactory to the Trustee and
UFS-1.
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 ARC
Notes designated for redemption or purchase, at their address as it appears upon
the registration books, not less than 15 days prior to the redemption or
purchase date.
If less than all of the Notes of any series are to be redeemed or
purchased, we will determine the Notes of each class of such 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 such redemption
the aggregate market value of the assets held in the trust estate will equal the
percentage of all Class A Notes then outstanding 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 such 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
that is specified in a Prospectus Supplement.
Accelerated Maturity of Notes
If an event of default shall have occurred and be continuing, the
Trustee may declare, or upon the written direction by the Registered Owners of
at least 51% of the collective aggregate principal amount of the Highest
Priority Notes then outstanding shall declare, the principal of all Notes then
outstanding, and the interest thereon, immediately due and payable, anything in
the Notes or in the Indenture to the contrary notwithstanding.
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SECURITY AND SOURCES OF PAYMENT FOR THE NOTES
General
The Notes are limited obligations of UFS-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 payments, proceeds, charges
and other income received by the Trustee or UFS-1 on account of
any financed student loan (including, but not limited to,
scheduled, delinquent and advance payments of and any insurance
proceeds with respect to, interest, including Interest Benefit
Payments, on financed student loans and any Special Allowance
Payments received by UFS-1 or the Trustee with respect to any
financed student loan) and investment income from all Funds and
any proceeds from the sale of other disposition of such financed
student loans;
o All moneys and investments held in the Funds; and
o Financed student loans purchased with money from the Acquisition
Fund or otherwise acquired or originated and pledged or credited
to the Acquisition Fund.
In addition, the trust estate may also consist of certain rights that
provide credit enhancement (for example, the right to draw under any letter of
credit or guarantee insurance) as described herein and in the related Prospectus
Supplement.
Flow of Funds
The following Funds will be created by the Trustee for the benefit of
the Registered Owners:
o Revenue Fund
o Acquisition Fund
o Reserve Fund
An Operating Fund was established by UFS-1 and does not constitute a
Fund within the meaning of 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 financed 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.
Set forth on the following page is a diagram of the flow of Revenues
received on the financed student loans.
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Note Sale Proceeds deposited to ACQUISITION FUND, REVENUE FUND,
RESERVE FUND (A) and OPERATING FUND as required
ACQUISITION FUND (B)
Student
Loan
Revenue
and all other Revenue(C)
REVENUE FUND
OPERATING FUND Program Expenses(D)
Recoveries of Principal to
ACQUISITION FUND prior to end
of Recycling Period
Transfer of Funds
1. Interest due on Senior Notes and Senior Issuer Derivative Payments
2. Principal and/or Premium due on Senior Notes
3. Interest due on Subordinate Notes and Subordinate Issuer Derivative Payments
4. Principal and/or Premium due on Subordinate Notes
5. Interest due on Junior-Subordinate Notes and Junior-Subordinate Issuer
Derivative Payments
6. Principal and/or Premium due on Junior-Subordinate Notes
7. RESERVE FUND replenishment, if necessary
8. To the ACQUISITION FUND, upon Issuer Order
9. Excess over ____% parity to Issuer, upon Issuer Order
(A) To pay insufficiencies of Principal and/or Premium, Interest on Notes and
Issuer Derivative Payments
(B) Upon Issuer Order, REVENUE FUND Deposit, if REVENUE FUND is
insufficient for Transfer of Fund items 1-7
Upon Issuer Order, RESERVE FUND Deposit, if RESERVE FUND is utilized
for Transfer of Fund items 1-6 (should REVENUE FUND be insufficient)
To redeem Notes after Recycling Period
To purchase Eligible Loans prior to end of Recycling Period
(C) All Recoveries of Principal, payments, proceeds, charges and other income
received by the Trustee or the Issuer from or on account of any Financed
Eligible Loan (including scheduled, delinquent and advance payments of and
any insurance proceeds with respect to interest, including Interest Benefit
Payments, on any Financed Eligible Loan and any Special Allowance Payment
received by the Issuer with respect to any Financed Eligible Loan) and all
interest earned or gain realized from the investment of amounts in any Fund
or Account and all payments received by the Issuer pursuant to a Derivative
Product.
(D) See definition of "Program Expenses" included within this document
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Acquisition Fund; Purchase and Sale of Financed Student Loans
We will deposit proceeds of any Notes into the Acquisition Fund. Moneys
may also be transferred to the Acquisition Fund from the Revenue Fund as
described below under "Revenue Fund." Financed student loans pledged to the
trust estate will be held by the Trustee or its agent or bailee and accounted
for as a part of the Acquisition Fund.
Moneys on deposit in the Acquisition Fund 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 all or any portion of the moneys
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 there are not sufficient moneys on deposit
in the Revenue Fund to make payments of principal and interest due on the Notes,
then the amount of any such deficiency will be transferred from the Acquisition
Fund.
While UFS-1 will be the beneficial owner of the financed student loans
and the Registered Owners will have a security interest therein, the Trustee
will be the legal owner thereof and will have a security interest in the
financed student loans for and on behalf of the Registered Owners. The notes
representing the financed student loans will be held in the name of the Trustee
for the account of UFS-1, for the benefit of the Registered Owners.
Revenue Fund
The Trustee will deposit into the Revenue Fund all Revenues derived from
financed student loans, and all other Revenue derived from moneys or assets on
deposit in the Acquisition Fund, the Reserve Fund, all Reciprocal Payments and
any other amounts as directed by UFS-1.
We may transfer moneys in the Revenue Fund to the Operating Fund,
subject to the limitation described under "Operating Fund" below.
On each Note Payment Date and Derivative Payment Date, money in the
Revenue Fund will be used and transferred to other funds or persons in the
following order of precedence:
1. on a parity basis, to pay interest due on any Class A Notes on
such Note Payment Date and any Company Derivative Payment secured on a
parity with the Class A Notes due on such Derivative Payment Date;
2. on a parity basis, to pay the principal of or premium, if any,
on any Class A Notes due on such Note Payment Date (if such Note Payment
Date is a Stated maturity or mandatory sinking fund redemption date with
respect to such Class A Notes);
3. on a parity basis, to pay interest due on any Class B Notes on
such Note Payment Date and any Company Derivative Payment secured on a
parity with the Class B Notes due on such Derivative Payment Date;
4. on a parity basis, to pay the principal of or premium, if any,
on any Class B Notes due on such Note Payment Date (if such Note Payment
Date is a Stated maturity or mandatory sinking fund redemption date with
respect to such Class B Notes);
5. on a parity basis, to pay interest on Class C Notes on such
Note Payment Date and to make any Company Derivative Payment secured on
a parity with such Class C Notes due on such Derivative Payment Date;
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6. on a parity basis, to pay the principal of or premium, if any,
on any Class C Notes due on such Note Payment Date (if such Note Payment
Date is a Stated maturity or mandatory sinking fund redemption date with
respect to such Class C Notes);
7. to the Reserve Fund the amount, if any, described under
"Reserve Fund" below;
8. at the option of UFS-1, to the Acquisition Fund; and
9. at the option of UFS-1, to UFS-1 to the extent permitted
under "Transfers to UFS-1" 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. The
Trustee also will deposit into the Reserve Fund amounts as described above in
"Revenue Fund" until the amount in the Reserve Fund equals the level that will
be described in a Supplemental Indenture. On each Note Payment Date, to the
extent there are insufficient moneys in the Revenue Fund to make payment of the
principal and interest then due on the Notes, then the amount of such deficiency
shall be paid directly from the Reserve Fund after any transfers from the
Acquisition Fund.
If the Reserve Fund is used for the purposes described above, the
Trustee will restore the Reserve Fund to the Reserve Fund requirement specified
in a Prospectus Supplement by transfers from the Revenue Fund on the next Note
Payment Date. If the full amount required to restore the Reserve Fund to the
Reserve Fund requirement is not available in the Revenue Fund on the next
succeeding Note Payment Date, the Trustee shall continue to transfer funds from
the Revenue Fund as they become available until the deficiency in the Reserve
Fund has been eliminated.
On any day that the amount in the Reserve Fund exceeds the Reserve Fund
requirement for any reason, the Trustee, at the direction of UFS-1 will transfer
the excess to the Acquisition Fund.
Operating Fund
The Trustee will deposit to the Operating Fund or transfer to UFS-1's
depository bank if not the Trustee, the amount, if any, specified in each
Supplemental Indenture. The Operating Fund is a special fund created with a
depository bank of UFS-1 and shall be used to pay Program Expenses of UFS-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 UFS-1, but the amount so transferred in any one fiscal
year may not exceed the amount budgeted by UFS-1 for such fiscal year, and shall
not exceed the amount designated in the cash flows provided to each Rating
Agency. UFS-1 will provide the Trustee with an Company Order from time to time
as to the amount to be transferred.
Transfers to UFS-1
Transfers from the Revenue Fund may be made to UFS-1 if there is on
deposit in the Reserve Fund an amount equal to at least the Reserve Fund
requirement. Additionally, transfers may be made to UFS-1 only if immediately
after taking into account any such transfer, the aggregate market value of the
assets in the trust estate will be equal to such percentage of the unpaid
principal amount of the Notes outstanding, as are acceptable to each Rating
Agency then rating the Notes, as evidenced by a confirmation of their ratings.
Investment of Funds Held by Trustee
Amounts credited to any Fund will be invested by the Trustee upon our
order in investment securities described in the Indenture. In the absence of any
such direction and to the extent practicable, the Trustee will invest amounts
held under the Indenture in direct obligations of, or in obligations fully
guaranteed by, the United States.
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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.
Purchase of Notes
Any amounts held under the Indenture which are available to redeem Notes
may instead be used to purchase Notes outstanding under the Indenture at the
same times and subject to the same conditions (except as to price) as apply to
the redemption of Notes, except that such purchases made with amounts held under
the Indenture shall be made only if the purchase price shall be less than the
required redemption price.
BOOK-ENTRY REGISTRATION
DTC, located in New York, New York, is to act as Securities Depository
for the book entry Notes of any Series. Unless otherwise specified with respect
to a Series, the Notes of each Series are to be issued as fully registered
securities registered in the name of Cede & Co. One fully registered bond
certificate is to be issued for each Class of the Notes or any Series, as set
forth in the cover page hereof, each in the aggregate principal amount of such
Class, and is to be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act. DTC holds securities that its participants ("Participants") deposit with
DTC. DTC also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges in deposited securities, through
electronic computerized book-entry changes in Participants' accounts, thereby
eliminating the need for physical movement of securities certificates. Direct
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. DTC is owned by a number
of its direct Participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others such as
securities brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a Direct Participant, either directly or
indirectly ("Indirect Participants"). The rules applicable to DTC and its
Participants are on file with the Securities and Exchange Commission.
Purchases of the Notes under the DTC system must be made by or through
Direct Participants, which are to receive a credit for the Notes on DTC's
records. The ownership interest of each actual purchaser of each Series of Notes
("Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners shall not receive written confirmation
from DTC of their purchase, but Beneficial Owners are expected to receive
written confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the Direct or Indirect Participant through
which the Beneficial Owner entered into the transaction. Transfers of ownership
interests in the Notes are to be accomplished by entries made on the books of
Participants acting on behalf of Beneficial Owners. Beneficial Owners shall not
receive certificates representing their ownership interests in the Notes, except
in the event that use of the book-entry system for the Series of any Notes is
discontinued.
To facilitate subsequent transfers, all Notes deposited by Participants
with DTC are registered in the name of DTC's partnership nominee, Cede & Co. The
deposit of such Notes with DTC and their registration in the name of Cede & Co.
effect no change in beneficial ownership. DTC has no knowledge of the actual
Beneficial Owners of Notes; DTC's records reflect only the identity of the
Direct Participants to whose accounts such Notes are credited, which may or may
not be the Beneficial Owners. The Participants remain responsible for keeping
account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners are governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
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Redemption notices shall be sent to Cede & Co. If less than all of a
Class of the Notes of any Series are being redeemed, DTC's practice is to
determine by lot the amount of the interest of each Direct Participant in such
Class to be redeemed.
Neither DTC nor Cede & Co. will consent or vote with respect to the
Notes of any Series. Under its usual procedures, DTC mails an omnibus proxy to
UFS-1 or Trustee, as appropriate, as soon as possible after the record date. The
omnibus proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Notes are credited on the record date.
Principal and interest payments on the Notes are to be made to DTC.
DTC's practice is to credit Direct Participant's accounts on the due date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on the due date. Payments by
Participants to Beneficial Owners are governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and shall be the
responsibility of such Participant and not of DTC, the Trustee or UFS-1, subject
to any statutory or regulatory requirements as may be in effect from time to
time. Payment of principal and interest to DTC is the responsibility of UFS-1 or
the Trustee, disbursement of such payments to Direct Participants shall be the
responsibility of DTC, and disbursement of such payments to the Beneficial
Owners shall be the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as Securities Depository with
respect to the Notes of any Series at any time by giving reasonable notice to
UFS-1 or the Trustee. Under such circumstances, in the event that a successor
securities depository is not obtained, note certificates are required to be
printed and delivered.
Cedelbank, societe anonyme ("CEDEL") is incorporated under the laws of
Luxembourg as a professional depository. CEDEL holds securities for its
participating organizations ("CEDEL Participants") and facilitates the clearance
and settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. CEDEL interfaces with domestic
markets in several countries. As a professional depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to CEDEL is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a CEDEL Participant, either directly
or indirectly.
The Euroclear System ("Euroclear") was created in 1968 to hold
securities for participants of Euroclear ("Euroclear Participants") and to clear
and settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may be settled in any of 27
currencies, including United States dollars. Euroclear includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator", under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks, 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.
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The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear, withdrawals of securities
and cash from the Euroclear, and receipts of payments with respect to securities
in Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons holding
through Euroclear Participants.
Distributions with respect to Notes held through CEDEL or Euroclear will
be credited to the cash accounts of CEDEL Participants or Euroclear Participants
in accordance with the relevant system's rules and procedures, to the extent
received by its Depositary (as defined below). Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Noteholder under the Indenture on behalf
of a CEDEL Participant or Euroclear Participant only in accordance with the
relevant rules and procedures and subject to the relevant Depositary's ability
to effect such actions on its behalf through DTC.
Noteholders may hold their Notes in the United States through DTC or in
Europe through CEDEL 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 DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A. ("Citibank") will act as depositary
for CEDEL and Morgan Guaranty Trust Company of New York ("Morgan") will act as
depositary for Euroclear (in such capacities, individually, the "Depositary"
and, collectively, the "Depositaries").
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Because of time-zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
or Euroclear Participant to a Participant will be received with value on the DTC
settlement date but will be available in the relevant CEDEL or Euroclear cash
account only as of the business day following settlement in DTC. For information
with respect to tax documentation procedures for the Notes, see "Certain Federal
Income Tax Consequences--Trusts for Which a Partnership Election Is Made--Tax
Consequences to Holders of the Notes--Foreign Holders" in the Prospectus.
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Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC Rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions to the Depositaries.
DTC has advised the Administrator that it will take any action permitted
to be taken by a Noteholder under the Indenture, only at the direction of one or
more Participants to whose accounts with DTC the Notes are credited.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of interests in the Notes among
participants of DTC, CEDEL and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
DTC management is aware that some computer applications, systems, and
the like for processing dates ("Systems") that are dependent upon calendar
dates, including dates before, on, and after January 1, 2000, may encounter
"Year 2000 problems." DTC has informed its Participants and other members of the
financial community (the "Industry") that it has developed and is implementing a
program so that its Systems, as the same relate to the timely payment of
distributions (including principal and income payments) to securityholders,
book-entry deliveries, and settlement of trades within DTC ("DTC Services"),
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally, DTC's plan
includes a testing phase, which is expected to be completed within appropriate
time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as third party vendors on whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information or the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed the Industry that it is
contacting (and will continue to contact) third party vendors from whom DTC
acquires services to:
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, DTC is in the
process of developing such contingency plans as it deems appropriate.
According to DTC, the information set forth in the preceding two
paragraphs about DTC has been provided to the Industry by DTC for informational
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
None of the trust, the seller, the servicer, the administrator, the
eligible lender trustee, the indenture trustee or the underwriters will have any
responsibility or obligation to any participants, Cedel participants or
Euroclear participants or the persons for whom they act as nominees with respect
to
o the accuracy of any records maintained by DTC, Cedel or Euroclear or
any participant,
o the payment by DTC, Cedel or Euroclear or any participant of any
amount due to any beneficial owner in respect of the principal amount
or interest on the senior notes,
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o the delivery by any participant, Cedel participant or Euroclear
participant of any notice to any beneficial owner which is required or
permitted under the terms of the indenture or the trust agreement to
be given to senior noteholders or o any other action taken by DTC as
the senior noteholder.
UFS-1 may decide to discontinue use of the system of book entry
transfers through DTC or a successor securities depository. In that event, note
certificates are to be printed and delivered.
ADDITIONAL NOTES
UFS-1 may, upon complying with the provisions of the Indenture,
authenticate and deliver from time to time additional Notes secured by the trust
estate on a parity with or subordinate to either the Class A Notes, the Class B
Notes or the Class C Notes, if any. In addition UFS-1 may enter into any
Derivative Product it deems necessary or desirable with respect to any or all of
the Notes. These actions may be taken by UFS-1 without the approval of the
holders of any outstanding Notes.
We will not issue additional Notes unless the following conditions have
been satisfied:
o UFS-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 pursuant to the provisions of the Indenture to
establish any additional Funds under the Indenture which it deems necessary or
convenient in connection with the issuance and delivery of any additional Notes.
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE
We will issue the Notes pursuant to an Indenture of Trust between us and
the Trustee. Each series of Notes will be issued pursuant to a Supplemental
Indenture of Trust applicable to such series as indicated in a Prospectus
Supplement. The following is a summary of certain provisions of the Indenture.
This summary does not purport to be comprehensive and reference should be made
to the Indenture for a full and complete statement of the provisions thereof.
Parity and Priority of Lien
The provisions, covenants and agreements set forth in the Indenture are
generally for the equal benefit, protection and security of the Registered
Owners of all of the Notes. All of the Notes, regardless of the time of their
issuance or maturity, are of equal rank without preference, priority or
distinction. However, the Supplemental Indenture for a series of the Notes will
give the Class A Notes priority over the Class B Notes with respect to payments
of principal and interest, and the Class B Notes priority over the Class C Notes
with respect to payments of principal and interest.
Student Loans Held in Trust Estate
Financed student loans may be sold, transferred or otherwise disposed of
by the Trustee free from the lien of the Indenture at any time if the Trustee is
provided with the following:
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1. a Company Order stating the sale price and directing that financed
student loans be sold, transferred or otherwise disposed of and
delivered.
2. a certificate signed by an authorized representative of UFS-1 to the
effect that:
o the disposition price is equal to or in excess of the
principal amount of the financed student loans (plus accrued
interest) or equal to or in excess of the purchase price
paid by for such financed student loans (less principal
payments received with respect to such financed student
loan); or
o the disposition price is lower than the principal amount of
the financed student loans (plus accrued interest), and
o UFS-1 reasonably believes that the Revenues expected to be
received (after giving effect to such disposition) would be
at least equal to the Revenues expected to be received
assuming no such sale, transfer or other disposition
occurred, or
o UFS-1 remains able to pay debt service on the Notes and make
payment on any other Obligations on a timely basis (after
giving effect to such sale, transfer or other disposition)
whereas it would not have been able to do so on a timely
basis if it had not sold, transferred or disposed of the
financed student loans at such discounted amount, or
o the aggregate market value of the trust estate (after giving
effect to such sale, transfer or other disposition) will be
at least equal to 100% of the aggregate principal amount of
the Notes and other Obligations plus accrued interest, or
o the amount for which the financed student loans are being
sold, assigned, transferred or disposed of is equal to the
purchase price paid by UFS-1 for such financed student loans
(less principal amounts received with respect to such
financed student loans).
Other Obligations of UFS-1
UFS-1 will not commingle the Funds established by the Indenture with
funds, proceeds or investment of funds relating to other issues or series of
notes issued by it, except to the extent such commingling is required by the
Trustee for ease in administration of its duties and responsibilities. Should
the Trustee require such permitted commingling, it 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 moneys, financed student loans and other assets
pledged under the Indenture are and will be owned by UFS-1 free and clear of any
pledge, lien, charge or encumbrance thereon prior to, of equal rank with or
subordinate to the respective pledges created by the Indenture, except as
otherwise expressly provided therein. Except as otherwise provided in the
Indenture, UFS-1 will not create or voluntarily permit to be created any debt,
lien, or charge on the financed student loans which would be on a parity with,
subordinate to, or prior to the lien of the Indenture; shall not do or omit to
do or suffer to be done or omitted to be done any matter or things whatsoever
whereby the lien of the Indenture or the priority of such lien for the
Obligations thereby secured might or could be lost or impaired; and will pay or
cause to be paid or will make adequate provisions for the satisfaction and
discharge of all lawful claims and demands which if unpaid might by law be given
precedence to or any equality with the Indenture as a lien or charge upon the
financed student loans.
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Derivative Products; Reciprocal Payments; Derivative Payments
UFS-1 is authorized under the Indenture to enter into a Derivative
Product, defined to mean a written contract under which UFS-1 is obligated to
pay to a counterparty (a "Reciprocal Payor") on specified payments dates certain
amounts in exchange for the Reciprocal Payor's obligation to make payments to
UFS-1 on specified payment dates in specified amounts. UFS-1's obligation to
make payments in connection with a Derivative Product may be secured by a pledge
of and lien on the trust estate. No Derivative Product may be entered into
unless the Trustee has received a confirmation from each Rating Agency that the
Derivative Product will not adversely affect the rating on any of the Notes.
<PAGE>
If any payment to a Reciprocal Payor under a Derivative Product would
result in a deficiency in the amounts required to make payments to the
Registered Owners of the Notes on a Note Payment Date, then the Trustee will
delay the making of such payment to the Reciprocal Payor until the first date on
which no deficiency would result from such payment or until such next Note
Payment Date, whichever is earlier.
Representations and Warranties of UFS-1
UFS-1 represents and warrants in the Indenture that:
o it is duly authorized under the laws of Nevada to create and
issue the Notes and to execute and deliver the Indenture and any
Derivative Product and to make the pledge to the payment of Notes
and any Company Derivative Payments thereunder,
o all necessary action on the part of UFS-1for the creation and
issuance of the Notes and the execution and delivery of the
Indenture and any Derivative Product has been duly and
effectively taken,
o the Notes in the hands of the Registered Owners thereof and the
Company Derivative Payments are and will be valid and enforceable
special limited obligations of UFS-1 secured by and payable
solely from the trust estate.
Further Covenants of UFS-1
UFS-1 will file financing statements and continuation statements in any
jurisdiction necessary to perfect and maintain the security interest granted by
UFS-1 under the Indenture.
Upon written request of the Trustee, UFS-1 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 financed
student loans, and will furnish the Trustee such other information as it may
reasonably request. The Trustee shall be under no duty to make any such
examination unless requested in writing to do so by the Registered Owners of 51%
in collective aggregate principal amount of the Notes, 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
thereby.
UFS-1 will cause an annual audit to be made by an independent auditing
firm of national reputation and file one copy thereof with the Trustee and each
Rating Agency within 150 days of the close of each fiscal year. The Trustee is
not obligated to review or otherwise analyze those audits.
On or before the fifteenth day of each month, UFS-1 will provide to the
Trustee for the Trustee to forward to each Note holder, a statement setting
forth information with respect to the Notes and financed student loans as of the
ending of the preceding month, including the following:
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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 financed 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.
A copy of the reports described above may be obtained by any Note holder
by a written request to the Trustee.
Enforcement of Servicing Agreement
UFS-1 will diligently enforce all terms, covenants and conditions of all
Servicing Agreements, including the prompt payment of all amounts due UFS-1
thereunder. UFS-1 will not permit the release of the obligations of any servicer
under any Servicing Agreement except in conjunction with a permitted amendments
or modifications and will not waive any default by the servicer under the
Servicing Agreement without the written consent of the Trustee. UFS-1 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.
Additional Covenants with
Respect to the Higher Education Act
UFS-1 will cause the Trustee to be, 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.
UFS-1, or its designated agent, is responsible for each of the following
actions with respect to the Higher Education Act:
o Dealing with the Secretary with respect to the rights, benefits
and obligations under the certificates of insurance and the
contract of insurance, and UFS-1 or its designated agent, is
responsible for dealing with the Guarantee Agencies with respect
to the rights, benefits and obligations under the Guarantee
Agreements with respect to the financed student loans;
o Causing to be diligently enforced, and causing to be taken all
reasonable steps, actions and proceedings necessary or
appropriate for the enforcement of all terms, covenants and
conditions of all financed student loans and agreements in
connection therewith, including the prompt payment of all
principal and interest payments and all other amounts due
thereunder;
o Causing the financed 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 financed student loans;
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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 thereunder, with
respect to the financed 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.
Continued Existence; Successor to UFS-1
UFS-1 will do or cause to be done all things necessary to preserve and
keep in full force and effect its existence, rights and franchises as a Nevada
corporation. UFS-1 will not sell, transfer or otherwise dispose of all or
substantially all of its assets, consolidate with or merge into another
corporation or entity, or permit one or more other corporations or entities to
consolidate with or merge into it. Those restrictions do not apply to a transfer
of financed student loans is made in connection with a discharge of the
Indenture or to a transaction if the transferee or the surviving or resulting
corporation or entity, if other than UFS-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 UFS-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 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 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 when due;
o default in the performance or observance of any other of the
covenants, agreements, or conditions on the part of UFS-1 to be
kept, observed, and performed contained in the Indenture or in
the Notes, and continuation of such default for a period of 90
days after written notice thereof by the Trustee to UFS-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 such portion of the trust estate as shall be
in the custody of others, and all property comprising the trust estate, and
have, hold, use, operate, manage and control the same. The Trustee may also, in
the name of UFS-1 or otherwise, conduct the business of UFS-1 and collect and
receive all charges, income and Revenues of the trust estate, and after
deducting therefrom all expenses incurred thereunder 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:
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(a) if the principal of none of the Obligations 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 Company Derivative Payments
secured on a parity with the Class A Notes then due, in order of
the maturity of the installments thereof, with interest on the
overdue installments thereof at the same rates, respectively, as
were borne by the Class A Notes on which such interest shall be
in default and any such Company Derivative Payments as provided
in the ISDA Master Agreement then due, such payments to be made
ratably to the parties entitled thereto without discrimination or
preference,
o second, to the payment of the interest in default on the Class B
Notes and to the payment of all Company Derivative Payments
secured on a parity with the Class B Notes then due, in order of
the maturity of the installments of such interest and any such
Company Derivative Payments, with interest on the overdue
installments thereof at the same rates, respectively, as were
borne by the Class B Notes on which such interest shall be in
default and any such Company Derivative payments then due, such
payments to be made ratably to the parties entitled thereto
without discrimination or preference and,
o third, to the payment of the interest in default on the Class C
Notes and to the payment of all Company Derivative payments
secured on a parity with such Class C Notes, if any, then due, in
order of the maturity of the installments of such interest and
any such Company Derivative Payments, with interest on the
overdue installments thereof at the same rates, respectively, as
were borne by the Class C Notes on which such interest shall be
in default and any such Company Derivative payments then due,
such payments to be made ratably to the parties entitled thereto
without discrimination or preference, except as may be provided
in a Supplemental Indenture; and
(b) if the principal of any of the Obligations shall have become due by
declaration of acceleration or otherwise,
o first, to the payment of the interest in default on the Class A
Notes and all Company Derivative payments secured on a parity
with the Class A Notes then due, in the order of the maturity of
the installments thereof, with interest on overdue installments
thereof at the same rates, respectively, as were borne by the
Class A Notes on which such interest shall be in default and such
Company Derivative Payments as provided in the ISDA Master
Agreement then due, as the case may be,
o second, to the payment of the principal of all Class A Notes then
due and any amount owed to a Reciprocal Payor secured on a parity
with Senior Obligations under the ISDA master Agreement, such
payments to be made ratably to the parties entitled thereto
without discrimination or preference,
o third, to the payment of the interest in default on the Class B
Notes and all Company Derivative Payments secured on a parity
with the Class B Notes then due, in the order of the maturity of
the installments thereof with interest on overdue installments
thereof at the same rates, respectively, as were borne by the
Class B Notes on which such interest shall be in default and such
Company Derivative payments as provided in the ISDA Master
Agreement then due, as the case may be,
o fourth, to the payment of the principal of all Notes then due and
any amount owed to a Reciprocal Payor secured on a parity with
Subordinate Obligations under the ISDA Master Agreement, such
payments to be made ratably to the parties entitled thereto
without discrimination or preference,
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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 installments thereof, with interest on overdue installments
thereof at the same rates, respectively, as were borne by the
Class C Notes on which such interest shall be in default and such
Company Derivative Payments as provided in the ISDA Master
Agreement then due, as the case may be, and
o sixth, to the payment of the principal of all Class C Notes then
due and any amount owed to a Reciprocal Payor secured on a parity
with Junior-Subordinate Obligations under the ISDA Master
Agreement, such payments to be made ratably to the parties
entitled thereto without discrimination or preference, except as
may be provided in a Supplemental Indenture.
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, at
any such place or places, and at such time or times and upon such notice and
terms as may be required by law. The Trustee is irrevocably appointed the true
and lawful attorney-in-fact of UFS-1, in its name and stead, to make and execute
all bills of sale, instruments of assignment and transfer and such other
documents of transfer as may be necessary or advisable in connection with a sale
of all or part of the trust estate, but UFS-1, if so requested by the Trustee,
shall ratify and confirm any sale or sales by executing and delivering to the
Trustee or to such purchaser or purchasers all such instruments as may be
necessary, or in the judgment of the Trustee, proper for the purpose which may
be designated in such request. In addition, the Trustee may proceed to protect
and enforce the rights of the Trustee, the Registered Owners of Obligations in
such manner as counsel for the Trustee may advise, whether for the specific
performance of any covenant, condition, agreement or undertaking contained in
the Indenture, or in aid of the execution of any power therein granted, or for
the enforcement of such other appropriate legal or equitable remedies as may in
the opinion of such counsel, be more effectual to protect and enforce the rights
aforesaid. The Trustee shall take any such action or actions if requested to do
so in writing by the Registered Owners of at least 51% of the collective
aggregate principal amount of the Highest Priority Obligations at the time
outstanding.
Appointment of Receiver. In case an event of default occurs, and if all
of the outstanding Obligations shall have been declared due and payable and in
case any judicial proceedings are commenced to enforce any right of the Trustee
or of the Registered Owners under the Indenture or otherwise, then as a matter
of right, the Trustee shall be entitled to the appointment of a receiver of the
trust estate and of the earnings, income or Revenue, rents, issues and profits
thereof with such powers as the court making such appointments may confer.
Accelerated Maturity. If an event of default shall have occurred and be
continuing, the Trustee may declare, or upon the written direction by the
Registered Owners of at least 51% of the collective aggregate principal amount
of the Highest Priority Obligations then outstanding shall declare, the
principal of all Obligations issued under the Indenture, and then outstanding,
and the interest thereon, if not previously due, immediately due and payable. A
declaration of acceleration upon the occurrence of a covenant default requires
the consent of 100% of the Registered Owners of the Highest Priority Obligations
then outstanding.
Direction of Trustee. Upon the happening of any event of default, the
Registered Owners of at least 51% of the collective aggregate principal amount
of the Highest Priority Obligations then outstanding shall have the right by an
instrument or instruments in writing delivered to the Trustee to direct and
control the Trustee as to the method of taking any and all proceedings for any
sale of any or all of the trust estate, or for the appointment of a receiver, if
permitted by law, and may at any time cause any proceedings authorized by the
terms of the Indenture to be so taken or to be discontinued or delayed. 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, but the Trustee shall be entitled to assume that the
action requested by the Registered Owners of 51% of the collective aggregate
principal amount of the Highest Priority Obligations then outstanding will not
be prejudicial to any non-assenting Registered Owners unless the Registered
Owners of more than 50% of the collective aggregate principal amount of the
non-assenting Registered Owners of such Highest Priority Obligations in writing,
show the Trustee how they will be prejudiced. The Registered Owners of a
majority of the collective aggregate principal amount of the Highest Priority
Obligations then outstanding, together with the Registered Owners of a majority
of the collective aggregate principal amount of all other Obligations then
outstanding, shall have the right, at any time, by an instrument or instruments
in writing executed and delivered to the Trustee, to direct the method and place
of conducting all proceedings to be taken in connection with the enforcement of
the terms and conditions of the Indenture, or for the appointment of a receiver
or any other proceedings thereunder, provided that such direction shall not be
otherwise than in accordance with the provisions of law and of the Indenture.
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Right to Enforce in Trustee. No Registered Owner of any Obligation shall
have any right as such Registered Owner to institute any suit, action, or
proceedings for the enforcement of the provisions of the Indenture or for the
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 such Registered Owner shall have previously given to the
Trustee written notice of a default under the Indenture, and of the continuance
thereof, and also unless the Registered Owners of the requisite principal amount
of the Obligations then outstanding shall have made written request upon the
Trustee and the Trustee shall have been afforded reasonable opportunity to
institute such action, suit or proceeding in its own name, and unless the
Trustee shall have been offered reasonable indemnity and security satisfactory
to it against the costs, expenses, and liabilities to be incurred therein or
thereby and the Trustee for 30 days after receipt of such notification, request,
or offer of indemnity, shall have failed to institute any such action, suit or
proceeding. No Registered Owner of the Obligations shall have the right in any
manner whatever by his or their action to affect, disturb, or prejudice the lien
of the Indenture or to enforce any right thereunder except in the manner
provided in the Indenture and for the equal benefit of the Registered Owners of
not less than 60% of the collective aggregate principal amount of the
Obligations then outstanding.
Waivers of Events of Default. The Trustee may in its discretion waive
any event of default under the Indenture and its consequences and rescind any
declaration of acceleration of Obligations, and will do so upon the written
request of the Registered Owners of at least a majority of the collective
aggregate principal amount of the Highest Priority Obligations then outstanding.
No waiver may be made of any event of default in the payment of the principal of
or premium on any Outstanding Obligations at the date of maturity or redemption
thereof, or any default in the payment when due of the interest on any such
Obligations, unless prior to such waiver or rescission, all arrears of interest
or all arrears of payments of principal and premium, if any, and all expenses of
the Trustee, in connection with such default shall have been paid or provided
for or any default in the payment of amounts set forth in the Indenture. No such
waiver or rescission shall extend to or affect any subsequent or other default,
or impair any rights or remedies consequent thereon.
The Trustee
Acceptance of Trust. The Trustee has accepted the trusts imposed upon it
by the Indenture, and will perform said trusts, but only upon and subject to the
following terms and conditions:
o The Trustee undertakes to perform such duties and only such
duties as are specifically set forth in the Indenture, and no
implied covenants or obligations shall be read into the Indenture
against the Trustee; and
o In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates
or opinions furnished to the Trustee and conforming to the
requirements of the Indenture; but in the case of any such
certificates or opinions which by any provisions of the Indenture
are specifically required to be furnished to the Trustee, the
Trustee shall be under a duty to examine the same to determine
whether or not they conform as to form with the requirements of
the Indenture and whether or not they contain the statements
required under the Indenture.
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o In case an event of default has occurred and is continuing, the
Trustee, in exercising the rights and powers vested in it by the
Indenture, shall use the same degree of care and skill in their
exercise as a prudent person would exercise or use under the
circumstances in the conduct of his or her own affairs.
o Before taking any action under the Indenture requested by
Registered Owners, the Trustee may require that it be furnished
an indemnity bond or other indemnity and security satisfactory to
it by the Registered Owners, as applicable, for the reimbursement
of all expenses to which it may be put and to protect it against
all liability, except liability which results from the negligence
or willful misconduct of the Trustee and negligence with respect
to moneys deposited and applied pursuant to the Indenture, by
reason of any action so taken by the Trustee.
Trustee May Act Through Agents. The Trustee may execute any of the
trusts or powers under the Indenture and perform any duty thereunder, either
itself or by or through its attorneys, agents, or employees, and it shall not be
answerable or accountable for any default, neglect or misconduct of any such
attorneys, agents or employees, if reasonable care has been exercised in the
appointment, supervision, and monitoring of the work performed. All reasonable
costs incurred by the Trustee and all reasonable compensation to all such
persons as may reasonably be employed in connection with the trusts will be paid
by UFS-1.
Indemnification of Trustee. Other than with respect to its duties to pay
on the Obligations when due, and its duty to pursue the remedy of acceleration
as provided in the Indenture, for each of which no additional security or
indemnity may be required, the Trustee will be under no obligation or duty to
perform any act at the request of Registered Owners or to institute or defend
any suit in respect thereof unless properly indemnified and provided with
security to its satisfaction as provided in the Indenture. The Trustee is not
required to take notice, or be deemed to have knowledge, of any default or event
of default of UFS-1 under the Indenture and may conclusively assume that there
has been no such default or event of default unless and until it shall have been
specifically notified in writing of such default or event of default by the
Registered Owners of the required percentages in principal amount of the
Obligations then outstanding hereinabove specified or an authorized
representative of UFS-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 to be done by it as Trustee, without
assurance of reimbursement or indemnity, and in such case the Trustee shall be
reimbursed or indemnified by the Registered Owners requesting such action, if
any, or UFS-1 in all other cases, for all fees, costs and expenses, liabilities,
outlays and counsel fees and other reasonable disbursements properly incurred in
connection therewith, unless such costs and expenses, liabilities, outlays and
attorneys' fees and other reasonable disbursements properly incurred in
connection therewith are adjudicated to have resulted from the negligence or
willful misconduct of the Trustee.
If UFS-1 or the Registered Owners, as appropriate, shall fail to make
such reimbursement or indemnification, the Trustee may reimburse itself from any
money in its possession under the provisions of the Indenture, subject only to
the prior lien of the Notes for the payment of the principal and interest
thereon from the Revenue Fund. None of the provisions contained in the Indenture
or any other Agreement to which it is a party shall require the Trustee to act
or to expend or risk its own funds or otherwise incur individual financial
liability in the performance of any of its duties or in the exercise of any of
its rights or powers if the Registered Owners shall not have offered security
and indemnity acceptable to it or if it shall have reasonable grounds for
believing that prompt repayment of such funds or adequate indemnity against such
risk or liability is not reasonably assured to it.
UFS-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 n any offering document distributed in connection with the issuance of
the Notes or caused by any omission or alleged omission from such offering
document of any material fact required to be stated therein or necessary in
order to make the statements made therein in the light of the circumstances
under which they were made, not misleading.
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Compensation of Trustee. UFS-1 will pay to the Trustee from time to time
reasonable compensation for all services rendered by it under the Indenture, and
also all of its reasonable expenses, charges, and other disbursements and those
of its attorneys, agents, and employees incurred in and about the administration
and execution of the trusts thereby created. The Trustee may not change the
amount of its annual compensation without giving UFS-1 at least 90 days' written
notice prior to the beginning of a fiscal year.
Resignation of Trustee. The Trustee and any successor to the Trustee may
resign and be discharged from the trust created by the Indenture by giving to
UFS-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.
Removal of Trustee. The Trustee or any successor Trustee may be removed
o at any time by the Registered Owners of a majority of the
collective aggregate principal amount of the Highest Priority
Obligations then outstanding,
o by UFS-1 for cause or upon the sale or other disposition of the
Trustee or its trust functions or
o by UFS-1 without cause so long as no event of default exists or
has existed within the last 30 days,
upon payment to the Trustee so removed of all money then due to it under the
Indenture and appointment of a successor thereto by UFS-1 and acceptance thereof
by said successor.
In the event a Trustee is removed, removal shall not become effective until
o in the case of removal by the Registered Owners, the Registered
Owners of Notes by instrument or concurrent instruments in
writing have appointed a successor Trustee or otherwise UFS-1
shall have appointed a successor, 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
or of any successor Trustee or of its officers shall be taken over by any public
officer or officers, a successor Trustee may be appointed by UFS-1. In the case
of any such appointment by UFS-1 of a successor to the Trustee, UFS-1 will cause
notice thereof to be mailed to the Registered Owners at the address of each
Registered Owner appearing on the note registration books.
Every successor Trustee appointed by the Registered Owners, by a court of
competent jurisdiction, or by UFS-1 will be
o 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 authorized under the law to exercise corporate trust powers, be
subject to supervision or examination by a federal or state
authority, and
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o an eligible lender under the Higher Education Act so long as such
designation is necessary to maintain guarantees and federal
benefits under the Act with respect to the financed student loans
originated under the Act.
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.
Supplemental Indentures
Supplemental Indentures Not Requiring Consent of Registered Owners.
UFS-1 and the Trustee may, without the consent of or notice to any of the
Registered Owners of any Obligations enter into any indenture or indentures
supplemental to the Indenture for any one or more of the following purposes:
(a) to cure any ambiguity or formal defect or omission in the Indenture;
(b) to grant to or confer upon the Trustee for the benefit of the
Registered Owners any additional benefits, rights, remedies, powers or
authorities that may lawfully be granted to or conferred upon the Registered
Owners or the Trustee;
(c) to subject to the Indenture additional revenues, properties or
collateral;
(d) to modify, amend or supplement the Indenture or any indenture
supplemental thereto in such manner as to permit the qualification thereof under
the Trust Indenture Act of 1939 or any similar federal statute hereafter in
effect or to permit the qualification of the Notes for sale under the securities
laws of the United States of America or of any of the states of the United
States of America, and, if they so determine, to add to the Indenture or any
indenture supplemental thereto such other terms, conditions and provisions as
may be permitted by said Trust Indenture Act of 1939 or similar federal statute;
(e) to evidence the appointment of a separate or co-trustee or a
co-registrar or transfer agent or the succession of a new trustee hereunder, or
any additional or substitute Guaranty Agency or servicer;
(f) to add provisions to or to amend provisions of the Indenture as may, in
Note Counsel's opinion, be necessary or desirable to assure implementation of
UFS-1's student loan program in conformance with the Act if along with such
Supplemental Indenture there is filed a Note Counsel's opinion to the effect
that the addition or amendment of such provisions will in no way impair the
existing security of the Registered Owners of any outstanding Obligations;
(g) to make any change as shall be necessary in order to obtain and
maintain for any of the Notes an investment grade Rating from a nationally
recognized rating service, which changes, in the opinion of the Trustee are not
to the prejudice of the Registered Owner of any of the Obligations;
(h) to make any changes necessary to comply with the Act and the
regulations thereunder or the Code and the regulations promulgated thereunder;
(i) to provide for the issuance of Notes pursuant to the provisions of the
Indenture, including the creation of appropriate Funds and accounts, with
respect to such Notes;
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(j) to make the terms and provisions of the Indenture, including the lien
and security interest granted therein, applicable to a Derivative Product;
(k) to create any additional Funds or accounts under the Indenture deemed
by the Trustee to be necessary or desirable;
(l) to amend the Indenture to allow for any Notes to be supported by a
letter of credit or insurance policy or a liquidity agreement, including
amendment with respect to repayment to such a provider on a parity with any
Notes or Derivative Product and providing rights to such provider under the
Indenture, including with respect to defaults and remedies;
(m) to amend the Indenture to provide for use of a surety bond or other
financial guaranty instrument in lieu of cash and/or Investment securities in
all or any portion of the Reserve Fund, so long as such action shall not
adversely affect the Ratings on any of the Notes;
(n) to make any other change with a confirmation by the Rating Agencies of
their ratings of the Notes; or
(o) to make any other change which, in the judgment of the Trustee is not
to the material prejudice of the Registered Owners of any Obligations.
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 collective aggregate
principal amount of the Obligations then outstanding.
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 Obligations or
the rate of interest thereon, or
o a privilege or priority of any Obligation or Obligations
over any other Obligation or Obligations, 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 or
No modification of the trusts, powers, rights, obligations, duties,
remedies, immunities and privileges of the Trustee may be made in a supplement
indenture without the prior written approval of the Trustee.
If at any time UFS-1 requests the Trustee to enter into a Supplemental
Indenture the Trustee will mail notice of the proposed execution of such
Supplemental Indenture to each Registered Owner of an Obligation. The notice
will describe the nature of the proposed supplemental indenture. If, within 60
days, or such longer period as shall be prescribed by UFS-1, following the
mailing of such notice, the Registered Owners of not less than a majority of the
collective aggregate principal amount of the Obligations outstanding at the time
of the execution of any such supplemental indenture have consented in writing to
and approved the substance of the amendments made by the supplemental indenture,
the Indenture shall be and be deemed to be modified and amended in accordance
therewith.
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Notice of Defaults. Within 90 days after the occurrence of any default
under the provisions of the Indenture with respect to the Obligations, the
Trustee will transmit notice of such default known to the Trustee, unless such
default is cured or waived. Except in the case of a default in the payment of
the principal of or interest with respect to any Obligation, the Trustee may
withhold such notice if and so long as an authorized officer of the Trustee in
good faith determine that the withholding of such notice is in the interest of
the Registered Owners of the Obligations.
Trust Irrevocable
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 UFS-1 pays, or causes to be paid, to the Registered Owners of the
Notes, the principal of and interest on the Notes, at the times and in the
manner stipulated in the Indenture and to each Reciprocal Payor, all Company
Derivative Payments then due, then the pledge of the trust estate will thereupon
terminate and be discharged and satisfied. In such event, the Trustee will
execute and deliver to UFS-1 all such instruments as may be desirable to
evidence such discharge and satisfaction, and the Trustee shall pay over or
deliver all money held by it under the Indenture to the party entitled to
receive the same under the Indenture. If UFS-1 pays or causes to be paid, or
there is otherwise paid, to the Registered Owners of any Outstanding Notes the
principal of and interest on such Notes and to each Reciprocal Payor all
Reciprocal Payments then due, at the times and in the manner stipulated in the
Indenture and in the Derivative Product, such Notes and each Reciprocal Payor
shall cease to be entitled to any lien, benefit, or security under the
Indenture, and all covenants, agreements, and obligations of UFS-1 to the
Registered Owners thereof and each Reciprocal Payor shall thereupon cease,
terminate, and become void and be discharged and satisfied.
Notes or interest installments shall be deemed to have been paid if
money for the payment or redemption thereof has been set aside and is being held
in trust by the Trustee at the stated maturity or earlier redemption date
thereof. Any outstanding Note will be deemed 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 which is
sufficient to pay when due the principal of and interest to become due on such
Note.
Any Company Derivative Payments are deemed to have been paid and the
applicable Derivative Product terminated, when payment of all Company Derivative
Payments due and payable to each Reciprocal Payor under its respective
Derivative Product have been made or duly provided for to the satisfaction of
each Reciprocal Payor and the respective Derivative Product has been terminated.
DESCRIPTION OF CREDIT ENHANCEMENT
General
Credit enhancement may be provided with respect to one or more classes
of the Notes of any series. The amounts and types of credit enhancement
arrangements and the provider thereof, if applicable, with respect to each class
of securities of a given series, if any, will be set forth in the related
Prospectus Supplement. Credit enhancement may be in the form of a letter of
credit, the subordination of one or more classes of Notes, the use of an
insurance policy or surety bonds, the establishment of one or more reserve
funds, interest rate swaps, or any combination of the foregoing. If so provided
in the related Prospectus Supplement, any form of credit enhancement may provide
credit enhancement for more than one series of Notes or more than one class of
Notes to the extent described therein.
The presence of a Reserve Fund and other forms of credit enhancement for
the benefit of any class or series of Notes is intended to enhance the
likelihood of receipt by the Noteholders of such class or series of the full
amount of principal and interest due thereon and to decrease the likelihood that
such Noteholders will experience losses. Unless otherwise specified in the
related Prospectus Supplement with respect to a series, the credit enhancement
will not provide protection against all risks of loss and will not guarantee
payment to such Noteholders of all amounts to which they are entitled under the
related Indenture. If losses or shortfalls occur that exceed the amount covered
by the credit enhancement or that are not covered by the credit enhancement,
Noteholders will bear their allocable share of deficiencies. Moreover, if a form
of credit enhancement covers more than one series of Notes, holders of Notes of
one series will be subject to the risk that such credit enhancement will be
exhausted by the claims of the holders of Notes of one or more other series.
35
<PAGE>
Subordinate Notes
The Notes will be designated Class A Notes, Class B Notes or Class C
Notes as specified in the related Prospectus Supplement. To the extent specified
in the related Prospectus Supplement, the rights of the holders of Class B Notes
to receive distributions on any Note Payment Date will be subordinated to the
corresponding rights of the holders of Class A Notes, and the rights of the
holders of Class C Notes to receive distributions on any Distribution Date will
be subordinated to the corresponding rights of the holders of the Class B Notes.
If so provided in the related Prospectus Supplement, the subordination of a
class may apply only in the event of, or may be limited to, certain types of
losses or shortfalls. The related Prospectus Supplement will set forth
information concerning the amount of subordination provided by a class or
classes of Notes in a series, the circumstances under which such subordination
will be available and the manner in which the amount of subordination will be
made available.
Letter of Credit
If so specified in the Prospectus Supplement with respect to a series,
deficiencies in amounts otherwise payable on such Notes or certain classes
thereof will be covered by one or more letters of credit, issued by a bank or
financial institution specified in such Prospectus Supplement (the "L/C Bank").
Under a letter of credit, the L/C Bank will be obligated to honor draws
thereunder in an aggregate fixed dollar amount, net of unreimbursed payments
thereunder, generally equal to a percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the financed student loans on
the related Cut-off Date or of the initial aggregate principal balance of the
Notes of one or more classes of Notes. If so specified in the related Prospectus
Supplement, the letter of credit may permit draws only in the event of certain
types of losses and shortfalls. The amount available under the letter of credit
will, in all cases, be reduced to the extent of the unreimbursed payments
thereunder and may otherwise be reduced as described in the related Prospectus
Supplement. The obligations of the L/C Bank under the letter of credit for each
Series of Notes will expire at the earlier of the date specified in the related
Prospectus Supplement or the termination of the trust estate.
Note Insurance and Surety Bonds
If so specified in the Prospectus Supplement with respect to a series of
the Notes, deficiencies in amounts otherwise payable on such Notes or certain
classes thereof will be covered by insurance policies and/or surety bonds
provided by one or more insurance companies or sureties. Such instruments may
cover, with respect to one or more classes of Notes of the related series,
timely distributions of interest and/or full distributions of principal on the
basis of a schedule of principal distributions set forth in or determined in the
manner specified in the related Prospectus Supplement.
Reserve Fund
In addition to the Reserve Fund described herein, one or more reserve
funds may be established with respect to a series, in which cash, a letter of
credit, eligible investments, a demand note or a combination thereof, in the
amounts, if any, so specified in the related Prospectus Supplement will be
deposited. The reserve fund for a series may also be funded over time by
depositing therein a specified amount of the distributions received on the
related receivables as specified in the related Prospectus Supplement.
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<PAGE>
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, will be applied by the Trustee for the purposes, in
the manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely payments of
principal of and interest on the Notes, if required as a condition to the rating
of such series by each Rating Agency rating such series or any classes relating
thereto. If so specified in the related Prospectus Supplement, a reserve fund
may be established to provide limited protection, in an amount satisfactory to
each Rating Agency which assigns rating to the Notes, against certain types of
losses not covered by insurance policies or other credit support. Following each
Interest Payment Date, amounts in such reserve fund in excess of any specified
reserve fund requirement may be released from the reserve fund under the
conditions and to the extent specified in the related Prospectus Supplement and
will not be available for further application by the Trustee.
Additional information concerning any reserve fund is to be set forth in
the related Prospectus Supplement, including the initial balance of such reserve
fund, the reserve fund balance to be maintained, the purposes for which funds in
the reserve fund may be applied to make distributions to Noteholders and use of
investment earnings from the reserve fund, if any.
37
<PAGE>
UNION FINANCIAL SERVICES-1, INC.
UFS-1 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. UFS-1 is a wholly-owned subsidiary of Union Financial
Services, Inc., a Nevada corporation ("UFS"), organized on January 26, 1996 for
the purpose of facilitating the financing of student loans and other financial
assets, and to engage in activities in connection therewith. UFS-1 was created
as a separate, limited purpose entity pursuant to Articles of Incorporation that
impose limitations on the nature of UFS-1's business and a restriction on
UFS-1's ability to commence a voluntary case or proceeding under any Insolvency
Laws without the prior unanimous affirmative vote of all of its directors.
UFS-1's Articles of Incorporation also require UFS-1 to have a director who
qualifies as an "independent director."
UFS-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
- -------------
(*) 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. UFS-1's next annual meeting is
scheduled for March, 2000.
</TABLE>
Executive Management
The Board of Directors and executive officers described below are
responsible for overall management of UFS-1. UFS-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.
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<PAGE>
Michael S. Dunlap, Chairman of the Board. As the Chairman of the Board of
Directors, Mr. Dunlap is responsible for the executive direction of UFS-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 UFS-1.
Included in his responsibilities are loan purchasing, marketing of corporate
services and coordination of UFS-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 UFS-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.
UFS-1's executive officers are elected annually by the Board of
Directors and serve at the discretion of the Board. UFS-1's directors hold
office until the next annual meeting of stockholders and until their successors
have been duly elected and qualified.
UFS provides certain administrative services to UFS-1 in connection with
the operation of UFS-1's student loan program. UFS receives compensation for
those services, but the amount of such payments is subject to approval by each
Rating Agency and payments are made only when funds are available in the
Operating Fund. The approved compensation currently is 0.18% of UFS-1's
outstanding assets per annum, or such other amount as may be specified in the
related Prospectus Supplement. UFS also receives compensation from UFS-1 for
services provided in connection with structuring, negotiating and implementing
UFS-1's financing programs. The amount of such fees paid to UFS, if any, in
connection with issuance of a series of the Notes will be described in the
applicable Prospectus Supplement.
THE STUDENT LOAN PROGRAM OF UNION FINANCIAL SERVICES-1, INC.
UFS-1 established its student loan program in order to effectuate its
general corporate purposes.
39
<PAGE>
Loan Purchase Agreements
UFS-1 will purchase its financed student loans from "eligible lenders"
under the Higher Education Act, pursuant to the terms of student loan purchase
agreements. The student loan purchase agreements will identify the portfolio of
student loans to be purchased by UFS-1 and specify the purchase price to be paid
for those loans. Each seller will be 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 such
instruments of transfer for the student loans as UFS-1 and its counsel may
determine is necessary for a valid transfer of the loans.
Each seller will make 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 such seller is the sole owner and holder of each loan and has
full right and authority to sell and assign the same free and
clear of all liens, pledges or encumbrances.
o each loan to be sold under the student loan purchase agreement
is either Insured or Guaranteed.
o such seller and any independent servicer have each exercised and
shall continue until the scheduled sale date to exercise due
diligence and reasonable care in making, administering, servicing
and collecting the loans.
o such seller, or the lender that originated a loan, has reported
the amount of origination fees, if any, authorized to be
collected with respect to such loan pursuant to Section 438(c) of
the Act to the Secretary for the period in which such fee was
authorized to be collected; and such seller or originating lender
has made any refund of an origination fee collected in connection
with any loan which may be required pursuant to the Higher
Education Act.
At the request of UFS-1 or the Trustee, each seller shall repurchase any
loan purchased by UFS-1 from such seller pursuant to its respective student loan
purchase agreement if:
o any representation or warranty made or furnished by such seller
in or pursuant to its respective student loan purchase agreement
shall prove to have been materially incorrect as to such loan;
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
such loan to UFS-1; or
o on account of any wrongful or negligent act or omission of such
seller or its servicing agent that occurred prior to the sale of
a loan to UFS-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 UFS-1 or the Trustee, the seller is required to pay to the
Trustee an amount equal to the then-outstanding principal balance of such loan,
plus the percentage of premium paid by UFS-1 in connection with the purchase of
the loan and interest and Special Allowance Payments accrued and unpaid with
respect to such loan, plus any attorneys' fees, legal expenses, court costs,
servicing fees or other expenses incurred by UFS-1, the Trustee in connection
with such loans and arising out of the reasons for the repurchase.
40
<PAGE>
Servicing of Financed Student Loans
UFS-1 is required under the Act, the rules and regulations of the
Guarantee Agency and the Indenture to use due diligence in the servicing and
collection of financed student loans and to use collection practices no less
extensive and forceful than those generally in use among financial institutions
with respect to other consumer debt.
The Trustee is acting as "eligible lender" with respect to the financed
student loans as an accommodation to UFS-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, UFS-1 or any other party in connection with the financed student loans
and the documents, agreements, understandings and arrangements relating thereto.
The Servicing Agreements
UFS-1 has entered into a servicing agreement with Union Bank 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 financed student loans serviced under the servicing
agreement are paid in full.
Union Bank has entered into an amendment to its servicing agreement with
UNIPAC Service Corporation, a Nebraska corporation ("UNIPAC"), under which
UNIPAC, as subservicer, assumed all of the duties of the servicer under the
servicing agreement for the term of the servicing agreement. UNIPAC will provide
data processing and other assistance necessary in connection with the servicing
of UFS-1's portfolio of financed student loans acquired in connection with its
student loan program as required by the Higher Education Act and the Guarantee
Agencies. UFS-1 will cause the Trustee to pay from the Revenue Fund established
under the Indenture to Union Bank servicing fees, and Union Bank, pursuant to
the subservicing agreements, pays UNIPAC subservicing fees and certain expenses
for the services which UNIPAC provides. In the event Union Bank no longer acts
as the primary servicer of the financed student loan portfolio, UNIPAC has
agreed to service the financed student loans under the terms of and pursuant to
the servicing agreement.
Under the terms of the servicing agreement, the servicer may be
obligated to pay UFS-1 an amount equal to the outstanding principal balance plus
all accrued interest and other fees due to the date of purchase of a financed
student loan if the servicer causes the loan to be denied the benefit of any
applicable guarantee and is unable to cause the reinstatement of such guarantee
within twelve (12) months of denial by the applicable Guarantee Agency. Upon
such payment, the loan shall be subrogated to the servicer. In the event the
servicer cures any financed student loan which has been subrogated to the
servicer, the servicing agreement provides that UFS-1 shall pay an amount equal
to the then outstanding principal balance plus all accrued interest due on such
financed student loan, less the amount subject to certain risk sharing
provisions in the Higher Education Act, whereupon the subrogation rights of the
servicer shall terminate.
Another servicer may be designated by UFS-1 with respect to certain
financed student loans financed from the proceeds of any such Series. If so
designated, the other servicer and the servicing agreement with respect thereto
will be described in such Prospectus Supplement. Any servicer, other than Union
Bank, shall be confirmed in writing by each Rating Agency. In addition, any
servicing agreement with Union Bank other than the servicing agreement will be
described in the related Prospectus Supplement.
41
<PAGE>
UNIPAC
UNIPAC began its education loan servicing operations on January 1, 1978,
and provides education loan servicing, time sharing, administration and other
services to lenders, secondary market purchasers and guarantee agencies
throughout the United States. UNIPAC is a privately held corporation, owned
primarily by Union Bank and Trust Company, Lincoln, Nebraska, with a minority
ownership held by Packers Service Group, Inc., Lincoln, Nebraska. UNIPAC offers
student loan servicing to lending institutions and secondary markets. UNIPAC's
corporate headquarters is located in Aurora, Colorado. In December 1989, UNIPAC
opened a second servicing center in Lincoln, Nebraska and in November, 1997,
UNIPAC opened a third servicing center in St. Paul, Minnesota.
UNIPAC's due diligence schedule is conducted through automated letter
generation. Telephone calls are made by an auto-dialer system. All functions are
monitored by an internal quality control system to ensure their performance.
Compliance training is provided on both centralized and unit level basis. In
addition, UNIPAC has distinct compliance and internal auditing departments whose
functions are to advise and coordinate compliance issues. In order to provide
these services, UNIPAC has developed and maintains a computer mainframe and
software system. See "Certain Relationships Among Financing Participants."
DESCRIPTION OF THE FEDERAL FAMILY EDUCATION LOAN PROGRAM
The Federal Family Education Loan Program
The Higher Education Act provides for a program of direct federal
insurance for student loans as well as reinsurance of student loans guaranteed
or insured by state agencies or private non-profit corporations (collectively,
"Federal Family Education Loans" and the "Federal Family Education Loan
Program").
The Higher Education Act currently authorizes certain student loans to
be covered under the Federal Family Education Loan Program (the "FFELP"). The
Higher Education Act Amendments of 1998 (the "1998 Amendments") extended the
principal provisions of the FFELP through September 30, 2004. Congress has
extended similar authorization dates in prior versions of the Higher Education
Act. However, the current authorization dates may not again be extended and the
other provisions of the Higher Education Act may not be continued in their
present form.
Generally, a student is eligible for loans made under the FFELP only if
he or she:
o has been accepted for enrollment or is enrolled in good standing at an
eligible institution of higher education;
o is carrying or planning to carry at least one-half the normal
full-time workload for the course of study the student is pursuing as
determined by the institution;
o has agreed to notify promptly the holder of the loan of any address
change; and
o meets the applicable "needs" requirements.
Eligible institutions include higher educational institutions and
vocational schools that comply with certain federal regulations. Each Loan is to
be evidenced by an unsecured note.
The Higher Education Act also establishes maximum interest rates for
each of the various types of loans. These rates vary not only among loan types,
but also within loan types depending upon when the loan was made or when the
borrower first obtained a loan under the FFELP. The Higher Education Act allows
lesser rates of interest to be charged.
42
<PAGE>
Types of Loans
Four types of loans are currently available under the Federal Family
Education Loan Program: Stafford Loans, Unsubsidized Stafford Loans, PLUS Loans
and Consolidation Loans. These loan types vary as to eligibility requirements,
interest rates, repayment periods, loan limits and eligibility for interest
subsidies and Special Allowance Payments. Some of these loan types have had
other names in the past. References herein to the various loan types include,
where appropriate, predecessors to such loan types.
The primary loan under the FFELP is the Subsidized Federal Stafford
Loan. Students who are not eligible for Subsidized Stafford Loans based on their
economic circumstances may be able to obtain Unsubsidized Federal Stafford
Loans. Parents of students may be able to obtain Federal PLUS Loans.
Consolidation Loans are available to borrowers with existing loans made under
the FFELP and certain other federal programs to consolidate repayment of such
existing loans. Prior to July 1, 1994, the FFELP also offered Federal
Supplemental Loans for Students ("Federal SLS Loans") to graduate and
professional students and independent undergraduate students and, under certain
circumstances, dependent undergraduate students, to supplement their Stafford
Loans.
Subsidized Federal Stafford Loans
General. Subsidized Stafford Loans are eligible for reinsurance under
the Higher Education Act if the eligible student to whom the loan is made has
been accepted or is enrolled in good standing at an eligible institution of
higher education or vocational school and is carrying at least one-half the
normal full-time workload at that institution. In connection with Subsidized
Stafford Loans there are limits as to the maximum amount which may be borrowed
for an academic year and in the aggregate for both undergraduate and
graduate/professional study. Both aggregate limitations exclude loans made under
the Federal SLS and Federal PLUS Programs. The Secretary of Education has
discretion to raise these limits to accommodate students undertaking specialized
training requiring exceptionally high costs of education.
Subsidized Stafford Loans are generally made only to student borrowers
who meet certain needs tests as provided in the Higher Education Act. Provisions
addressing the implementation of needs analysis and the relationship between
unmet need for financing and the availability of Subsidized Federal Stafford
Loan Program funding have been the subject of frequent and extensive amendment
in recent years. Further amendment to such provisions may materially affect the
availability of Subsidized Stafford Loan funding to borrowers or the
availability of Subsidized Stafford Loans for secondary market acquisition.
Interest Rates for Subsidized Federal Stafford Loans. For a Stafford
Loan made prior to July 1, 1994, the applicable interest rate for a borrower
who, on the date the promissory note was signed, did not have an outstanding
balance on a previous loan which was made, insured or guaranteed under the FFELP
(a "New Borrower"):
(a) is 7% per annum for a loan covering a period of instruction
beginning before January 1,1981;
(b) is 9% per annum for a loan covering a period of instruction
beginning on or before January 1, 1981, but before September 13, 1983;
(c) is 8% per annum for a loan covering a period of instruction
beginning on or after September 13, 1983, but before July 1, 1988;
(d) is 8% per annum for the period from the disbursement of the
loan to the date which is four years after the loan enters repayment,
for a loan made prior to October 1, 1992, covering a period of
instruction beginning on or after July 1, 1988, and thereafter shall be
adjusted annually, and for any 12-month period commencing on a July 1
shall be equal to the bond equivalent rate of 91-day U.S. Treasury bills
auctioned at the final auction prior to the preceding June 1, plus 3.25%
per annum (but not to exceed 10% per annum); or
(e) for a loan made on or after October 1, 1992 shall be adjusted
annually, and for any 12-month period commencing on a July 1 shall be
equal to the bond equivalent rate of 91-day U.S. Treasury bills
auctioned at the final auction prior to the preceding June 1, plus 3.1%
per annum (but not to exceed 9% per annum).
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<PAGE>
For a Stafford Loan made prior to July 1, 1994, the applicable interest
rate for a borrower who, on the date the promissory note evidencing the loan was
signed, had an outstanding balance on a previous loan made insured or guaranteed
under the FFELP (a "Repeat Borrower"):
(a) for a loan made prior to July 23, 1992 is the applicable
interest rate on the previous loan or, if such previous loan is not a
Stafford Loan 8% per annum or
(b) for a loan made on or before July 23, 1992 shall be adjusted
annually, and for any twelve month period commencing on a July 1 shall
be equal to the bond equivalent rate of 91-day U.S. Treasury bills
auctioned at the final auction prior to the preceding June 1, plus 3.1%
per annum but not to exceed:
o 7% per annum in the case of a Stafford Loan made to a borrower
who has a loan described in clause (a) above;
o 8% per annum in the case of (A) a Stafford Loan made to a
borrower who has a loan described in clause (c) above, (B) a
Stafford Loan which has not been in repayment for four years and
which was made to a borrower who has a loan described in clause
(d) above (C) a Stafford Loan for which the first disbursement
was made prior to December 20, 1993 to a borrower whose previous
loans do not include a Stafford Loan or an Unsubsidized Stafford
Loan;
o 9% per annum in the case of (A) a Stafford Loan made to a
borrower who has a loan described in clauses (b) or (e) above or
(B) a Stafford Loan for which the first disbursement was made on
or after December 20, 1993 to a borrower whose previous loans do
not include a Stafford Loan or an Unsubsidized Stafford Loan; and
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 (d) above.
The interest rate on all Stafford Loans made on or after July 1, 1994
but prior to July 1, 1998, regardless of whether the borrower is a New Borrower
or a Repeat Borrower, is the rate described in clause (b) above, except that
such rate shall not exceed 8.25% per annum. For any Stafford Loan made on or
after July 1, 1995, the interest rate is further reduced prior to the time the
loan enters repayment and during any Deferment Periods. During such periods, the
formula described in clause (b) above is applied, except that 2.5% is
substituted for 3.1%, and the rate shall not exceed 8.25% per annum.
For Stafford Loans made on or after July 1, 1998 but before October 1,
1998, the applicable interest rate shall be adjusted annually, and for any
twelve month period commencing on a July 1 shall be equal to the bond equivalent
rate of 91-day U.S. Treasury bills auctioned at the final auction prior to the
proceeding June 1, plus 1.7% per annum prior to the time the loan enters
repayment and during any Deferment Periods, and 2.3% per annum during repayment,
but not to exceed 8.25% per annum.
For loans made on or after October 1, 1998, the applicable rate will
continue to be adjusted annually, but for any 12-month period commencing on a
July 1 will be equal to the bond equivalent rate of securities with a comparable
maturity (as established by the Secretary of Education), plus 1% per annum, but
not to exceed 8.25% per annum. There can be no assurance that the interest rate
provisions for such loans will not be further amended, either before or after
the rate described herein becomes effective.
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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.
Such students are entitled to borrow the difference between the Stafford Loan
maximum and their Subsidized Stafford eligibility through the Unsubsidized
Stafford program. In other respects, the general requirements for Unsubsidized
Stafford Loans are essentially the same as those for Subsidized Stafford Loans.
The interest rate, the annual loan limits and the special allowance payment
provisions of the Unsubsidized Stafford Loans are the same as the Subsidized
Stafford Loans. However, the terms of the Unsubsidized Stafford Loans differ
materially from Subsidized Stafford Loans in that the federal government will
not make interest subsidy payments and the loan limitations are determined
without respect to the expected family contribution. The borrower will be
required to pay interest from the time such loan is disbursed or capitalize the
interest until repayment begins. Unsubsidized Stafford Loans were not available
before October 1, 1992. A student meeting the general eligibility requirements
for a loan under the FFELP is eligible for an Unsubsidized Stafford Loan without
regard to need.
Interest Rates for Unsubsidized Federal Stafford Loans. Unsubsidized
Stafford Loans are subject to the same interest rate provisions as Subsidized
Stafford Loans.
Federal PLUS Loans
General. PLUS Loans are made only to borrowers who are parents and,
under certain circumstances, spouses of remarried parents, of dependent
undergraduate students. For PLUS Loans made on or after July 1, 1993, the parent
borrower must not have an adverse credit history as determined pursuant to
criteria established by the Department of Education. The basic provisions
applicable to PLUS Loans are similar to those of Subsidized Stafford Loans with
respect to the involvement of guarantee agencies and the Secretary of Education
in providing federal reinsurance on the loans. However, PLUS Loans differ
significantly from Subsidized Stafford Loans, particularly because federal
interest subsidy payments are not available under the PLUS Loan program and
special allowance payments are more restricted. Prior to the Higher Education
Amendments of 1986, the Higher Education Act did not distinguish between PLUS
Loans and SLS Loans. Student borrowers were eligible for PLUS Loans; however,
parents of graduate and professional students were ineligible.
Interest Rates for Federal PLUS Loans. The applicable interest rate
depends upon the date of issuance of the loan and the period of enrollment for
which the loan is to apply. The applicable interest rate on a PLUS Loan:
(a) made on or after January 1, 1981, but before October 1,
1981, is 9% per annum;
(b) made on or after October 1, 1981, but before November 1,
1982, is 14% per annum;
(c) made on or after November 1, 1982, but before July 1,
1987, is 12% per annum;
(d) made on or after July 1, 1987, but before October 1, 1992
shall be adjusted annually, and for any 12-month period beginning on
July 1 shall be equal to the bond equivalent rate of 52-week U.S.
Treasury bills auctioned at the final auction prior to the preceding
June 1, plus 3.25% per annum (but not to exceed 12% per annum);
(e) made on or after October 1, 1992, but before July 1, 1994,
shall be adjusted annually, and for any 12-month period beginning on
July 1 shall be equal to the bond equivalent rate of 52-week U.S.
Treasury bills auctioned at the final auction prior to the preceding
June 1, plus 3.1% per annum (but not to exceed 10% per annum).
(f) made on or after July 1, 1994, but before July 1, 1998, is
the same as that described in clause (e) above, except that such rate
shall not exceed 9% per annum; or
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(g) made on or after July 1, 1998, but before October 1, 1998,
shall be adjusted annually, and for any 12-month period beginning on
July 1 shall be equal to the bond equivalent rate of 91-day U.S.
Treasury bills auctioned at the final auction prior to the proceeding
June 1, plus 3.1% per annum (but not to exceed 9% per annum).
For PLUS Loans made on or after October 1, 1998, the applicable rate
will continue to be adjusted annually, but for any 12-month period commencing on
a July 1 will be equal to the bond equivalent rate of securities with a
comparable maturity (as established by the Secretary of Education), plus 2.1%
per annum, but not to exceed 9% per annum.
If requested by the borrower, an eligible lender may consolidate SLS or
PLUS Loans of the same borrower held by the lender under a single repayment
schedule. The repayment period for each included loan shall be based on the
commencement of repayment of the most recent loan. The consolidated loan shall
bear interest at a rate equal to the weighted average of the rates of the
included loans. Such a consolidation shall not be treated as the making of a new
loan. In addition, at the request of the borrower, a lender may refinance an
existing fixed rate SLS or PLUS Loan, including an SLS or PLUS Loan held by a
different lender who has refused to refinance such loan, at a variable interest
rate. In such a case, proceeds of the new loan are used to discharge the
original loan.
Federal SLS Loans
General. Eligible borrowers for SLS Loans were limited to graduate or
professional students, independent undergraduate students, and under certain
circumstances, dependent undergraduate students, if such students' parents were
unable to obtain a PLUS Loan and were also unable to provide such students'
expected family contribution. Except for dependent undergraduate students,
eligibility for SLS Loans was determined without regard to need. The basic
provisions applicable to SLS Loans are similar to those of Subsidized Stafford
Loans with respect to the involvement of guarantee agencies and the Secretary of
Education in providing federal reinsurance on the loans. However, SLS Loans
differ significantly from Subsidized Stafford Loans, particularly because
federal interest subsidy payments are not available under the SLS Loan program
and special allowance payments are more restricted.
Interest Rates for Federal SLS Loans. The applicable interest rates on
SLS Loans made prior to October 1, 1992 are identical to the applicable interest
rates on PLUS Loans made at the same time. For SLS Loans made on or after
October 1, 1992, the applicable interest rate is the same as the applicable
interest rate on PLUS Loans, except that the ceiling is 11% per annum instead of
10% per annum.
Federal Consolidation Loans
General. The Higher Education Act authorizes a program under which
certain borrowers may consolidate their various student loans into a single loan
insured and reinsured on a basis similar to Subsidized Stafford Loans. Federal
Consolidation Loans may be made in an amount sufficient to pay outstanding
principal, unpaid interest and late charges on certain federally insured or
reinsured student loans incurred under and pursuant to the FFELP, other than
Federal PLUS Loans made to "parent borrowers", selected by the borrower, as well
as loans made pursuant to the Perkins (formally "National Direct Student Loan")
and Health Professional Student Loan Programs. To be eligible for a
Consolidation Loan, a borrower must have outstanding indebtedness on student
loans made under the FFELP and/or certain other federal student loan programs,
and be in repayment status or in a Grace Period, or be a defaulted borrower who
has made arrangements to repay any defaulted loan satisfactory to the holder of
the defaulted loan.
A married couple who agree to be jointly liable on a Consolidation Loan,
for which the application is received on or after January 1, 1993, may be
treated as an individual for purposes of obtaining a Consolidation Loan. For
Consolidation Loans disbursed prior to July 1, 1994 the borrower was required to
have outstanding student loan indebtedness of at least $7,500. Prior to the
adoption of the Higher Education Technical amendments Act of 1993, PLUS Loans
could not be included in the Consolidation Loan. For Consolidation Loans for
which the applications were received prior to January 1, 1993, the minimum
student loan indebtedness was $5,000 and the borrower could not be delinquent
more than 90 days in the payment of such indebtedness. For applications received
on or after January 1, 1993, borrowers may add additional loans to a Federal
Consolidation Loan during the 180-day period following the origination of the
Federal Consolidation Loan.
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Interest Rates for Federal Consolidation Loans. A Consolidation Loan
made prior to July 1, 1994 bears interest at a rate equal to the weighted
average of the interest rates on the loans retired, rounded to the nearest whole
percent, but not less than 9% per annum. Except as described in the next
sentence, a Consolidation Loan made on or after July 1, 1994 bears interest at a
rate equal to the weighted average of the interest rates on the loans retired,
rounded upward to the nearest whole percent, but with no minimum rate. For a
Consolidation Loan for which the application is received by an eligible lender
on or after November 13, 1997 and before October 1, 1998, the interest rate
shall be adjusted annually, and for any twelve-month period commencing on a July
1 shall be equal to the bond equivalent rate of 91-day U.S. Treasury bills
auctioned at the final auction prior to the preceding June 1, plus 3.1% per
annum, but not to exceed 8.25% per annum. Notwithstanding these general interest
rates, the portion, if any, of a Consolidation Loan that repaid a loan made
under title VII, Sections 700-721 of the Public Health Services Act, as amended,
has a different variable interest rate. Such portion is adjusted on July 1 of
each year, but is the sum of the average of the T-Bill Rates auctioned for the
quarter ending on the preceding June 30, plus 3.0%, without any cap on the
interest rate. (For a discussion of required payments that reduce the return on
Consolidation Loans, see "Fees - Rebate Fees on Consolidation Loans" below.)
Maximum Loan Amounts
Each type of loan is subject to limits as to the maximum principal
amount, both with respect to a given year and in the aggregate. Consolidation
Loans are limited only by the amount of eligible loans to be consolidated. All
of the loans are limited to the difference between the cost of attendance and
the other aid available to the student. Stafford Loans are also subject to
limits based upon the needs analysis as described above under "Eligibility
Stafford Loans" above. Additional limits are described below.
Loan Limits for Stafford and Unsubsidized Stafford Loans. Except as
described in the next paragraph, Stafford and Unsubsidized Stafford Loans are
generally treated as one loan type for loan limit purposes. A student who has
not successfully completed the first year of a program of undergraduate
education may borrow up to $2,625 in an academic year. A student who has
successfully completed such first year, but who has not successfully completed
the second year may borrow up to $3,500 per academic year. An undergraduate
student who has successfully completed the first and second year, but who has
not successfully completed the remainder of a program of undergraduate
education, may borrow up to $5,500 per academic year. For students enrolled in
programs of less than an academic year in length, the limits are generally
reduced in proportion to the amount by which such programs are less than one
year in length. A graduate or professional student may borrow up to $8,500 in an
academic year. The maximum aggregate amount of Stafford and Unsubsidized
Stafford Loans (including that portion of a Consolidation Loan used to repay
such loans) which an undergraduate student may have outstanding is $23,000. The
maximum aggregate amount for a graduate and professional student, including
loans for undergraduate education, is $65,500. The Secretary is authorized to
increase the limits applicable to graduate and professional students who are
pursuing programs which the Secretary determines to be exceptionally expensive.
At the time that SLS Loans were eliminated, the loan limits for
Unsubsidized Stafford Loans were increased by amounts equal to the prior SLS
Loan limits (as described below under "SLS Loans"). Prior to the enactment of
the Higher Education Amendments of 1992, an undergraduate student who had not
successfully completed the first and second year of a program of undergraduate
education could borrow Stafford Loans in amounts up to $2,625 in an academic
year. An undergraduate student who had successfully completed such first and
second year, but who had not successfully completed the remainder of a program
of undergraduate education could borrow up to $4,000 per academic year. The
maximum for graduate and professional students was $7,500 per academic year. The
maximum aggregate amount of Stafford Loans which a borrower could have
outstanding (including that portion of a Consolidation Loan used to repay such
loans) was $17,250. The maximum aggregate amount for a graduate or professional
student, including loans for undergraduate education, was $54,750.
Prior to the 1986 changes, the annual limits were generally lower.
Loan Limits for Plus Loans. For Plus Loans made on or after July 1,
1993, the amounts of Plus Loans are limited only by the student's unmet need.
Prior to that time Plus Loans were subject to limits similar to those to which
SLS Loans were then subject (see "SLS Loans" below), applied with respect to
each student on behalf of whom the parent borrowed.
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Loan Limits for SLS Loans. A student who had not successfully completed
the first and second year of a program of undergraduate education could borrow
an SLS Loan in an amount of up to $4,000. A student who had successfully
completed such first and second year, but who had not successfully completed the
remainder of a program of undergraduate education could borrow up to $5,000 per
year. Graduate and professional students could borrow up to $10,000 per year.
SLS Loans were subject to an aggregate maximum of $23,000 ($73,000 for graduate
and professional students). Prior to the 1992 changes, SLS Loans were available
in amounts of $4,000 per academic year, up to a $20,000 aggregate maximum. Prior
to the 1986 changes, a graduate or professional student could borrow $3,000 of
SLS Loans per academic year, up to a $15,000 maximum, and an independent
undergraduate student could borrow $2,500 of SLS Loans per academic year minus
the amount of all other FFEL Program loans to such student for such academic
year, up to the maximum amount of all FFEL Program loans to that student of
$12,500. In 1989, the amount of SLS Loans for students enrolled in programs of
less than an academic year in length were limited in a manner similar to the
limits described above under "Stafford Loans".
Disbursement Requirements
The Higher Education Act now requires that virtually all Stafford Loans
and PLUS Loans be disbursed by eligible lenders in at least two separate
installments. The proceeds of a loan made to any undergraduate first-year
student borrowing for the first time under the program must be delivered to the
student no earlier than thirty days after the enrollment period begins.
Repayment
Grace Periods. Loans made under the FFELP, other than Consolidation
Loans, must provide for repayment of principal in periodic installments over a
period of not less than five nor more than ten years. Lenders are required to
offer extended repayment schedules to new borrowers after the enactment of the
1998 Amendments who accumulate outstanding loans of more than $30,000, in which
case the repayment period may extend up to 25 years subject to certain minimum
repayment amounts. A Consolidation Loan must be repaid during a period agreed to
by the borrower and lender, subject to maximum repayment periods which vary
depending upon the principal amount of the borrower's outstanding student loans,
but no longer than 30 years. For Consolidation Loans for which the application
was received prior to January 1, 1993, the repayment period could not exceed 25
years. Repayment of principal on a Stafford Loan does not commence while a
student remains a qualified student, but generally begins upon expiration of the
applicable Grace Period as described below. Such Grace Periods may be waived by
borrowers. For Stafford Loans for which the applicable rate of interest is 7%
per annum, the repayment period commences not more than twelve months after the
borrower ceases to pursue at least a half-time course of study. For other
Stafford Loans and Unsubsidized Stafford Loans, the repayment period commences
not more than six months after the borrower ceases to pursue at least a
half-time course of study. The six month or twelve month periods are the "Grace
Periods".
In the case of SLS, PLUS and Consolidated Loans, the repayment period
commences on the date of final disbursement of the loan, except that the
borrower of an SLS Loan who also has a Stafford Loan may defer repayment of the
SLS Loan to coincide with the commencement of repayment of the Stafford or
Unsubsidized Stafford Loan. During periods in which repayment of principal is
required, payments of principal and interest must in general be made at a rate
of not less than the greater of $600 per year or the interest that accrues
during the year, except that a borrower and lender may agree at any time before
or during the repayment period that repayment may be at a lesser rate. A
borrower may agree, with concurrence of the lender, to repay the loan in less
than five years with the right subsequently to extend his minimum repayment
period to five years. Borrowers may accelerate, without penalty, the repayment
of all or any part of the loan.
Income Sensitive Repayment Schedules. Since 1992, lenders of
Consolidation Loans have been required to establish graduated or
income-sensitive repayment schedules and lenders of Stafford and SLS Loans have
been required to offer borrowers the option of repaying in accordance with
graduated or income-sensitive repayment schedules. UFS-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.
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Deferment Periods. No principal repayments need be made during certain
periods of deferment prescribed by the Higher Education Act ("Deferment
Periods"). For loans to a borrower who first obtained a loan which was disbursed
before July 1, 1993, deferments are available:
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;
o during a period not exceeding three years while the borrower is in
service, comparable to the service referred to in clauses (ii) and
(iii), as a full-time volunteer for an organization which is exempt
from taxation under Section 501(c)(3) of the Code;
o during a period not exceeding two years while the borrower is serving
an internship, the successful completion of which is required to
receive professional recognition required to begin professional
practice or service, or a qualified internship or residency program;
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 FFELP), or is pursuing a course of study pursuant to a
graduate fellowship program or a rehabilitation training program for
disabled individuals approved by the Secretary of Education;
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, (A) during a period not in excess of three years while
the borrower is a full-time teacher in a public or nonprofit private
elementary or secondary school in a "teacher shortage area" (as
prescribed by the Secretary of Education), and (B) during a period not
in excess of 12 months for mothers, with preschool age children, who
are entering or re-entering the work force and who are compensated at
a rate not exceeding $1 per hour in excess of the federal minimum
wage.
For loans to a borrower who first obtains a loan on or after July 1,
1993, deferments are available:
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(a) during any period that the borrower is pursuing at least a
half-time course of study at an eligible institution or a course of study
pursuant to a graduate fellowship program or rehabilitation training program
approved by the Secretary;
(b) during a period not exceeding three years while the borrower
is seeking and unable to find full-time employment; and
(c) during a period not in excess of three years for any reason
which the lender determines, in accordance with regulations under the Higher
Education Act, has caused or will cause the borrower economic hardship. Economic
hardship includes working full time and earning an amount not in excess of the
greater of the minimum wage or the poverty line for a family of two. Additional
categories of economic hardship are based on the relationship between a
borrower's educational debt burden and his or her income.
Prior to the 1992 changes, only the Deferment Periods described above in
clauses (vi) and (vii) (with respect to the parent borrower) and the Deferment
Period described in clause (viii) (with respect to the parent borrower or a
student on whose behalf the parent borrowed) were available to PLUS Loan
borrowers, and only the Deferment Periods described above in clauses (vi), (vii)
and (viii) were available to Consolidation Loan borrowers. Prior to the 1986
changes, PLUS Loan borrowers were not entitled to Deferment Periods.
Deferment Periods extend the ten-year maximum term.
Forbearance Period. The Higher Education Act also provides for periods
of forbearance during which the borrower, in case of temporary financial
hardship, may defer any payments (a "Forbearance Period"). A borrower is
entitled to forbearance for a period not to exceed three years while the
borrower's debt burden under Title IV of the Higher Education Act (which
includes the FFELP) equals or exceeds 20% of the borrower's gross income, and
also is entitled to forbearance while he or she is serving in a qualifying
medical or dental internship program or in a "national service position" under
the National and Community Service Trust Act of 1993. In addition, mandatory
administrative forbearances are provided when exceptional circumstances such as
a local or national emergency or military mobilization exist, or when the
geographical area in which the borrower or endorser resides has been designated
a disaster area by the President of the United States or Mexico, the Prime
Minister of Canada, or by the governor of a state. In other circumstances,
forbearance is at the lender's option. Such forbearance also extends the ten
year maximum term.
Interest Payments During Grace, Deferment and Forbearance Periods. As
described under "Interest Subsidy Payments" below, the Secretary of Education
makes interest payments on behalf of the borrower of certain eligible loans
while the borrower is in school and during Grace and Deferment Periods. Interest
that accrues during Forbearance Periods and, if the loan is not eligible for
interest Subsidy Payments, while the borrower is in school and during the Grace
and Deferment Periods, may be paid monthly or quarterly or capitalized (added to
the principal balance) not more frequently than quarterly.
Fees
Guarantee Fee. A Guarantee Agency is authorized to charge a premium, or
guarantee fee, of up to 1% of the principal amount of the loan, which must be
deducted proportionately from each installment payment of the proceeds of the
loan to the borrower. Guarantee fees may not currently be charged to borrowers
of Consolidation Loans. However, lenders may be charged an insurance fee to
cover the costs of increased or extended liability with respect to Consolidation
Loans. For loans made prior to July 1, 1994, the maximum guarantee fee was 3% of
the principal amount of the loan, but no such guarantee fee was authorized to be
charged with respect to Unsubsidized Stafford Loans.
Origination Fee. An eligible lender is authorized to charge the borrower
of a Stafford or PLUS Loan an origination fee in an amount not to exceed 3% of
the principal amount of the loan, and is required to charge the borrower of an
Unsubsidized Stafford Loan an origination fee in the amount of 3% of the
principal amount of the loan. These fees must be deducted proportionately from
each installment payment of the loan proceeds prior to payment to the borrower
and are not retained by the lender, but must be passed on to the Secretary of
Education. For loans made prior to July 1, 1994, the maximum authorized fee for
Stafford, PLUS and SLS Loans was 5%, and the required fee for Unsubsidized
Stafford Loans was 6.5% of the principal amount of the loan.
Lender Origination Fee. The lender of any loan under the FFELP made on
or after October 1, 1993 is required to pay to the Secretary of Education a fee
equal to 0.5% of the principal amount of such loan.
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Rebate Fee on Consolidation Loans. The holder of any Consolidation Loan
made on or after October 1, 1993 is required to pay to the Secretary of
Education a monthly fee equal to .0875% (1.05% per annum) of the principal
amount of, and accrued interest on, such Consolidation Loan. For loans made
pursuant to applications received on or after October 1, 1998, and on or before
January 31, 1999 the fee on consolidation loans of 1.0% is reduced to .62%.
Interest Subsidy Payments
"Interest Subsidy Payments" are interest payments paid with respect to
an eligible loan during the period prior to the time that the loan enters
repayment and during Grace and Deferment Periods. The Secretary of Education and
the Guarantee Agencies entered into Interest Subsidy Agreements (as described in
"Description of the Guarantee Agencies -- Federal Agreements") whereby the
Secretary of Education agrees to pay Interest Subsidy Payments to the holders of
eligible guaranteed loans for the benefit of students meeting certain
requirements, subject to the holders' compliance with all requirements of the
Higher Education Act. Only Stafford Loans and Consolidation Loans for which the
application was received on or after January 1, 1993, are eligible for Interest
Subsidy Payments. Consolidation Loans made after August 10, 1993 are eligible
for Interest Subsidy Payments only if all loans consolidated thereby are
Stafford Loans, except that Consolidation Loans for which the application is
received by an eligible lender on or after November 13, 1997 and before October
1, 1998, are eligible for Interest Subsidy Payments on that portion of the
Consolidation Loan that repays Stafford Loans or similar subsidized loans made
under the direct loan program. In addition, to be eligible for Interest Subsidy
Payments, guaranteed loans must be made by an eligible lender under the
applicable Guarantee Agency's guarantee program, and must meet requirements
prescribed by the rules and regulations promulgated under the Higher Education
Act.
The Secretary of Education makes Interest Subsidy Payments quarterly on
behalf of the borrower to the holder of a guaranteed loan in a total amount
equal to the interest which accrues on the unpaid principal amount prior to the
commencement of the repayment period of the loan or during any Deferment Period.
A borrower may elect to forego Interest Subsidy Payments, in which case the
borrower is required to make interest payments.
Special Allowance Payments
The Higher Education Act provides for special allowance payments to be
made by the Secretary of Education to eligible lenders. The rates for special
allowance payments are based on formulas that differ according to the type of
loan, the date the loan was originally made or insured and the type of funds
used to finance such loan (taxable or tax-exempt). The amount of the Special
Allowance Payments, which are made on a quarterly basis, is computed by
reference to the average of the bond equivalent rates of the 91-day Treasury
bills auctioned during the preceding quarter (the "T-Bill Rate").
Federal Subsidized and Unsubsidized Stafford Loans. The effective
formulas for special allowance payment rates for Stafford and Unsubsidized
Stafford Loans are summarized in the following chart:
Date of Loans Annualized SAP Rate
- ---------------------------- -------------------------------------------------
On or after October 1, 1981 T-Bill Rate less Applicable Interest Rate +3.5%
On or after November 16, 1986 T-Bill Rate less Applicable Interest Rate +3.25%
On or after October 1, 1992 T-Bill Rate less Applicable Interest Rate +3.1%
On or after July 1, 1995 T-Bill Rate less Applicable Interest Rate +2.5%(1)
On or after July 1, 1998 T-Bill Rate less Applicable Interest Rate +2.1%(2)
- --------------
(1) Applies to Stafford and Unsubsidized Stafford Loans prior to the time
such loans enter repayment and during any Deferment Periods.
(2) Substitute 2.8% in this formula while such loans are in repayment.
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For Loans made on or after October 1, 1998, the special allowance
formula is revised similarly to the manner in which the applicable interest rate
formula is revised (as defined above under "Interest Rates for Stafford Loans").
The effective formulas for special allowance payment rates for
Subsidized Federal Stafford Loans differ depending on whether loans to borrowers
whose first loans were disbursed prior to July 23, 1992 were acquired or
originated with the proceeds of tax-exempt obligations. There are minimum
special allowance payment rates for Subsidized Federal Stafford Loans acquired
with proceeds of tax-exempt obligations made on and after October 1, 1980,
except for 427A Loans (while bearing interest at 10%), which rates effectively
ensure an overall minimum return of 9.5% on such Subsidized Federal Stafford
Loans. However, loans acquired with the proceeds of tax-exempt obligations
originally issued after September 30, 1993 will no longer be assured of a
minimum special allowance payment. In addition, the formula will be the same as
for loans acquired with taxable proceeds (i.e., the full, rather than half,
special allowance payment rate).
Federal PLUS and SLS Loans. For PLUS and SLS Loans which bear interest
at rates adjusted annually, Special Allowance Payments are made only in years
during which the interest rate ceiling on such loans operates to reduce the rate
that would otherwise apply based upon the applicable formula. See "Interest
Rates for PLUS Loans" and "Interest Rates for SLS Loans" above. Special
Allowance Payments are paid with respect to PLUS Loans made on or after July 1,
1994 only if the rate that would otherwise apply exceeds 10% per annum,
notwithstanding that the interest rate ceiling on such loans is 9% per annum.
The portion, if any, of a Consolidation Loan that repaid a loan made under Title
VII, Sections 700-721 of the Public Health Services Act, as amended, is
ineligible for Special Allowance Payments.
The Balanced Budget and Deficit Control Act of 1985, as amended (known
as the "Gramm-Rudman Law") requires the President to issue a sequester order for
any federal fiscal year in which the projected budget exceeds the target for
that year. A sequester order for any fiscal year would apply to loans made on or
after October 1 of that fiscal year. The sequester order would change the
formula for calculating Special Allowance Payments for the first four Special
Allowance Payment periods relating to loans originally disbursed during that
fiscal year. The special allowance formula would be reduced to the T-Bill Rate
plus 3.0% (for loans with a special allowance formula of the T-Bill Rate plus
3.1%).
The Higher Education Act provides that if Special Allowance Payments or
Interest Subsidy Payments have not been made within 30 days after the Secretary
of Education receives an accurate, timely and complete request therefor, the
special allowance payable to such holder shall be increased by an amount equal
to the daily interest accruing on the Special Allowance and Interest Subsidy
Payments due the holder.
Special Allowance Payments and Interest Subsidy Payments are reduced by
the amount which the lender is authorized or required to charge as an
origination fee, as described above under "Fees -- Origination Fee". In
addition, the amount of the lender origination fee described above under "Fees
- -- Lender Origination Fees" is collected by offset to Special Allowance Payments
and Interest Subsidy Payments.
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DESCRIPTION OF THE GUARANTEE AGENCIES
The financed student loans in the trust estate will be guaranteed by any
one or more Guarantee Agencies identified in the related Prospectus Supplement.
The following discussion relates to Guarantee Agencies under the FFELP.
A Guarantee Agency guarantees loans made to students or parents of
students by lending institutions such as banks, credit unions, savings and loan
associations, certain schools, pension funds and insurance companies. A
Guarantee Agency generally purchases defaulted student loans which it has
guaranteed from its cash and reserves (generally referred to herein as its
"Reserve Fund") A lender may submit a default claim to the Guarantee Agency
after the student loan has been delinquent for at least 240 days. The default
claim package must include all information and documentation required under the
FFELP regulations and the Guarantee Agency's policies and procedures.
In general, a Guarantee Agency's Reserve Fund has been funded
principally by administrative cost allowances paid by the Secretary of
Education, guarantee fees paid by lenders, investment income on moneys in the
Reserve Fund, and a portion of the moneys collected from borrowers on Guaranteed
Loans that have been reimbursed by the Secretary of Education to cover the
Guarantee Agency's administrative expenses.
Various changes to the Higher Education Act have adversely affected the
receipt of revenues by the Guarantee Agencies and their ability to maintain
their Reserve Funds at previous levels, and may adversely affect their ability
to meet their guarantee obligations. These changes include the reduction in
reinsurance payments from the Secretary of Education because of reduced
reimbursement percentages; the reduction in maximum permitted guarantee fees
from 3% to 1% for loans made on or after July 1, 1994; the replacement of the
administrative cost allowance with a student loan processing and issuance fee
equal to 65 basis points (40 basis points for loans made one or after October 1,
1993) paid at the time a loan is guaranteed, and an account maintenance fee of
12 basis points (10 basis points for fiscal years 2001-2003) paid annually on
outstanding guaranteed student loans; the reduction in supplemental preclaims
assistance payments from the Secretary of Education; and the reduction in
retention by a Guarantee Agency of collections on defaulted loans from 27% to
24% (23% beginning on October 1, 2003). Additionally, the adequacy of a
Guarantee Agency's Reserve Fund to meet its guarantee obligations with respect
to existing student loans depends, in significant part, on its ability to
collect revenues generated by new loan guarantees. The Federal Direct Student
Loan Program discussed below may adversely affect the volume of new loan
guarantees. Future legislation may make additional changes to the Higher
Education Act that would significantly affect the revenues received by Guarantee
Agencies and the structure of the guarantee agency program.
The Higher Education Act gives the Secretary of Education various
oversight powers over Guarantee Agencies. These include requiring a Guarantee
Agency to maintain its Reserve Fund at a certain required level and taking
various actions relating to a Guarantee Agency if its administrative and
financial condition jeopardizes its ability to meet its obligations. These
actions include, among others, providing advances to the Guarantee Agency,
terminating the Guarantee Agency's Federal Reimbursement Contracts, assuming
responsibility for all functions of the Guarantee Agency, and transferring the
Guarantee Agency's guarantees to another Guarantee Agency or assuming such
guarantees. The Higher Education Act provides that a Guarantee Agency's Reserve
Fund shall be considered to be the property of the United States to be used in
the operation of the FFELP or the Federal Direct Student Loan Program, and,
under certain circumstances, the Secretary of Education may demand payment of
amounts in the Reserve Fund. The 1998 Amendments mandate the recall of Guarantee
Agency reserve funds by the Secretary of Education amounting to $85 million in
fiscal year 2002, $82.5 million in fiscal year 2006, and $82.5 million in fiscal
year 2007. However, certain minimum reserve levels are protected from recall and
under the 1998 Amendments, Guarantee Agency reserve funds were restructured to
provide Guarantee Agencies with additional flexibility in choosing how to spend
certain funds they receive. The new recall of reserves for Federal Guarantee
Agencies increases the risk that resources available to Guarantee Agencies to
meet their guarantee obligation will be significantly reduced. Relevant federal
laws, including the Higher Education Act, be further changed in a manner that
may adversely affect the ability of a Guarantee Agency to meet its guarantee
obligations. See "Description of the Federal Family Education Loan Program"
herein.
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Under the Higher Education Act, if the Department of Education has
determined that a Guarantee Agency is unable to meet its insurance obligations,
the holders of loans guaranteed by such Guarantee Agency must submit claims
directly to the Department of Education, and the Department of Education is
required to pay the full Guarantee Payment due with respect thereto in
accordance with guarantee claims processing standards no more stringent than
those applied by the Guarantee Agency.
There are no assurances as to the Secretary of Education's actions if a
Guarantee Agency encounters administrative or financial difficulties or that the
Secretary of Education will not demand that a Guarantee Agency transfer
additional portions or all of its Reserve Fund to the Secretary of Education.
Information relating to the particular Guarantee Agencies guaranteeing
the Financed Student Loans will be set forth in the Prospectus Supplement. Such
information will be provided by the respective Guarantee Agencies, and neither
such information nor information included in the reports referred to therein has
been verified by, or is guaranteed as to accuracy or completeness by, the Issuer
or the underwriters. No representation is made by UFS-1 or the underwriters as
to the accuracy or adequacy of such information or the absence of material
adverse changes in such information subsequent to the dates thereof.
Federal Agreements
General. A Guaranty Agency's right to receive federal reimbursements for
various guarantee claims paid by such Guarantee Agency is governed by the Higher
Education Act and various contracts entered into between Guarantees Agencies and
the Secretary of Education. Each Guarantee Agency and the Secretary of Education
have entered into Federal Reimbursement Contracts pursuant to the Higher
Education Act, which provide for the Guarantee Agency to receive reimbursement
of a percentage of insurance payments that the Guarantee Agency makes to
eligible lenders with respect to loans guaranteed by the Guarantee Agency prior
to the termination of the Federal Reimbursement Contracts or the expiration of
the authority of the Higher Education Act. The Federal Reimbursement Contracts
provide for termination under certain circumstances and also provide for certain
actions short of termination by the Secretary of Education to protect the
federal interest.
In addition to guarantee benefits, qualified Student Loans acquired
under the FFELP benefit from certain federal subsidies. Each Guarantee Agency
and the Secretary of Education have entered into an Interest Subsidy Agreement
under the Higher Education Act; which entitles the holders of eligible loans
guaranteed by the Guarantee Agency to receive Interest Subsidy Payments from the
Secretary of Education on behalf of certain students while the student is in
school, during a six to twelve month Grace Period after the student leaves
school, and during certain Deferment Periods, subject to the holders' compliance
with all requirements of the Higher Education Act. See "Description of the FFELP
- -- Federal Interest Subsidy Payments" for a more detailed description of the
Interest Subsidy Payments.
United States Courts of Appeals have held that the federal government,
through subsequent legislation, has the right unilaterally to amend the
contracts between the Secretary of Education and the Guarantee Agencies
described herein. Amendments to the Higher Education Act in 1986, 1987, 1992,
1993, and 1998, respectively (i) abrogated certain rights of guarantee agencies
under contracts with the Secretary of Education relating to the repayment of
certain advances from the Secretary of Education, (ii) authorized the Secretary
of Education to withhold reimbursement payments otherwise due to certain
guarantee agencies until specified amounts of such guarantee agencies' reserves
had been eliminated, (iii) added new reserve level requirements for guarantee
agencies and authorized the Secretary of Education to terminate the Federal
Reimbursement Contracts under circumstances that did not previously warrant such
termination, (iv) expanded the Secretary of Education's authority to terminate
such contracts and to seize guarantee agencies' reserves, and (v) mandated the
additional recall of Guarantee Agency reserve funds.
Federal Insurance and Reimbursement of Guarantee Agencies
Effect of Annual Claims Rate. With respect to loans made prior to
October 1, 1993, the Secretary of Education currently agrees to reimburse the
Guarantee Agency for up to 100% of the amounts so expended, as discussed in the
formula described below, so long as the eligible lender has properly serviced
such loan. The amount of reimbursement is lower for loans originated after
October 1, 1993, as described below. Depending on the claims rate experience of
a Guarantee Agency, such reimbursement may be reduced as discussed in the
formula described below. The Secretary of Education also agrees to repay 100% of
the unpaid principal plus applicable accrued interest expended by a Guarantee
Agency in discharging its guarantee obligation as a result of the bankruptcy,
death, or total and permanent disability of a borrower, or in the case of a PLUS
Loan, the death of the student on behalf of whom the loan was borrowed, or in
certain circumstances, as a result of school closures, which reimbursements are
not to be included in the calculations of the Guarantee Agency's Claims Rate
experience for the purpose of federal reimbursement under the Federal
Reimbursement Contracts.
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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: (a) guarantee payments on such loans, (b)
the original principal amount of such loans that have been fully repaid, and (c)
the original amount of such loans for which the first principal installment
payment has not become due. Guarantee Agencies with default rates below 5% are
required to pay the Secretary of Education annual fees equivalent to 0.51% of
new loans guaranteed, while all other such agencies must pay a 0.5% fee. The
Secretary of Education may withhold reimbursement payments if a Guarantee Agency
makes a material misrepresentation or fails to comply with the terms of its
agreements with the Secretary of Education or applicable federal law.
Under the guarantee agreements, if a payment on a Federal Family
Education Loan guaranteed by a Guarantee Agency is received after reimbursement
by the Secretary of Education, the Guarantee Agency is entitled to receive an
equitable share of the payment.
Any originator of any student loan guaranteed by a Guarantee Agency is
required to discount from the proceeds of the loan at the time of disbursement,
and pay to the guarantee agency, an insurance premium which may not exceed that
permitted under the Higher Education Act.
Under present practice, after the Secretary of Education reimburses a
Guarantee Agency for a default claim paid on a guaranteed loan, the Guarantee
Agency continues to seek repayment from the borrower. The Guarantee Agency
returns to the Secretary of Education payments that it receives from a borrower
after deducting and retaining: a percentage amount equal to the complement of
the reimbursement percentage in effect at the time the loan was reimbursed, and
an amount equal to 27% (or 18-1/2% in the case of a payment from the proceeds of
a Consolidation Loan) of such payments for certain administrative costs. The
Secretary of Education may, however, require the assignment to the Secretary of
defaulted guaranteed loans, in which event no further collections activity need
be undertaken by the Guarantee Agency, and no amount of any recoveries shall be
paid to the Guarantee Agency. Prior to the 1993 changes, the percentage of
collections which Guarantee Agencies could retain was 30%.
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A Guarantee Agency may enter into an addendum to its Interest Subsidy
Agreement that allows the Guarantee Agency to refer to the Secretary of
Education certain defaulted guaranteed loans. Such loans are then reported to
the IRS to "offset" any tax refunds which may be due any defaulted borrower. To
the extent that the Guarantee Agency has originally received less than 100%
reimbursement from the Secretary of Education with respect to such a referred
loan, the Guarantee Agency will not recover any amounts subsequently collected
by the federal government which are attributable to that portion of the
defaulted loan for which the Guarantee Agency has not been reimbursed.
Rehabilitation of Defaulted Loans. Under of the Higher Education Act,
the Secretary of Education is authorized to enter into an agreement with a
Guarantee Agency pursuant to which the Guarantee Agency shall sell defaulted
loans that are eligible for rehabilitation to an eligible lender. The Guarantee
Agency shall repay the Secretary of Education an amount equal to 81.5% of the
then current principal balance of such loan, multiplied by the reimbursement
percentage in effect at the time the loan was reimbursed. The amount of such
repayment shall be deducted from the amount of federal reimbursement payments
for the fiscal year in which such repayment occurs, for purposes of determining
the reimbursement rate for that fiscal year.
For a loan to be eligible for rehabilitation, the Guarantee Agency must
have received consecutive payments for 12 months of amounts owed on such loan.
Upon rehabilitation, a loan is eligible for all the benefits under the Higher
Education Act for which it would have been eligible had no default occurred
(except that a borrower's loan may only be rehabilitated once).
Eligibility for Federal Reimbursement. To be eligible for federal
reimbursement payments, guaranteed loans must be made by an eligible lender
under the applicable Guarantee Agency's Guarantee Program, which must meet
requirements prescribed by the rules and regulations promulgated under the
Higher Education Act, including the borrower eligibility, loan amount,
disbursement, interest rate, repayment period and guarantee fee provisions
described herein and the other requirements set forth in the Higher Education
Act.
Prior to the 1998 Amendments, a Federal Family Loan was considered in to
be in default for purposes of the Higher Education Act when the borrower failed
to make an installment payment when due, or to comply with the other terms of
the loan, and if the failure persists for 180 days in the case of a loan
repayable in monthly installments or for 240 days in the case of a loan
repayable in less frequent installments. Under the 1998 Amendments, the
delinquency period required for a student loan to be declared in default is
increased from 180 days to 240 days for loans on which the first day of
delinquency occurs on or after the date of enactment of the 1998 Amendments.
The Guarantee Agency must pay the lender for the defaulted loan prior to
submitting a claim to the Secretary of Education for reimbursement. The
Guarantee Agency must submit a reimbursement claim to the Secretary of Education
within 45 days after it has paid the lender's default claim. As a prerequisite
to entitlement to payment on the guarantee by the Guarantee Agency, and in turn
payment of reimbursement by the Secretary of Education, the lender must have
exercised reasonable care and diligence in making, servicing and collecting the
guaranteed loan. Generally, these procedures require that completed loan
applications be processed, a determination of whether an applicant is an
eligible borrower attending an eligible institution under the Higher Education
Act be made, the borrower's responsibilities under the loan be explained to him
or her, the promissory note evidencing the loan be executed by the borrower and
that the loan proceeds be disbursed by the lender in a specified manner. After
the loan is made, the lender must establish repayment terms with the borrower,
properly administer deferments and forbearances and credit the borrower for
payments made. If a borrower becomes delinquent in repaying a loan, a lender
must perform certain collection procedures, primarily telephone calls, demand
letters, skiptracing procedures and requesting assistance from the applicable
Guarantee Agency, that vary depending upon the length of time a loan is
delinquent.
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Direct Loans
The 1993 Amendments authorized a program of "direct loans," to be
originated by schools with funds provided by the Secretary of Education. Under
the direct loan program, the Secretary of Education is directed to enter into
agreements with schools, or origination agents in lieu of schools, to disburse
loans with funds provided by the Secretary. Participation in the program by
schools is voluntary. The goals set forth in the 1993 Amendments call for the
direct loan program to constitute 5% of the total volume of loans made under the
FFELP and the direct loan program for academic year 1994-1995, 40% for academic
year 1995-1996, 50% for academic years 1996-1997 and 1997-1998 and 60% for
academic year 1998-1999. No provision is made for the size of the direct loan
program thereafter. Based upon information released by the General Accounting
Office, participation by schools in the direct loan program has not been
sufficient to meet the goals for the 1995-1996 or 1996-1997 academic years. The
1998 Amendments removed references to the "phase-in" of the Direct Loan Program,
including restrictions on annual limits for Direct Loan Program volume and the
Secretary's authority to select additional institutions to achieve balanced
school representation.
The loan terms are generally the same under the direct loan program as
under the FFELP, though more flexible repayment provisions are available under
the direct loan program. At the discretion of the Secretary of Education,
students attending schools that participate in the direct loan program (and
their parents) may still be eligible for participation in the FFELP, though no
borrower could obtain loans under both programs for the same period of
enrollment.
It is difficult to predict the impact of the direct lending program.
There is no way to accurately predict the number of schools that will
participate in future years, or, if the Secretary authorizes students attending
participating schools to continue to be eligible for FFELP loans, how many
students will seek loans under the direct loan program instead of the FFELP. In
addition, it is impossible to predict whether future legislation will eliminate,
limit or expand the direct loan program or the FFELP.
Other Guarantee Agencies
Although UFS-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, UFS-1 may acquire student loans under the
Indenture which are guaranteed by other Guarantee Agencies with the approval of
the Rating Agencies.
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 UFS-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.
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Characterization of the Trust Estate
Based upon certain assumptions and certain representations of UFS-1,
Kutak Rock has rendered, with respect to the Prior Notes, and will render, with
respect to the Additional Notes, its opinion to UFS-1 to the effect that the
Notes, issued or to be issued, as the case may be, should be treated as debt of
UFS-1, rather than as an interest in the financed student loans for federal
income tax purposes. In addition, Kutak Rock has rendered its opinion to the
effect that this discussion is a summary of all material federal income tax
consequences as to the purchase, ownership and disposition of the Notes with
respect to the investors described herein. Such opinion is not binding on the
courts or the Service. It is possible that the Service could assert that, for
purposes of the Code, the transaction contemplated by this Memorandum
constitutes a sale of the financed student loans (or an interest therein) to the
Registered Owners or that the relationship which will result from this
transaction is that of a partnership, or an association taxable as a
corporation.
If, instead of treating the transaction as creating secured debt in the
form of the Series issued by UFS-1 as a corporate entity, the transaction were
treated as creating a partnership among the Registered Owners, the servicer and
UFS-1 which has purchased the underlying financed student loans, the resulting
partnership would not be subject to federal income tax. Rather, the servicer,
UFS-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 UFS-1 which was classified as a corporation or a publicly
traded partnership taxable as a corporation and treated as having purchased the
financed student loans, the Trust would be subject to federal income tax at
corporate income tax rates on the income it derives from the financed student
loans, which would reduce the amounts available for payment to the Registered
Owners. Cash payments to the Registered Owners generally would be treated as
dividends for tax purposes to the extent of such corporation's accumulated and
current earnings and profits. A similar result would apply if the Registered
Owners were deemed to have acquired stock or other equity interests in UFS-1.
However, as noted above, UFS-1 has been advised that the Notes should be treated
as debt of UFS-1 for federal income tax purposes.
Characterization of the Notes as Indebtedness
UFS-1 and the Registered Owners express in the Indenture their intent
that, for federal income tax purposes, the Notes will be indebtedness of UFS-1
secured by the financed student loans. UFS-1 and the Registered Owners, by
accepting the Notes, have agreed to treat the Notes as indebtedness of UFS-1 for
federal income tax purposes. UFS-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.
UFS-1 believes that it has retained the preponderance of the primary
benefits and burdens associated with ownership of the financed student loans and
should, thus, be treated as the owner of the financed student loans for federal
income tax purposes. If, however, the Service were successfully to assert that
this transaction should be treated as a sale of the financed student loans, the
Service could further assert that the entity created pursuant to the Indenture,
as the owner of the financed student loans for federal income tax purposes,
should be deemed engaged in a business and, therefore, characterized as a
publicly traded partnership taxable as a corporation.
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Taxation of Interest
Income of Registered Owners
Payments of interest with regard to the Notes will be includible as
ordinary income when received or accrued by the Registered Owners in accordance
with their respective methods of tax accounting and applicable provisions of the
Code. In particular, Section 1272 of the Code requires the current ratable
inclusion in income of original issue discount using a constant yield method 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.
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. UFS-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,
UFS-1 believes, based on the advice of counsel, that it will retain ownership of
the financed student loans for federal income tax purposes. In the event the
Indenture is deemed to create a pass-through entity as the owner of the financed
student loans for federal income tax purposes instead of UFS-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.
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UFS-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 financed student loans (and not as an association taxable as
a corporation), then UFS-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
UFS-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.
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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.
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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 UFS-1 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.
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 UFS-1 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 UFS-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 UFS-1 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).
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Any ERISA Plan fiduciary considering whether to purchase Notes of
any Series on behalf of an ERISA Plan should consult with its counsel regarding
the applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment and the availability of any
of the exemptions referred to above. Persons responsible for investing the
assets of Tax-Favored Plans that are not ERISA Plans should seek similar counsel
with respect to the prohibited transaction provisions of the Code.
CERTAIN RELATIONSHIPS AMONG FINANCING PARTICIPANTS
UFS-1 expects to acquire all of the financed student loans to be pledged
to the Trustee from Union Bank pursuant to student loan purchase agreements, and
UFS-1 may acquire additional student loans from Union Bank in the future. Union
Bank will, unless specified with respect to a series of the Notes in the related
Prospectus Supplement, also act as servicer for all other financed student loans
pursuant to the Servicing Agreement. However, UNIPAC, as subservicer, will
discharge the servicer's duties with respect to financed student loans pursuant
to a Subservicing Agreement with Union Bank. UNIPAC is a privately held
corporation which is 80.5% owned by Union Bank. UNIPAC will also act as
custodian for the financed student loans. See "Risk Factors-Reliance upon
Sellers," "-Certain Legal Aspects" and "-Perfection of Security Interest in
Student loans" herein.
UFS-1 is a wholly owned subsidiary of Union Financial Services, Inc.
("UFS"). UFS is a privately held corporation whose minority owners include the
parent of Union Bank, certain employees of Union Bank and certain relatives of
such employees.
PLAN OF DISTRIBUTION
UFS-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, UFS-1 may sell
such Notes, directly or through agents, through a competitive bidding process
described in the applicable Prospectus Supplement. UFS-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 UFS-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 such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents. Underwriters, dealers and agents that participate in the distribution of
the Notes of a series may be deemed to be underwriters and any discounts or
commissions received by them from UFS-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. Any such underwriters will be identified, and any such
compensation received from UFS-1 will be described, in the applicable Prospectus
Supplement.
Under agreements which may be entered into by UFS-1, the underwriters
and agents who participate in the distribution of the Notes may be entitled to
indemnification by UFS-1 against certain liabilities, including liabilities
under the Securities Act, or to contribution with respect to payments which the
underwriters or agents may be required to make in respect thereto.
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If so indicated in the Prospectus Supplement, UFS-1 will authorize
underwriters or other persons acting as UFS-1's agents to solicit offers by
certain institutions to purchase the Notes from UFS-1 pursuant to contracts
providing for payment and delivery on a future date. Institutions with which
such contracts may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and others, but in all cases such institutions must be approved by
UFS-1. The obligation of any purchaser under any such contract will be subject
to the condition that the purchaser of the Notes shall not at the time of
delivery be prohibited under the laws of the jurisdiction to which such
purchaser is subject from purchasing such Notes. The underwriters and such other
agents will not have responsibility in respect of the validity or performance of
such contracts.
The underwriters may, from time to time, buy and sell Notes, but there
can be no assurance that an active secondary market will develop and there is no
assurance that any market, if established, will continue.
LEGAL MATTERS
Certain legal matters will be passed upon by Ballard Spahr Andrews &
Ingersoll, LLP, Denver, Colorado as Company's Counsel and by Kutak Rock, Denver,
Colorado as Note Counsel and as special tax counsel. Other counsel, if any,
passing upon legal matters for UFS-1 or any placement agent or underwriter will
be identified in the related Prospectus Supplement.
FINANCIAL INFORMATION
UFS-1 has determined that its financial statements are not material to
the offering made hereby. UFS-1 will engage in no activities other than as
described herein. Accordingly, no financial statements with respect to UFS-1 are
included in this Prospectus.
RATINGS
It is a condition to the issuance of the Notes of any series that the
classes of Notes publicly offered be rated by at least one nationally recognized
statistical rating organization in one of its generic rating categories which
signifies investment grade (typically, in one of the four highest rating
categories). Such ratings will be described in the related Prospectus
Supplement.
A securities rating addresses the likelihood of the receipt by owners of
the Notes of payments of principal and interest with respect to their Notes from
assets in the trust estate. The rating takes into consideration the
characteristics of the financed student loans, and the structural, legal and tax
aspects associated with the rated Notes.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
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INDEX TO AND GLOSSARY OF CERTAIN TERMS
There is provided below an index to and a glossary of certain
definitions used in this Prospectus. To the extent not contained herein, certain
definitions may be set forth in the Indenture included as an exhibit to this
Registration Statement of which this Prospectus is a part. In addition, certain
definitions related to Auction procedures are set forth herein under
"Definitions and Provisions Related to ARC Notes and Auction
Procedures-Auction-Related Definitions" and certain definitions related to LIBOR
Rate Notes are set forth herein under "Definitions and Provisions Related to
LIBOR Rate Notes-LIBOR-Related Definitions."
Index to Defined Terms
There follows a reference to the definitions of capitalized terms used
in this Prospectus.
91-day Treasury Bills.......................................................11
Account.....................................................................66
Act.........................................................................66
All Hold Rate...............................................................66
Applicable LIBOR-Based Rate.................................................66
Applicable Number of Business Days..........................................66
Auction.....................................................................66
Auction Agent...............................................................66
Auction Date................................................................66
Auction Note Interest Rate..................................................66
Auction Period..............................................................66
Auction Period Adjustment...................................................67
Auction Procedures..........................................................67
Auction Rate................................................................67
Authorized Officer..........................................................67
Authorized Representative...................................................67
Beneficial Owner............................................................19
Bid/Hold Orders..............................................................7
Board or Board of Directors.................................................67
Bond-Equivalent Yield.......................................................67
Book-entry Form.............................................................67
Broker-Dealer Agreement.....................................................67
Business Day................................................................67
Carry-over Amount...........................................................67
Certificate of Insurance....................................................67
Class A Notes...............................................................68
Class B Notes...............................................................68
Class C Notes...............................................................68
Code ...................................................................56, 68
Commission .................................................................68
Company Derivative Payment..................................................68
Contract of Insurance.......................................................68
Custodian Agreement.........................................................68
Department................................................................. vi
Derivative Payment Date.....................................................68
Derivative Product..........................................................68
Disqualified Persons........................................................60
DOL.........................................................................60
Dutch Auction................................................................7
Eligible Carry-over Make-Up Amount..........................................68
Eligible Lender.............................................................69
Eligible Loan Acquisition Certificate.......................................69
ERISA ......................................................................59
ERISA Plans.................................................................59
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Event of Bankruptcy.........................................................69
Federal Reimbursement Contracts.............................................69
Financed ...................................................................69
Fiscal Year................................................................ 69
Fitch ......................................................................69
Funds.......................................................................69
Guarantee Agencies...........................................................i
Guarantee Agreements........................................................69
Guarantee or Guaranteed.....................................................69
Guaranty Agency.............................................................69
Highest Priority Obligations................................................69
Hold Order..................................................................70
Indenture ..................................................................70
Index Rates..................................................................5
Indirect Participants.......................................................19
Initial Auction Agent.......................................................70
Initial Auction Agent Agreement.............................................70
Initial Interest Payment Date...............................................70
Initial Interest Period.....................................................70
Initial Period .............................................................70
Initial Rate ...............................................................70
Initial Rate Adjustment Date................................................70
Insurance" or "Insured" or "Insuring........................................70
Interest Benefit Payment....................................................70
Interest Payment Date............................................7, 10, 11, 70
Interest Period.....................................................10, 11, 70
Interest Rate Adjustment Date...............................................70
Interest Rate Determination Date............................................70
Investment Agreement........................................................70
IRAs........................................................................59
ISDA Master Agreement.......................................................70
Junior-Subordinate Notes....................................................71
Junior-Subordinate Obligations..............................................71
L/C Bank................................................................... 35
LIBOR Rate Notes............................................................iv
LIBOR-Based Rate............................................................71
Market Agent................................................................71
Maximum Auction Rate........................................................71
National Direct Student Loan................................................45
Ninety-One Day United States Treasury Bill Rate.............................71
Non-Payment Rate............................................................71
Note Counsel................................................................71
Note Payment Date...........................................................71
Notes.......................................................................71
Obligations ................................................................72
One-Month LIBOR.............................................................71
One-Year LIBOR .............................................................71
Participant.................................................................72
Participants................................................................19
Parties in Interest.........................................................60
Payment Default.............................................................72
Person ....................................................................72
Plan ..................................................................... 60
Plans ..................................................................... 60
Potential Bid Orders.........................................................8
Program ................................................................... 72
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Program Expenses............................................................72
PTCE....................................................................... 60
Qualified Retirement Plans..................................................59
Rating......................................................................72
Rating Agency...............................................................73
Rating Confirmation.........................................................73
Reciprocal Payments.........................................................73
Reciprocal Payor............................................................73
Record Date .................................................................7
Recoveries of Principal.....................................................73
Registered Owner............................................................73
Registered Owners............................................................6
Regulations ................................................................60
Reserve Fund Requirement....................................................73
Reuters Screen LIBOR Page...................................................73
Revenue" or "Revenues.......................................................73
S&P ....................................................................... 73
Secretary ................................................................. 73
Securities Depository.......................................................73
Sell Order..................................................................74
Seller .....................................................................73
Senior Notes ...............................................................74
Senior Obligations..........................................................74
Service ....................................................................56
Servicer ..................................................................74
Servicing Agreement.........................................................74
Six-Month LIBOR.............................................................71
Special Allowance Payments..................................................74
Subordinate Notes...........................................................74
Subordinate Obligations.....................................................74
Subservicing Agreement......................................................74
Substitute Auction Agent....................................................74
Substitute Auction Agent Agreement..........................................74
Supplemental Indenture......................................................74
Tax-Favored Plans...........................................................59
Three-Month LIBOR...........................................................71
Treasury Bill Rate..........................................................74
UFS ................................................................... 37, 61
UNIPAC..................................................................... 40
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Glossary of Terms
There follows definitions of certain capitalized terms used in this Prospectus.
The Indenture contains the definition of certain terms not included herein and
reference is made thereto for such definitions. The following definitions shall
be applicable with respect to each Series unless otherwise specified in the
related Prospectus Supplement.
"Account" shall mean any account created and established within any Fund by the
Indenture.
"Act" shall mean the Higher Education Act of 1965, as amended or supplemented
from time to time, or any successor federal act and all regulations, directives,
bulletins, and guidelines promulgated from time to time thereunder.
"All Hold Rate" means the Applicable LIBOR-Based Rate less 0.20%; provided that
in no event shall the applicable All Hold Rate be greater than the applicable
Maximum Auction Rate.
"Applicable LIBOR-Based Rate" means, (a) for Auction Periods of 35 days or
less, One-Month LIBOR, (b) for Auction Periods of more than 35 days but less
than 91 days, Three-Month LIBOR, (c) for Auction Periods of more than 90 days
but less than 181 days, Six-Month LIBOR, and (d) for Auction Periods of more
than 180 days, One-Year LIBOR.
"Applicable Number of Business Days" means the greater of two Business Days or
one Business Day plus the number of Business Days by which the Auction Date
precedes the first day of the next succeeding Interest Period.
"ARC Note Interest Rate" means each variable rate of interest per annum borne
by an ARC Note for each Auction Period and determined in accordance with the
provisions of the Indenture. However, in the event of a Payment Default, the ARC
Note Interest Rate shall equal the applicable Non-Payment Rate, provided that
such ARC Note Interest Rate shall in no event exceed the applicable Maximum
Auction Rate.
"Auction" means the implementation of the Auction Procedures on an Auction Date.
"Auction Agent" means the Initial Auction Agent under the Initial Auction Agent
Agreement unless and until a Substitute Auction Agent Agreement becomes
effective, after which "Auction Agent" shall mean the Substitute Auction Agent.
"Auction Agent Agreement" means the Initial Auction Agent Agreement unless and
until a Substitute Auction Agent Agreement is entered into, after which "Auction
Agent Agreement" shall mean such Substitute Auction Agreement.
"Auction Date" means, with respect to any class of ARC Notes, the date
specified in the related Prospectus Supplement, and thereafter, the Business Day
immediately preceding the first day of each Auction Period for each respective
class, other than:
(a) each Auction Period commencing after the ownership of the
applicable ARC Notes is no longer maintained in Book-entry Form by the
Securities Depository;
(b) each Auction Period commencing after and during the continuance of
a Payment Default; or
(c) each Auction Period commencing less than the Applicable Number of
Business Days after the cure or waiver of a Payment Default.
Notwithstanding the foregoing, the Auction Date for one or more Auction Periods
may be changed pursuant to the Indenture.
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"Auction Period" means the Interest Period applicable to the ARC Notes during
which time the Interest Rate is determined pursuant to the Indenture, which
Auction Period (after the Initial Period for such class) initially shall consist
generally of the number of days specified with respect to any series of the
Notes in the related Prospectus Supplement, as the same may be adjusted pursuant
to the Indenture.
"Auction Period Adjustment" means an adjustment to the Auction Period as
provided in the Indenture.
"Auction Procedures" means the procedures set forth in the Indenture by which
the Auction Rate is determined.
"Auction Rate" means the rate of interest per annum that results from
implementation of the Auction Procedures and is determined as described in the
Indenture.
"Authorized Officer" shall mean, when used with reference to UFS-1, its
Chairman, President, Vice President or Secretary, or any other officer or board
member authorized in writing by the Board to act on behalf of UFS-1.
"Authorized Representative" shall mean, when used with reference to UFS-1, (a)
an Authorized Officer or (b) any affiliate organization or other entity
authorized by the Board to act on UFS-1's behalf.
"Board" or "Board of Directors" shall mean the Board of Directors of UFS-1.
"Bond-Equivalent Yield" means, in respect of any security with a maturity of
six months or less the rate for which is quoted in The Wall Street Journal on a
bank discount basis, a yield (expressed as a percentage) calculated in
accordance with the following formula and rounded up to the nearest
one-hundredth of one percent:
Bond Equivalent Yield = Q x N x 100
-----------------------------------
360 - (T x Q)
where "Q" refers to the per annum rate for the security quoted on a bank
discount basis and expressed as a decimal, "N" refers to 365 or 366 (days), as
the case may be, and "T" refers to the number of days to maturity.
"Book-entry Form" or "Book-entry System" means a form or system under which (a)
the beneficial right to principal and interest may be transferred only through a
book entry, (b) physical securities in registered form are issued only to a
Securities Depository or its nominee as registered owner, with the securities
"immobilized" to the custody of the Securities Depository, and (c) the book
entry is the record that identifies the owners of beneficial interests in that
principal and interest.
"Broker-Dealer Agreement" means each agreement between the Auction Agent and a
Broker-Dealer, and approved by UFS-1, pursuant to which the Broker-Dealer agrees
to participate in Auctions as set forth in the Auction Procedures, as from time
to time amended or supplemented. Each Broker-Dealer Agreement shall be in
substantially the form of the Broker-Dealer Agreement dated as of________ __,
____ among UFS-1, Bankers Trust Company, as Auction Agent, and PaineWebber
Incorporated, as Broker-Dealer.
"Business Day" shall mean the definition of Business Day found in the
Supplemental Indenture authorizing a series of Notes.
"Carry-over Amount" means, with respect to the ARC Notes, the excess, if any,
of (a) the amount of interest on an ARC Note that would have accrued with
respect to the related Interest Period at the applicable Auction Rate over (b)
the amount of interest on such ARC Note actually accrued with respect to such
ARC Note with respect to such Interest Period based on the applicable Maximum
Auction Rate without regard to the last two clauses of the definition thereof
together with the unreduced portion of any such excess from prior Interest
Periods; provided that any reference to "principal" or "interest" in the
Indenture and the ARC Notes shall not include within the meanings of such words
any Carry-over Amount or any interest accrued on any Carry-over Amount.
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"Certificate of Insurance" shall mean any certificate evidencing a financed
student loan is Insured pursuant to a Contract of Insurance.
"Class A Notes" shall mean UFS-1's Student Loan Asset-Backed Notes issued
pursuant to the Indenture and designated as Class A.
"Class B Notes" shall mean UFS-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 UFS-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.
"Commission" shall mean the Securities and Exchange Commission.
"Company Derivative Payment" shall mean a payment required to be made by or on
behalf of UFS-1 due to a Reciprocal Payor pursuant to a Derivative Product.
"Contract of Insurance" shall mean the contract of insurance between the
Eligible Lender and the Secretary.
"Custodian Agreement" shall mean, collectively, the custodian agreements with
any Servicer or other custodian or bailee related to financed student loans.
"Derivative Payment Date" shall mean, with respect to a Derivative Product, any
date specified in the Derivative Product on which both or either of UFS-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 UFS-1
and a Reciprocal Payor, which provides that UFS-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 UFS-1 is obligated to pay (whether on a net payment
basis or otherwise) on one or more scheduled and specified Derivative Payment
Dates, UFS-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 UFS-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 UFS-1's obligation to make Company Derivative Payments
may be secured by a pledge of and lien on the trust estate on an equal and
ratable basis with any class of UFS-1's Outstanding Notes and which Company
Derivative Payments may be equal in priority with any priority classification
of UFS-1's Outstanding Notes; and
(c) under which Reciprocal Payments are to be made directly to the
Trustee for deposit into the Revenue Fund.
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"Eligible Carry-over Make-Up Amount" means, with respect to each Interest
Period relating to the ARC Notes as to which, as of the first day of such
Interest Period, there is any unpaid Carry-over Amount, an amount equal to the
lesser of (a) interest computed on the principal balance of the ARC Notes in
respect to such Interest Period at a per annum rate equal to the excess, if any,
of applicable Maximum Auction Rate without regard to the last two clauses of the
definition thereof over the Auction Rate, together with the unreduced portion of
any such excess from prior Interest Periods and (b) the aggregate Carry-over
Amount remaining unpaid as of the first day of such Interest Period together
with interest accrued and unpaid thereon through the end of such Interest
Period.
"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.
"Eligible Loan Acquisition Certificate" shall mean a certificate signed by an
Authorized Representative of UFS-1.
"Event of Bankruptcy" shall mean (a) UFS-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 UFS-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
financed student loans and other student loans Guaranteed or Insured by the
Guarantee Agency and Interest Benefit Payments and Special Allowance Payments to
holders of qualifying Student Loans Guaranteed or Insured by the Guarantee
Agency.
"Financed" when used with respect to student loans, shall mean or refer to
student loans (a) acquired by UFS-1 with balances in the Acquisition Fund or
otherwise deposited in or accounted for in the Acquisition Fund or otherwise
constituting a part of the trust estate and (b) student loans substituted or
exchanged for financed student loans, but does not include student loans
released from the lien of the Indenture and sold or transferred, to the extent
permitted by the Indenture.
"Fiscal Year" shall mean the fiscal year of UFS-1 as established from time to
time.
"Fitch" shall mean Fitch IBCA, Inc., a corporation organized and existing under
the laws of the-State of Delaware, its successors and assigns.
"Funds" shall mean the funds created under Section 5.01 of the Indenture and
held by the Trustee, including the Acquisition Fund, the Revenue Fund and the
Reserve Fund.
"Guarantee" or "Guaranteed" shall mean, with respect to 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.
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"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-ARC
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 UFS-1, 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 ARC Notes, the period commencing on the Issue
Date and continuing through the day immediately preceding the Initial Rate
Adjustment Date for such ARC Notes.
"Initial Rate" means, with respect to a class of any series, the rate per annum
specified in the related Prospectus Supplement.
"Initial Rate Adjustment Date" means, with respect to the class of any series,
the date specified in the related Prospectus Supplement.
"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 Eligible Loans
received pursuant to the Act and an agreement with the federal government, or
any similar payments.
"Interest Payment Date" shall mean the Interest Payment Dates specified for
Notes in the Supplemental Indenture authorizing the issuance of such Notes.
"Interest Period" means, with respect to the ARC Notes, the Initial Period and
each period commencing on an Interest Rate Adjustment Date for such class and
ending on the day before (a) the next Interest Rate Adjustment Date for such
class or (b) the Stated Maturity of such class, as applicable. 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."
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"Interest Rate Adjustment Date" means the date on which an ARC Note Interest
Rate is effective, and means, with respect to the ARC Notes, the date of
commencement of each Auction Period.
"Interest Rate Determination Date" means, with respect to the ARC Notes, the
Auction Date, or if no Auction Date is applicable to such class, the Business
Day immediately preceding the date of commencement of an Auction Period.
"Investment Agreement" shall mean any investment agreement approved by the
Rating Agencies.
"ISDA Master Agreement" shall mean the ISDA Interest Rate and Currency Exchange
Agreement, copyright 1992, as amended from time to time, and as in effect with
respect to any Derivative Product.
"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
ARCs which, when taken together with the interest rate on the ARCs for the
one-year period ending on the final day of the proposed Auction Period, would
result in the average interest rate on the ARCs for such period either (a) not
being in excess (on a per annum basis) of the average of the Ninety-One Day
United States Treasury Bill Rate plus 1.20% for such one-year period (if all of
the ratings assigned by the Rating Agencies to the ARCs are "Aa3" or "AA-" or
better), (b) not being in excess (on a per annum basis) of the average of the
Ninety-One Day United States Treasury Bill Rate plus 1.50% for such one-year
period (if any one of the ratings assigned by the Rating Agencies to the ARCs is
less than "Aa3" or "AA-" but both are at least any category of "A", or (c) not
being in excess (on a per annum basis) of the average of the Ninety-One Day
United States Treasury Bill Rate plus 1.75% for such one-year period (if any one
of the ratings assigned by the Rating Agencies to the ARCs is less than the
lowest category of "A"); provided, however, that if the ARCs have not been
outstanding for at least such one-year period then for any portion of such
period during which such ARCs were not outstanding, the interest rates on the
ARCs for purposes of this definition, shall be deemed to be equal to such rates
as the Market Agent shall determine were the rates of interest on equivalently
rated auction securities with comparable lengths of auction periods during such
period. For purposes of the Auction Agent and the Auction Procedures, the
ratings referred to in this definition shall be the last ratings of which the
Auction Agent has been given notice pursuant to the Auction Agent Agreement. The
percentage amount to be added to the Ninety-One Day United States Treasury Bill
Rate in any one or more of (a), (b) and (c) above may be increased with a Rating
Confirmation.
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"Ninety-One Day United States Treasury Bill Rate" shall mean the Bond
Equivalent Yield on the 91-day United States Treasury Bills sold at the last
auction thereof that immediately precedes the Auction Date, as determined by the
Market Agent on the Auction Date.
"Non-Payment Rate" means One-Month LIBOR plus 1.50%.
"Note Counsel" shall mean Kutak Rock, or any other counsel of nationally
recognized standing in the field of law relating to notes, selected by UFS-1 and
reasonably acceptable to the Trustee.
"Note Payment Date" shall mean, for any Note, any Interest Payment Date, its
Stated maturity or the date of any other regularly scheduled principal payment
with respect thereto.
"Notes" shall mean UFS-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; provided, however, that if the banks selected as aforesaid
are not quoting as mentioned in this sentence, One-Month LIBOR, Three-Month
LIBOR, Six-Month LIBOR or One-Year LIBOR, respectively, in effect for the
applicable Interest Period will be One-Month LIBOR, Three-Month LIBOR, Six-Month
LIBOR or One-Year LIBOR, respectively, in effect for the immediately preceding
Interest Period.
"Obligations" shall mean Senior Obligations, Subordinate Obligations and
Junior-Subordinate Obligations.
"Participant" means a member of, or participant in, the Depository.
"Payment Default" means, with respect to a class of the ARC Notes, (a) a
default in the due and punctual payment of any installment of interest on such
class, or (b) a default in the due and punctual payment of any interest on and
principal of such class at their maturity.
"Person" shall mean an individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization, or
government or agency or political subdivision thereof.
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"Program" shall mean UFS-1's program for the financing and the purchase of
student loans, as the same may be modified from time to time.
"Program Expenses" shall mean (a) the fees and expenses of the Trustee; (b) the
fees and expenses of any auction agent, any market agent, any calculation agent
and any broker-dealer then acting under a Supplemental Indenture with respect to
auction rate Notes; (c) the fees and expenses of any remarketing agent then
acting under a Supplemental Indenture with respect to variable rate Notes; (d)
the fees and expenses due to any credit provider of any Notes for which a credit
facility or liquidity facility is in place; (e) the fees of any servicer and/or
custodian under any servicing agreement or custodian agreement; (f) the fees and
expenses of UFS-1 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
financed 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 UFS-1's maintenance and operation of its Program as a direct
consequence of the Indenture, the Notes or the financed student loans;
including, but not limited to, taxes, the reasonable fees and expenses of
attorneys, agents, financial advisors, consultants, accountants and other
professionals, attributable to such maintenance and operation, marketing
expenses for the Program and a prorated portion of the rent, personnel
compensation, office supplies and equipment, travel expenses and other lawful
payments made to members of the Board.
"Rating" shall mean one of the rating categories of S&P and Fitch or any other
Rating Agency, provided S&P and Fitch or any other Rating Agency, as the case
may be, is currently rating the Notes.
"Rating Agency" shall mean, collectively, S&P and Fitch and their successors
and assigns or any other Rating Agency requested by UFS-1 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
UFS-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, UFS-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 financed 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 financed student loan and any payments
representing such principal from the guarantee or insurance of any financed
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.
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"Revenue" or "Revenues" shall mean all Recoveries of Principal, payments,
proceeds, charges and other income received by the Trustee or UFS-1 from or on
account of any financed student loan (including scheduled, delinquent and
advance payments of and any insurance proceeds with respect to, interest,
including Interest Benefit Payments, on any financed student loan and any
Special Allowance Payment received by UFS-1 with respect to any financed student
loan) and all interest earned or gain realized from the investment of amounts in
any Fund or Account and all payments received by UFS-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) UFS-1 discontinues use of
the Securities Depository pursuant to Section 2.01(d) of the Indenture, any
other securities depository which agrees to follow the procedures required to be
followed by a securities depository in connection with the Notes and which is
selected by the Issuer with the consent of the Trustee.
"Seller" shall mean an Student Lender from which the Issuer is purchasing or
has purchased or agreed to purchase student loans pursuant to a student loan
purchase agreement between the Issuer and such Student Lender.
"Sell Order" has the meaning set forth under "Description of the Notes-ARC
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, Union Bank and Trust Company, UNIPAC
Service Corporation and any other additional Servicer or successor Servicer
selected by UFS-1.
"Servicing Agreement" shall mean the servicing agreements with any Servicer
relating to Financed student loans, as amended from time to time.
"Special Allowance Payments" shall mean the special allowance payments
authorized to be made by the Secretary by Section 438 of the Act, or similar
allowances, if any, authorized from time to time by federal law or regulation.
"State" shall mean the State of Nevada.
"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.
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"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.
"Subservicing Agreement" shall mean the Servicing Agreement, dated as of
__________, 1999, between the servicer and the subservicer and any other
subservicing agreement with any other subservicer relating to financed student
loans.
"Substitute Auction Agent" means the Person with whom the Company and the
Trustee enter into a Substitute Auction Agent Agreement.
"Substitute Auction Agent Agreement" means an auction agent agreement
containing terms substantially similar to the terms of the Initial Auction Agent
Agreement, whereby a Person having the qualifications required by the Indenture
agrees with the Trustee and the Company to perform the duties of the Auction
Agent under the Indenture.
"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.
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APPENDIX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Notes (the
"Global Securities") will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through any of The Depository
Trust Company, Cedel Bank or Euroclear. The Global Securities will be tradeable
as home market instruments in both the European and U.S. domestic markets.
Initial settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel Bank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Asset-Backed Certificates issues.
Secondary, cross-market trading between Cedel Bank or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedel Bank and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf of
their participants through their respective Depositaries, which in turn will
hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior Asset-Backed Certificates
issues. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel Bank or
Euroclear accounts will follow the settlement procedures applicable to
conventional Eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Student
Loan Asset-Backed Securities issues in same-day funds.
Trading between Cedel Bank and/or Euroclear Participants. Secondary
market trading between Cedel Bank Participants or Euroclear Participants
will be settled using the procedures applicable to conventional
eurobonds in same-day funds.
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Trading between DTC Seller and Cedel Bank or Euroclear Purchaser. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a Cedel Bank Participant or a Euroclear Participant, the
purchaser will send instructions to Cedel Bank or Euroclear through a Cedel
Bank Participant or Euroclear Participant at least one business day prior to
settlement. Cedel Bank or Euroclear will instruct the respective Depositary, as
the case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days, or a 360-day year of twelve 30-day months, as applicable. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will
then be made by the respective Depositary of the DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be credited to the respective clearing system and by
the clearing system, in accordance with its usual procedures, to the Cedel Bank
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York.) If
settlement is not completed on the intended value date (i.e., the trade fails),
the Cedel Bank, or Euroclear cash debt will be valued instead as of the actual
settlement date.
Cedel Bank Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel Bank or Euroclear. Under
this approach, they may take on credit exposure to Cedel Bank or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Cedel Bank or Euroclear has extended a line of
credit to them, Cedel Bank Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedel Bank Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially
reduce or offset the amount of such overdraft charges, although this result
will depend on each Cedel Bank Participant's or Euroclear Participant's
particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global
Securities to the respective European Depositary for the benefit of Cedel Bank
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two
DTC Participants.
Trading between Cedel Bank or Euroclear Seller and DTC Purchaser. Due
to time zone differences in their favor, Cedel Bank Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred the respective clearing system, through
the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel Bank or Euroclear through a Cedel Bank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedel Bank or Euroclear will instruct the Depositary, as appropriate, to
deliver the Global Securities to the DTC Participant's account against payment.
Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date on the
basis of the actual number of days in such accrual period and a year assumed to
consist of 360 days, or a 360-day year of twelve 30-day months, as applicable.
For transactions settling on the 31st of the month, payment will include
interest accrued to an excluding the first day of the following month. The
payment will then be reflected in the account of the Cedel Bank Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in
the Cedel Bank Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when
settlement occurred in New York). Should the Cedel Bank Participant or
Euroclear Participant have a line of credit with its respective clearing system
and elect to be in debt in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft incurred over that
one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Cedel Bank
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
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Finally, day traders that use Cedel Bank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Bank Participants
or Euroclear Participants should note that these trades would automatically
fail on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through Cedel Bank or Euroclear for one day (until
the purchase side of the day trade is reflected in their Cedel Bank or
Euroclear accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their Cedel
Bank or Euroclear accounts in order to settle the sale side of the
trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant
is at least one day prior to the value date for the sale to the Cedel
Bank Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedel Bank, or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate.
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on
Income Effectively Connected with the Conduct of a Trade or Business in the
United States).
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.
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Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Note Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership, or other entity taxable as such,
organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is includible in gross
income for United States tax purposes, regardless of its source or (iv) a trust
other than a "Foreign Trust," as defined in Section 7701(a)(31) of the Code.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities as well as the
application of recently issued Treasury regulations relating to tax
documentation requirements that are generally effective with respect to
payments made after December 31, 1998.
81
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[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.
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The registrant has adopted a bylaw which makes indemnification mandatory
under certain circumstances for a person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, by reason of the fact that he is or was a director or officer of the
registrant or of affiliated corporations or other entities. Such persons must be
indemnified against reasonably incurred expenses (including attorneys' fees),
judgments, penalties, fines and amounts paid in settlement if it is determined
in accordance with the procedures set forth in the bylaws that such person
conducted himself in good faith and that he reasonably believed (a) in the case
of conduct in his official capacity with the registrant, that his conduct was in
the registrant's best interest, or (b) in all other cases (except criminal
cases), that his conduct was at least not opposed to the registrant's best
interests, or (c) in the case of any criminal proceeding, that he had no
reasonable cause to believe his conduct was unlawful. The registrant must also
indemnify any such person who was wholly successful in defense of any action,
suit, or proceeding as to which he was entitled to indemnification against
expenses (including attorneys' fees) reasonably incurred by him in connection
with the proceeding. No indemnification shall be made to such persons with
respect to any claim, issue or matter in connection with a proceeding by or in
the right of registrant in which the person is adjudged liable to the
registrant, or in connection with any proceeding charging that the person
derived an improper personal benefit in which he was adjudged liable on the
basis that he derived an improper personal benefit.
Pursuant to agreements which the registrant may enter into with
underwriters or agents (forms of which are included as exhibits to this
Registration Statement), officers and directors of the registrant, and
affiliates thereof, may be entitled to indemnification by such underwriters or
agents against certain liabilities, including liabilities under the Securities
Act of 1933, as amended, arising from information which has been furnished to
the registrant by such underwriters or agents that appear in the Registration
Statement or any Prospectus.
Item 16. Exhibits.
The following is a complete list of exhibits filed as part of the
Registration Statement. Exhibit numbers correspond to the numbers in the Exhibit
Table of Item 601 of Regulation S-K.
Exhibit No. Description
* 1.1 Form of Underwriting Agreement
4.1 Form of Indenture of Trust by and between Registrant and Zions First
National Bank, a national banking association, 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)
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<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 Amended and Restated Servicing Agreement dated as of June 19, 1996, by
and between the Registrant and Union Bank and Trust Company was filed
as an Exhibit to Registrant's Registration Statement on Form S-3 (File
No. 333-28551) and is hereby incorporated by reference.
10.2.1 Second Amended and Restated Servicing Agreement dated as of December
18, 1998 by and between the Registrant and Union Bank and Trust
Company was filed as an Exhibit to the Registrant's current report on
Form 8-K on January 6, 1999, as is hereby incorporated by reference.
* 12.1 Statement of Computation of Ratio of Earnings to Fixed Charges
* 23.1 Consent of Kutak Rock (included in Exhibit 5.1 hereto)
* 23.2 Consent of Ballard Spahr Andrews & Ingersoll, LLP
24.1 Power of Attorney 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.
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:
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<PAGE>
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) 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.
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<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions in Item 15, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
or 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(l) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
posteffective amendment that contains a form of prospectus shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering hereof.
The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"), in accordance with the rules and regulations
prescribed by the Commission under Section 305(b) (2) of the Trust Indenture
Act.
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<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 May 3, 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 May 3, 1999
*------------------------------- (Principal Executive Officer)
Michael S. Dunlap
/s/ Stephen F. Butterfield President and Director May 3, 1999
- --------------------------------
Stephen F. Butterfield
/s/ Ronald W. Page Vice-President, Secretary, May 3, 1999
- ------------------------------- Treasurer and Director
Ronald W. Page (Principal Financial and
Accounting Officer)
*----------------------------- Director May 3, 1999
Ross Wilcox
*----------------------------- Director May 3, 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.
II-6
