<PAGE> 1
Filed pursuant to Rule 424(b)(1)
Registration No. 333-4418
PROSPECTUS
NELLIE MAE EDUCATION LOAN TRUST
$67,000,000 LIBOR RATE ASSET BACKED CLASS A-1 NOTES
$48,800,000 LIBOR RATE ASSET BACKED CLASS A-2 NOTES
$7,700,000 LIBOR RATE ASSET BACKED CERTIFICATES
NELLIE MAE EDUCATION FUNDING, LLC (SELLER)
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EACH OF NELLIE MAE, INC. AND THE SELLER IS A PRIVATE, NONGOVERNMENTAL
ORGANIZATION AND THE FINANCED LOANS ARE NOT FUNDED OR
INSURED BY ANY GOVERNMENTAL ENTITY.
------------------
The Nellie Mae Education Loan Trust (the "Trust" or "Issuer") will be
formed pursuant to a Trust Agreement, dated as of June 1, 1996 (together with
any supplemental or amendment thereto, the "Trust Agreement"), between Nellie
Mae Education Funding, LLC ("Seller") and Fleet National Bank, as owner trustee
(the "Owner Trustee"), and will issue (i) an aggregate of $67,000,000 LIBOR Rate
Asset Backed Class A-1 Notes (the "A-1 Notes"), which will bear interest at an
interest rate equal to the LIBOR Rate plus 0.17%, but not to exceed at any time
18% per annum, and have a Maturity Date of December 15, 2004; an aggregate of
$48,800,000 LIBOR
(cover continued on next page)
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SEE "RISK FACTORS" BEGINNING ON PAGE 14 OF THIS PROSPECTUS FOR A DISCUSSION
OF RISK FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE 1996 SECURITIES.
THE OFFERED 1996 NOTES REPRESENT OBLIGATIONS OF, AND THE 1996 CERTIFICATES
REPRESENT UNDIVIDED BENEFICIAL INTERESTS IN, THE TRUST AND DO NOT
REPRESENT OBLIGATIONS OF OR INTERESTS IN NELLIE MAE, INC., THE
SELLER, THE OWNER TRUSTEE, THE INDENTURE TRUSTEE OR ANY
OF THEIR RESPECTIVE AFFILIATES OR SUBSIDIARIES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO THE
PUBLIC DISCOUNT(1) SELLER(2)
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A-1 Notes.............................. 100% 0.65% 99.35%
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A-2 Notes.............................. 100% 0.65% 99.35%
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1996 Certificates...................... 100% 0.65% 99.35%
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Total................................ $123,500,000 $802,750 $122,697,250
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(1) Nellie Mae, Inc. has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Seller, estimated at $100,000.
The 1996 Securities are offered by the Underwriter subject to prior sale,
when, as and if issued to and accepted by the Underwriter, subject to approval
of certain legal matters by counsel for the Underwriter. The Underwriter
reserves the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the 1996 Securities will be
made in book-entry form only through the Same Day Funds Settlement System of The
Depository Trust Company on or about July 12, 1996.
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SMITH BARNEY INC.
Dated: July 9, 1996
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(cover continued from previous page)
Asset Backed Class A-2 Notes (the "A-2 Notes", and together with the A-1
Notes,the "1996 Notes"), which will bear interest at an interest rate equal to
the LIBOR Rate plus 0.26%, but not to exceed 18% per annum, and have a Maturity
Date of December 15, 2018; and (iii) an aggregate of $7,700,000 LIBOR Rate Asset
Backed Certificates (the "1996 Certificates" and together with the 1996 Notes,
the "1996 Securities"), which will bear interest at an interest rate equal to
the LIBOR Rate plus 0.625%, but not to exceed 18% per annum, and have a Maturity
Date of December 15, 2018. In the event that the interest rate on the 1996 Notes
or 1996 Certificates, as the case may be, for any Interest Period exceeds the
applicable Net Loan Rate (as defined herein) for such Interest Period, the
Noteholders or Certificateholders, as the case may be, will receive interest
payments on the 1996 Notes or 1996 Certificates for such Interest Period at the
applicable Net Loan Rate; the difference between the interest rate and the
applicable Net Loan Rate for such an Interest Period shall be deferred and paid
to the Noteholders or Certificateholders, as the case may be, on the next
succeeding Distribution Date on which funds are available therefor, except as
described herein. The 1996 Notes will be issued pursuant to a Master Trust
Indenture, dated as of June 1, 1996 (the "Master Indenture," and together with
any supplements or amendments thereto, the "Indenture") between the Issuer and
State Street Bank and Trust Company, as indenture trustee (the "Indenture
Trustee"), and the First Terms Supplement thereto. The 1996 Certificates will be
issued pursuant to the Trust Agreement and the First Trust Supplement thereto.
The assets of the Trust will consist primarily of a pool of student loans
purchased or to be purchased from the Seller as more completely described
herein. The Notes will be secured by the assets of the Trust (other than the
Certificate Fund) pursuant to the Indenture. Pursuant to the Indenture, the
Issuer, subject to certain conditions contained therein, may issue from time to
time additional notes that will be equally and ratably secured with the 1996
Notes by the assets of the Trust (collectively with the 1996 Notes, the
"Notes"). In addition, the Issuer may issue from time to time, subject to
certain conditions contained in the Trust Agreement, additional certificates
(together with the 1996 Certificates, the "Certificates," and collectively with
the Notes, the "Securities"). A registration statement for such additional
Securities will be filed with the Securities and Exchange Commission if and when
such additional Securities are offered to the public. This Prospectus relates
only to the 1996 Securities.
There is currently no secondary market for the 1996 Securities. The
Underwriter intends to make a secondary market for the 1996 Securities, but has
no obligation to do so. There can be no assurance that a secondary market for
the 1996 Securities will develop or, if one does develop, that it will continue.
(end of cover page)
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES
AND THE CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
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SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus. Certain capitalized terms
used in this Summary are defined elsewhere in this Prospectus. A Glossary of
Major Defined Terms is set forth immediately preceding the back cover page.
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Issuer ...................... Nellie Mae Education Loan Trust (the "Trust" or the
"Issuer") is a Massachusetts business trust to be formed by
the Seller and the Owner Trustee pursuant to the Trust
Agreement, dated as of June 1, 1996. The activities of the
Trust and the Owner Trustee are limited by the terms of the
Trust Agreement to acquiring, owning, selling and managing
the Loans and the other assets of the Trust as described
herein, issuing the Securities, collecting and making
payments thereon and other activities related thereto. See
"FORMATION OF THE TRUST."
Seller ...................... Nellie Mae Education Funding, LLC (the "Seller") is a
Delaware limited liability company. The Seller is a limited
purpose entity formed solely to acquire Loans from Nellie
Mae, Inc., to transfer such Loans to the Issuer and to carry
out certain related functions described herein. Nellie Mae,
Inc. owns 99% of the interests in the Seller, and NMI
Education Loan Corporation ("NMELC"), a Massachusetts
non-profit corporation of which Nellie Mae, Inc. is the sole
member, owns the remaining one percent (1%) interest in the
Seller. See "ORGANIZATIONAL CHART" and "NELLIE MAE EDUCATION
FUNDING, LLC."
Administrator ............... Nellie Mae, Inc. ("Nellie Mae, Inc."), will act as
administrator (in such capacity, the "Administrator") on
behalf of the Trust pursuant to an Administration Agreement
(as amended and supplemented from time to time, the
"Administration Agreement"), among the Administrator, the
Issuer, the Owner Trustee and the Indenture Trustee. Nellie
Mae, Inc. is a non-profit corporation organized and existing
under the laws of The Commonwealth of Massachusetts and is
an organization described in Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended. Nellie Mae, Inc.
carries on a private, nongovernmental education loan program
to provide funds to assist families and individuals in
financing the cost of attendance at various educational
institutions, by originating or purchasing loans made for
such purposes. Nellie Mae, Inc.'s loan program, which is
unrelated to any federally guaranteed or insured education
loan programs, is designed to meet the needs of parents and
students whose education loan requirements are not fully met
by such federal education loan programs. See "NELLIE MAE,
INC." Neither Nellie Mae, Inc. nor any of its affiliates,
including the Seller, nor any other private or governmental
entity has guaranteed, insured or is otherwise obligated
with respect to the Securities. See "RISK FACTORS."
Indenture Trustee ........... State Street Bank and Trust Company is the Indenture Trustee
under the Indenture.
Owner Trustee ............... Fleet National Bank is the Owner Trustee under the Trust
Agreement.
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Servicer .................... USA Group Loan Services, Inc. (the "Servicer" or "Loan
Services") will service those Financed Loans that are
acquired by the Issuer and delivered to Loan Services. Loan
Services is a private, non-profit corporation organized
under the laws of Delaware. See "SERVICER."
Purpose of Issue ............ Proceeds of the 1996 Securities will be used by the Issuer
to finance the Issuer's purchase of certain loans (the
"Loans") originated or purchased under Nellie Mae, Inc.'s
private, nongovernmental education loan program to finance
the cost of higher education (the Loans so financed by the
1996 Securities being referred to herein as the "1996
Financed Loans", and together with any similar loans
financed by the issuance of additional Securities, the
"Financed Loans").
Assets of the Trust
Financed Loans .............. The Financed Loans will consist of Loans made or purchased
by Nellie Mae, Inc. pursuant to its private, nongovernmental
graduate and undergraduate loan program and will include
rights to receive payments made with respect to such
Financed Loans. As of April 30, 1996 (the "Initial Cut-off
Date"), the Initial Loans had an aggregate principal balance
of $64,934,152 and a remaining weighted average maturity of
142 months.
A. Loan Origination Process Applicants for Nellie Mae, Inc.'s student loans apply
directly to Nellie Mae, Inc. Upon review and approval of the
applicant for credit qualification, Nellie Mae, Inc.
confirms with the student's school that the requested loan
amount is within the student's costs of education that have
not been met through other sources of financial aid.
Proceeds of the loan are then disbursed either by Nellie
Mae, Inc., or by a commercial bank on its behalf, directly
to the student's school on behalf of the student. When the
loan is in repayment, the borrower makes monthly payments to
the Servicer as agent for Nellie Mae, Inc. which is the
owner of the loan. The Servicer deposits these payments into
the designated Nellie Mae, Inc. account. In addition, from
time to time, Nellie Mae, Inc. has purchased existing
portfolios of student loans from banks ("Purchased Loans").
Each Purchased Loan is reviewed prior to its purchase to
ensure that it meets Nellie Mae, Inc.'s own credit
underwriting criteria for newly originated student loans.
Certain of the Financed Loans are Purchased Loans. See "CASH
FLOW CHART" and "THE TRUST ESTATE-Nellie Mae, Inc.'s Loan
Program--Loan Origination Process."
B. Securitization of Financed Loans On or prior to the date of issuance of the 1996 Securities
(the "Closing Date"), Nellie Mae, Inc. will sell student
loans that will constitute the Initial Loans to the Seller
pursuant to a Master Terms Purchase Agreement, dated as of
June 1, 1996 and Purchase Agreement Number 1 dated as of the
Closing Date (together with subsequent supplemental purchase
agreements entered into on or before January 10, 1997, the
"Purchase Agreement") and the Seller will sell the Initial
Loans to the Issuer pursuant to a Master Terms Sales
Agreement, dated as of June 1, 1996 and Sales Agreement
Number 1 dated as of the Closing Date (together with
subsequent supplemental sales agreements entered into on or
before January 10, 1997, the "Sales Agreement"). The Issuer
will purchase the 1996 Financed Loans with the proceeds of
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the 1996 Securities. The Issuer will make payments of
principal and interest due to the 1996 Securityholders from
the net cash receipts of payments made by the borrowers of
the 1996 Financed Loans. See "CASH FLOW CHART" and
"DESCRIPTION OF THE SALES AND PURCHASE AGREEMENTS."
Pre-Funding Account ......... From time to time on or prior to January 10, 1997, pursuant
to the Purchase Agreement, Nellie Mae, Inc. will be
obligated to sell, and the Seller will be obligated to
purchase, subject to the satisfaction of certain conditions
described therein, Subsequent Loans at a purchase price
equal to the principal balance plus accrued interest less
amounts held to insure against loan losses. Pursuant to the
Sales Agreement, and subject to the satisfaction of certain
conditions described herein and therein, the Seller will in
turn sell the Subsequent Loans to the Issuer at a purchase
price equal to the amount paid by the Seller to Nellie Mae,
Inc. for such Subsequent Loans, which purchase price shall
be paid from moneys on deposit in the 1996-A Subaccount
within the Pre-Funding Account. Subsequent Loans will be
transferred from Nellie Mae, Inc. to the Seller and from the
Seller to the Issuer on the Business Day specified by Nellie
Mae, Inc. and the Seller (each, a "Subsequent Transfer
Date"). The 1996-A Subaccount of the Pre-Funding Account
will be maintained with the Indenture Trustee and will be an
asset of the Indenture Trust Estate. The 1996-A Subaccount
of the Pre-Funding Account is designed solely to hold funds
to be applied by the Issuer during the 1996 Funding Period
(as defined below) to pay to the Seller the purchase price
for Subsequent Loans. Moneys on deposit in the 1996-A
Subaccount of the Pre-Funding Account will not be available
to cover losses on or in respect of the 1996 Financed Loans.
On the Closing Date, the 1996-A Subaccount of the
Pre-Funding Account will be created with an initial deposit,
from the proceeds of the Securities, of $54,523,282 (the
"1996 Pre-Funded Amount"). The "1996 Funding Period" will be
the period from the Closing Date until the earliest to occur
of (i) the date on which the amount on deposit in the 1996-A
Subaccount of the Pre-Funding Account is less than $100,000,
(ii) the date on which an Event of Default occurs under the
Indenture, (iii) the date on which an Event of Termination
occurs under the Sales Agreement, (iv) the insolvency of the
Seller or Nellie Mae, Inc. or (v) the close of business on
January 10, 1997. During the 1996 Funding Period, on one or
more Subsequent Transfer Dates, the 1996 Pre-Funded Amount
will be applied to purchase Subsequent Loans from the
Seller. Nellie Mae, Inc. expects that it will have
commitments for Loans equal to or in excess of the 1996
Pre-Funded Amount on or before November 15, 1996 (the
"Commitment Cut-off Date") and that the 1996 Pre-Funded
Amount will be fully applied to acquire Loans by January 10,
1997, although no assurance can be given that this will in
fact occur. Any portion of the 1996-A Subaccount of the
Pre-Funding Account remaining uncommitted to the acquisition
of Loans after the Commitment Cut-off Date and any portion
of the 1996-A Subaccount in the Pre-Funding Account
remaining unexpended at the end of the Funding Period, will
be applied to pay principal of the Notes on the first
Distribution Date after (i) the Commitment Cut-off Date; or
(ii) the end of the 1996 Funding Period, as the case may be.
Application
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of amounts in the 1996-A Subaccount of the Pre-Funding
Account may be applied to pay principal of the 1996 Notes on
or before the Commitment Cut-off Date or the end of the 1996
Funding Period if the Issuer certifies to the Indenture
Trustee, based upon a certificate received by the Issuer
from the Seller, that the amount of Loans committed or
originated will be insufficient to utilize by the Commitment
Cut-off Date or the end of the 1996 Funding Period, as the
case may be, the entire 1996 Pre-Funding Amount.
Revenue Fund ................ The Indenture Trustee is required to maintain the Revenue
Fund into which is deposited (i) all amounts received in
respect of the Financed Loans, whether as principal,
interest, late charges or in payment or repurchase of
Financed Loans, (ii) amounts received on cancellation of
Financed Loans, (iii) amounts received as recoveries from a
Guarantor, if any, and (iv) amounts received as earnings on
or income from Investment Securities included in the
balances of the Funds and Accounts. See "DESCRIPTION OF THE
INDENTURE-Flow of Funds--Revenue Fund."
Debt Service Reserve Fund ... The Indenture Trustee is required to maintain the Debt
Service Reserve Fund. On the Closing Date, the Indenture
Trustee is required to deposit to the applicable Account
within the Debt Service Reserve Fund the amount specified in
the related Terms Supplement. Moneys shall also be deposited
into the applicable Debt Service Reserve Account from the
applicable Revenue Account if the amount therein is less
than the applicable Debt Service Reserve Requirement. See
"DESCRIPTION OF THE INDENTURE-Flow of Funds--Debt Service
Reserve Fund."
Sales and Purchase Agreements Nellie Mae, Inc. will sell Loans to the Seller pursuant to a
Master Terms Purchase Agreement and Supplemental Purchase
Agreements and the Seller will sell Loans to the Trust
pursuant to a Master Terms Sales Agreement and Supplemental
Sales Agreements.
Nellie Mae, Inc. and the Seller, under the Purchase
Agreement and the Sales Agreement, respectively, will be
obligated to repurchase any Financed Loan if the interest of
the purchaser of such Financed Loan is materially adversely
affected by a breach of any representation or warranty made
by Nellie Mae, Inc. or the Seller, as the case may be, with
respect to the Financed Loan, if the breach has not been
cured following the discovery by or notice to Nellie Mae,
Inc. or the Seller, as the case may be. See "DESCRIPTION OF
SALES AND PURCHASE AGREEMENTS.
Servicing Agreement ......... The Issuer will enter into a Servicing Agreement dated as of
June 1, 1996 with the Servicer for the servicing of the
Financed Loans. See "SERVICER."
Administration Agreement .... The Issuer, the Indenture Trustee and the Owner Trustee will
enter into an Administration Agreement dated as of June 1,
1996 with the Administrator pursuant to which the
Administrator will perform certain duties on behalf of the
Issuer and the Owner Trustee in connection with the Notes,
the Certificates and the Trust Estate, including the
Financed
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Loans. See "DESCRIPTION OF ADMINISTRATION AGREEMENT."
The 1996 Notes
General ..................... The 1996 Notes are to be issued in the following classes and
initial principal amounts (each a "Class"):
$67,000,000 A-1 Notes
$48,800,000 A-2 Notes
The Trust will issue the 1996 Notes pursuant to the Master
Trust Indenture, dated as of June 1, 1996 (the "Master
Indenture") and the First Terms Supplement dated as of June
1, 1996, authorizing such 1996 Notes (the "First Terms
Supplement" and, together with the Master Indenture and any
other amendments or supplements thereto, the "Indenture")
between the Trust and the Indenture Trustee. The 1996 Notes
will represent obligations of the Trust, secured by the
assets of the Trust (other than the Certificate Fund). The
1996 Notes will be issued as fully-registered notes without
coupons and are initially to be issued in the name of Cede &
Co., as nominee of The Depository Trust Company ("DTC"). See
"THE 1996 NOTES."
Interest Payments ........... Interest on the A-1 Notes for the period beginning on the
date of issuance to, but not including, August 15, 1996 (the
"Initial Period") shall accrue at an interest rate equal to
5.6739%, and interest on the A- 2 Notes for the Initial
Period shall accrue at an interest rate equal to 5.7639%.
Thereafter, interest on the 1996 Notes will accrue at an
interest rate which shall be equal to the LIBOR Rate plus
0.17%, in the case of the A-1 Notes, and the LIBOR Rate plus
0.26%, in the case of the A-2 Notes. The interest rate on
each Class of 1996 Notes will be adjusted on August 15,
1996, and on the 15th day of each month thereafter (each a
"Rate Adjustment Date"), based on the LIBOR Rate determined
on the second Business Day immediately preceding each such
Rate Adjustment Date (a "Rate Determination Date"). The
interest rate on the 1996 Notes shall never exceed the
maximum rate permitted by law. In addition, the interest
rate on the 1996 Notes shall never exceed, for any Interest
Period, a rate of 18% per annum. See "THE NOTES--Interest on
the Notes."
Interest on the 1996 Notes (calculated on the basis of a
360-day year for actual days elapsed) will be payable on the
15th day of each month (each a "Distribution Date").
In the event that the interest rate on the 1996 Notes for
any Interest Period exceeds the applicable Net Loan Rate
(which rate is equal to the weighted average interest rate
on the 1996 Financed Loans minus one and eight-tenths
percent (1.8%)) for such Interest Period, the Noteholders
will receive interest payments on the 1996 Notes for such
Interest Period in an amount equal to such applicable Net
Loan Rate; the difference between the interest rate and the
applicable Net Loan Rate for such an Interest Period shall
be deferred and paid to the Noteholders on the next
succeeding Distribution Date on which funds are available
therefor, PROVIDED that the principal of such 1996 Notes
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is not fully paid prior to such Distribution Date. See "THE
1996 NOTES--Interest on the Notes."
Principal Payments .......... Each Class of 1996 Notes has the following stated maturity
dates:
Class Maturity Date
----- -------------
A-1 December 15, 2004
A-2 December 15, 2018
The 1996 Notes are subject to mandatory principal
distributions, mandatory prepayments and optional purchase
prepayment prior to maturity. See "THE 1996
NOTES--Prepayment."
Mandatory Principal
Distributions ............... The Indenture provides that, except as provided under "THE
1996 NOTES--Prepayment--Mandatory Principal Distributions,"
principal payments on or with respect to the 1996 Financed
Loans must be deposited to the 1996-A Subaccount of the Note
Payment Account established under the Indenture.
The 1996 Notes are subject to mandatory principal
distributions on each Distribution Date as a whole or in
part in amounts equal to moneys representing principal
payments on or with respect to the 1996 Financed Loans
deposited to the credit of the 1996-A Subaccount of the Note
Payment Account. No principal of A-2 Notes may be so prepaid
unless no A-1 Notes remain outstanding.
The 1996 Notes are also subject to mandatory principal
distributions using funds that would otherwise be available
to increase amounts in the Debt Service Reserve Account,
make distributions with respect to the Certificates, or for
other purposes set forth in the Indenture, if the Trust's
ratio of assets to liabilities (as more specifically defined
below, the "Primary Parity Trigger") falls below certain
prescribed levels. See "--The 1996 Certificates - Interest
Payments" and "DESCRIPTION OF THE INDENTURE-Flow of Funds."
If the Primary Parity Trigger (as defined below) is less
than 104%, the Indenture requires that the interest payments
on or with respect to the 1996 Financed Loans and other
moneys in the 1996-A Accounts and Subaccounts under the
Indenture in excess of amounts necessary to pay interest
(exclusive of Deferred Interest) on the 1996 Notes shall be
applied to make mandatory principal distributions on the
1996 Notes. See "DESCRIPTION OF INDENTURE--Flow of Funds."
In addition, if the Primary Parity Trigger is less than
112.78%, the Indenture requires that the interest payments
on or with respect to the 1996 Financed Loans and other
moneys in various 1996-A Accounts and Subaccounts under the
Indenture in excess of amounts necessary to pay interest on
the 1996 Securities (exclusive of Deferred Interest) and to
increase the amount in the 1996-A Account of the Debt
Service Reserve Fund to the Debt Service Reserve Requirement
shall be applied to make mandatory principal distributions
on the 1996 Notes. See "DESCRIPTION OF INDENTURE--Flow of
Funds."
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"Primary Parity Trigger" means, as of any date of
determination, an amount (expressed as a percentage) equal
to the sum of (i) the Balances then on deposit in all Funds
and Accounts allocable to the 1996 Securities (excluding
Balances attributable to principal of or accrued interest on
Defaulted Loans) and (ii) amounts on deposit in the lockbox
account held by the Servicer and allocable to the 1996
Financed Loans, divided by an amount equal to the principal
amount of all Notes then Outstanding plus all accrued and
unpaid interest thereon plus any unpaid portion of the
Administration Requirement. The Primary Parity Trigger shall
be calculated by the Administrator as of the date of the
information contained in the then most recent report of the
Servicer provided by the Issuer to the Indenture Trustee.
"Secondary Parity Trigger" shall mean, as of any date of
determination, an amount (expressed as a percentage) equal
to the sum of (i) the Balances then on deposit in all Funds
and Accounts hereunder (excluding Balances attributable to
principal of or accrued interest on Defaulted Loans) and
(ii) amounts on deposit in the lockbox account held by the
Servicer and allocable to the 1996 Financed Loans, divided
by an amount equal to the principal amount of all Notes and
Certificates then Outstanding plus all accrued and unpaid
interest thereon plus any unpaid portion of the
Administration Requirement. The Secondary Parity Trigger
shall be calculated by the Administrator as of the date of
the information contained in the then most recent report of
the Servicer provided by the Issuer to the Indenture
Trustee.
The 1996 Notes are also subject to mandatory principal
distribution from excess moneys in the 1996-A Subaccount of
the Pre-Funding Account. See "DESCRIPTION OF THE
INDENTURE--Flow of Funds."
Optional Purchase
Prepayment .................. The Seller may repurchase all remaining Financed Loans, and
thus effect the early retirement of the A-2 Notes, on any
Distribution Date on or after which the Balance in the
1996-A Account of the Student Loan Portfolio Fund is equal
to or less than 10% of the Initial Pool Balance, at a price
equal to the outstanding principal balance of the Financed
Loans, plus accrued and unpaid interest. See "THE 1996
NOTES--Prepayment--Optional Purchase Prepayment."
Principal Factor ............ All prepayments of 1996 Notes of any Class, whether by
mandatory principal distribution or prepayment, shall be
made pro rata within that Class. In connection with each
prepayment of 1996 Notes of any Class, the Indenture Trustee
shall compute the Principal Factor for that Class. The
Principal Factor shall be a seven-digit decimal indicating
the principal balance of each 1996 Note of a Class as of a
Distribution Date (after giving effect to any prepayments
made on that date) as a fraction of the original principal
amount of the 1996 Note. The principal balance of any 1996
Note can be determined by multiplying the original principal
amount of such 1996 Note by the Principal Factor applicable
to that Class of 1996 Notes.
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Security for the Notes
Indenture Trust Estate ...... The Indenture Trust Estate consists of (i) all Revenues (as
defined herein); (ii) the amounts in all Subaccounts,
Accounts and Funds (whether derived from proceeds of the
sale of the Notes, from Revenues or from any other source,
excluding the Certificate Fund); (iii) all rights, title,
interest and privileges of the Issuer, as the owner of the
Financed Loans, in and to (a) the Financed Loans, including
all promissory notes evidencing the indebtedness for
Financed Loans and all related documentation, and all rights
of the Issuer to receive any and all payments of any nature
and from any source with respect to the Financed Loans, (b)
each Guaranty Agreement insofar as it relates to the
Financed Loans, (c) the Servicing Agreement, (d) the
Administration Agreement, and (e) any Sales Agreements with
the Seller with respect to the Financed Loans; (iv) all
products and proceeds of any of the foregoing; and (v) all
other property of every kind and nature which is now or from
time to time hereafter pledged, assigned or transferred as
and for security under the Indenture to the Indenture
Trustee by the Issuer or by anyone on its behalf. See "THE
TRUST ESTATE."
Collateralization ........... Upon closing, the value of all assets pledged to the
Indenture Trust Estate will equal 110.65% of the principal
amount of all of the Notes and is expected to reach at least
112.78% upon expenditure of all the funds in the 1996-A
Subaccount in the Pre-Funding Account.
Denominations ............... The 1996 Notes will be offered for purchase in minimum
denominations of $20,000 and integral multiples of $1,000 in
excess thereof in book-entry form only. Definitive 1996
Notes will be issued only under the limited circumstances
described herein. Persons acquiring beneficial interests in
the Notes will hold their interests through DTC. See
"INFORMATION REGARDING THE SECURITIES-Book-Entry
Registration" and "-Definitive Securities."
Additional Notes ............ The Indenture provides that the Issuer may from time to time
issue additional Notes to acquire additional Loans. Such
additional Notes shall be secured by the Indenture Trust
Estate equally and ratably with the 1996 Notes. In order to
issue additional Notes, the Indenture requires that the
Issuer satisfy certain conditions, including but not limited
to, the condition that the issuance of such additional Notes
will not adversely affect the ratings on the then
outstanding Notes and Certificates. A registration statement
for such additional Notes will be filed with the Securities
and Exchange Commission (the "Commission") if and when such
additional Notes are offered to the public. This Prospectus
relates only to the 1996 Securities.
The 1996 Certificates
General ..................... The 1996 Certificates will represent undivided interests in
the Trust. See "THE 1996 CERTIFICATES-General."
The Trust will issue $7,700,000 aggregate principal amount
of 1996 Certificates pursuant to the Trust Agreement and the
First Trust Supplement. Payments in respect of the
Certificates, including the
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1996 Certificates, will be subordinated to payments on the
Notes to the extent described herein. See "THE 1996
CERTIFICATES-General."
Interest Payments ........... Interest on the 1996 Certificates (calculated on the basis
of a 360-day year for actual days elapsed) will be payable
on each Distribution Date.
Interest on the 1996 Certificates for the period beginning
on the date of issuance to, but not including, August 15,
1996 (the "Initial Period") shall accrue at an interest rate
equal to 6.1289%. Thereafter, interest on the 1996
Certificates will accrue at an interest rate which shall be
equal to the LIBOR Rate plus 0.625%. The interest rate on
the 1996 Certificates will be adjusted on August 15, 1996,
and on the 15th day of each month thereafter (each a "Rate
Adjustment Date"), based on the LIBOR Rate determined on the
second Business Day immediately preceding each such Rate
Adjustment Date (a "Rate Determination Date"). The interest
rate on the 1996 Certificates shall never exceed the maximum
rate permitted by law. In addition, the interest rate on the
1996 Certificates shall never exceed, for any Interest
Period, the rate of 18% per annum. See "THE 1996
CERTIFICATES--Interest on the Certificates."
In the event that the interest rate on the 1996 Certificates
for any Interest Period exceeds the applicable Net Loan Rate
for such Interest Period, the Certificateholders will
receive interest payments on the 1996 Certificates for such
Interest Period in an amount equal to such applicable Net
Loan Rate; the difference between the interest rate and the
applicable Net Loan Rate for such an Interest Period shall
be deferred and paid to the Certificateholders on the next
succeeding Distribution Date on which funds are available
therefor, PROVIDED that the principal of such 1996
Certificates is not fully paid prior to such Distribution
Date. See "THE 1996 CERTIFICATES--Interest on the
Certificates."
NO INTEREST ON THE 1996 CERTIFICATES SHALL BE DISTRIBUTED IF
AFTER SUCH DISTRIBUTION THE PRIMARY PARITY TRIGGER WOULD BE
LESS THAN 104%. See "DESCRIPTION OF INDENTURE--Flow of
Funds" and "THE 1996 NOTES--Prepayment--Mandatory Principal
Distributions."
Principal Payments .......... The 1996 Certificates shall have a maturity date of December
15, 2018.
Mandatory Principal
Distributions ............... The Indenture provides that, except as provided under "THE
1996 NOTES--Prepayment--Mandatory Principal Distributions,"
principal payments on or with respect to the 1996 Financed
Loans must be deposited to the 1996-A Subaccount of the Note
Payment Account established under the Indenture.
The Indenture provides that if no 1996 Notes are
Outstanding, principal payments on or with respect to the
1996 Financed Loans shall be transferred to the Owner
Trustee and applied to the prepayment of principal of the
1996 Certificates in accordance with the Trust Agreement on
each Distribution Date.
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Optional Purchase
Prepayment .................. The Seller may repurchase all remaining 1996 Financed Loans,
and thus effect the early retirement of the 1996
Certificates, on any Distribution Date on or after which the
Balance in the 1996-A Account of the Student Loan Portfolio
Fund is equal to or less than 10% of the Initial Pool
Balance, at a price equal to the outstanding principal
balance of the 1996 Financed Loans, plus accrued and unpaid
interest. See "THE 1996 CERTIFICATES--Prepayment-Optional
Purchase Prepayment".
Principal Factor ............ All prepayments of 1996 Certificates, whether by mandatory
principal distribution or optional purchase prepayment,
shall be made pro rata. In connection with each prepayment
of 1996 Certificates, the Owner Trustee shall compute the
Principal Factor for the 1996 Certificates. The Principal
Factor shall be a seven-digit decimal indicating the
principal balance of each 1996 Certificate as of a
Distribution Date (after giving effect to any prepayments
made on that date) as a fraction of the original principal
amount of the 1996 Certificate. The principal balance of any
1996 Certificate can be determined by multiplying the
original principal amount of the 1996 Certificate by the
Principal Factor applicable to that 1996 Certificate.
Collateralization ........... Upon closing, the value of all moneys and 1996 Financed
Loans owned by the Issuer will equal 103.75% of the
principal amount of all Notes and Certificates and is
expected to be at least 105.74% upon expenditure of all the
funds in the 1996-A Subaccount in the Pre- Funding Account.
Additional Certificates ..... The Trust Agreement provides that the Issuer may from time
to time issue additional Certificates to acquire additional
Loans. In order to issue additional Certificates, the Trust
Agreement requires that the Issuer satisfy certain
conditions, including but not limited to, the condition that
the issuance of such additional Certificates will not
adversely affect the ratings on the then outstanding Notes
and Certificates. A registration statement for such
additional Certificates will be filed with the Commission if
and when such additional Certificates are offered to the
public. This Prospectus relates only to the 1996 Securities.
Denominations ............... The 1996 Certificates will be issued in minimum
denominations of $20,000 and integral multiples of $1,000 in
excess thereof in book-entry form only; provided, however,
that 1996 Certificates may be issued in denominations less
than $20,000 and other than in integral multiples of $1,000
to the Seller and NMELC. Persons acquiring beneficial
interests in the 1996 Certificates will hold their interests
through DTC. Definitive certificates will be issued only
under the limited circumstances described herein. See
"INFORMATION REGARDING THE 1996 SECURITIES--Book-Entry
Registration" and "--Definitive Securities."
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Tax Considerations .......... In the opinion of counsel for the Issuer, (i) the 1996
Notes will be characterized as debt for Federal income
tax purposes, and (ii) the 1996 Certificates will
constitute interests in a trust fund that will not be
treated as an association taxable as a corporation.
Each Noteholder, by the acceptance of a Note of a given
Series, will agree to treat such Note as indebtedness,
and each Certificateholder, by the acceptance of a
Certificate of a given Class and assuming that any such
Certificates are sold to persons other than the Seller,
will agree to treat the Issuer as a partnership in
which such Certificateholder is a partner for Federal
income tax purposes.
Due to the method of allocation of Issuer income to the
Certificateholders, cash basis holders may, in effect, be
required to report income from the Certificates on an
accrual basis. In addition, because tax allocations and
tax reporting will be done on a uniform basis, but
Certificateholders may be purchasing Certificates at
different times and at different prices,
Certificateholders may be required to report on their
tax returns taxable income that is greater or less than
the amount reported to them by the Trust. See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES."
ERISA Considerations ........ A fiduciary of any employee benefit plan or other
retirement arrangement subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), should carefully review with its
legal advisors whether the purchase or holding of any
class of Securities could give rise to a transaction
prohibited or not otherwise permissible under ERISA or
Section 4975 of the Code. See "ERISA CONSIDERATIONS."
Subordination of Certificates The rights of the Certificateholders to receive
distributions with respect to the 1996 Financed Loans
will be subordinated to the rights of the Noteholders,
to the extent described herein. This subordination is
intended to enhance the likelihood of timely receipt
by the Noteholders of the full amount of interest and
principal required to be paid to such Holders, and to
afford such Noteholders limited protection against
losses in respect of the 1996 Financed Loans.
The protection afforded to the Noteholders by the
subordination feature described above will be effected by
the preferential right of the Noteholders to receive, to
the extent described herein, current distributions from
collections on or in respect of the Financed Loans prior to
the application of such collections for making payments in
respect of the Certificates. There is no other protection
against losses on the Financed Loans afforded to the
Holders of the Notes.
Ratings of the Securities ... It is a condition of the issuance of the Notes and of the
Certificates that the Notes be rated in the highest
investment rating category by at least two nationally
recognized rating agencies and that the Certificates be
rated in the "A" rating category by at least two such rating
agencies. A rating is not a recommendation to purchase, hold
or sell Securities, inasmuch as such rating does not comment
as to market price or suitability for a particular investor.
The ratings of the Notes and
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Certificates address the likelihood of the ultimate payment
of principal of and interest on the Notes and Certificates
pursuant to their respective terms. However, the Rating
Agencies do not evaluate, and the ratings of the Notes and
Certificate do not address, the likelihood of payment of the
Noteholders' Deferred Interest or the Certificateholders'
Deferred Interest. There can be no assurance that a rating
will remain for any given period of time or that a rating
will not be lowered or withdrawn entirely by a Rating Agency
if, in its judgement, circumstances in the future so
warrant. There can be no assurance as to whether any
additional rating agency will rate the Notes or the
Certificates, or if one does, what rating would be assigned
by such rating agency.
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RISK FACTORS
Prospective purchasers of the 1996 Securities should consider carefully
the following discussion of risk factors associated with an investment in the
1996 Securities.
LIMITED LIQUIDITY
There is currently no secondary market for the 1996 Securities. Smith
Barney Inc. (the "Underwriter") intends to make a secondary market in the 1996
Securities, but has no obligation to do so. There can be no assurance that a
secondary market will develop for the 1996 Securities or, if it does develop,
that it will provide the Holders of the 1996 Securities with liquidity of
investment or that it will remain for the term of the 1996 Securities.
BASIS RISK; NET LOAN RATE
The Financed Loans bear interest based on the Prime Rate, which is the
base rate on corporate loans at large U.S. money center commercial banks as
reported in THE WALL STREET JOURNAL. The 1996 Securities, however, will bear
interest based on the LIBOR Rate as published by the Telerate Service, up to a
maximum of 18%. If the spread between the Prime Rate and the LIBOR Rate were to
narrow permanently, the Holders of the 1996 Securities might receive interest at
a rate equal to the Net Loan Rate. Interest at a rate equal to the difference
between the interest rate on the 1996 Securities and the Net Loan Rate would be
deferred until the next succeeding Distribution Date on which funds are
available therefor. To the extent principal of the 1996 Securities is paid prior
to the payment of any Deferred Interest, the Deferred Interest on such principal
will not be paid.
FACTORS POSSIBLY AFFECTING RECEIPT OF REVENUES FROM OR WITH RESPECT TO THE
FINANCED LOANS
GENERALLY. Actual revenues received from the Financed Loans and,
therefore, the Trust's ability to pay promptly the amount of interest and
principal payable on the 1996 Securities, will depend on various factors
including, among others, the maturities and other terms of the Financed Loans
and the timely receipt of payments of principal of and interest on such Financed
Loans. To the extent actual revenues received from or with respect to the
Financed Loans vary in timing or amount from the assumptions for this financing,
the ability of the Trust to pay principal of and interest on some or all of the
1996 Securities could be adversely affected.
VARIABILITY OF ACTUAL CASH FLOWS. Amounts received with respect to the
Financed Loans may vary in both timing and amount from the payments actually due
on the Financed Loans for a variety of economic, social and other factors,
including, both individual factors, such as unemployment of the borrower, and
general factors, such as a general economic downturn which could increase the
amount of defaulted Financed Loans. Failure by borrowers to pay timely the
principal of and interest on the Financed Loans will affect the amount of
available funds, which may reduce the amount of principal and interest paid to
Holders of the 1996 Securities. The effect of such factors, including the effect
on the Trust's ability to pay principal and interest with respect to the 1996
Securities, is impossible to predict.
LOAN DEFERMENT AND FORBEARANCE; REPAYMENT STATUS OF THE INITIAL LOANS.
The terms of the Financed Loans allow qualified borrowers of undergraduate loans
(see "THE TRUST ESTATE-Undergraduate Loan Program") to defer payments of
principal and qualified borrowers of graduate loans (see "THE TRUST
ESTATE-Graduate Loan Program") to defer payments of both principal and interest
during periods when the student is continuously enrolled in school. In either
the Undergraduate or Graduate loan program, the student may extend the period of
continuous enrollment, thereby extending the term of the loan and, in the case
of Graduate loans, may further delay the payment of interest. However, once a
student is no longer enrolled, such student cannot return to a continuous
enrollment status.
As of the Initial Cut-off Date, borrowers of 46.4% of the Initial Loans
were deferring payments of principal and interest and 23.0% were deferring
payments of principal.
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Borrowers are also eligible for periods of forbearance at the
discretion of Nellie Mae, Inc., whereby payments of principal and interest may
be reduced or deferred. Nellie Mae, Inc.'s policy is to permit up to two, six
month periods of forbearance in cases of demonstrated financial hardship. As of
the Initial Cut-off Date, borrowers of 2.4% of the Initial Loans were in a
forbearance status. See "THE TRUST ESTATE-The Initial Loans."
LIMITED LIQUIDITY OF FINANCED LOANS. If an Event of Default occurs
under the Indenture, subject to certain conditions, the Indenture Trustee is
authorized, with the consent of the Noteholders, to sell the Financed Loans.
There can be no assurance, however, that the Indenture Trustee will be able to
find a purchaser for the Financed Loans in a timely manner or that the market
value of such Financed Loans would, at any time, be equal to the aggregate
outstanding principal amount of the 1996 Securities and accrued interest
thereon.
DEFAULT RISK ON FINANCED LOANS. The Financed Loans are not made under
any federal or governmental loan program and are not insured or guaranteed by
any governmental agency or instrumentality. The actual cash flow to the
Indenture Trust Estate may vary depending upon the actual default experience of
the Financed Loans. If actual default experience is higher than expected by
Nellie Mae, Inc., there will be a delay or reduction in receipt of Revenues by
the Indenture Trustee. If the actual experience is substantially higher than
expected, a delay or reduction in payments to Noteholders and Certificateholders
may occur.
GEOGRAPHICAL CONCENTRATION OF BORROWERS. The Financed Loans are made
and are expected to be made to borrowers concentrated in certain geographical
regions of the United States. The borrowers' ability to repay the Financed Loans
may be affected by the general economic condition of such particular
geographical region. See "THE TRUST ESTATE-The Initial Loans."
CONCENTRATION OF BORROWERS BY SCHOOL. The Financed Loans are made and
are expected to be made to borrowers concentrated in certain schools. The
borrowers' ability to repay the Financed Loans may be affected by the employment
prospects of graduates of such particular schools. See "THE TRUST ESTATE-The
Initial Loans."
SUBORDINATION OF CERTIFICATES
The rights of the Certificateholders to receive payments of interest
are subordinated to the rights of the Noteholders to receive payments of
interest and the rights of the Certificateholders to receive payments of
principal are subordinated to the rights of the Noteholders to receive payments
of interest and principal. Consequently, Revenues on deposit in the Revenue Fund
and the Debt Service Reserve Fund on (i) any Distribution Date, will be applied
to the payment of interest on the Notes before payment of interest on the
Certificates and (ii) any Distribution Date that is also a Maturity Date, will
be applied to the payment of interest on the Notes before payment of interest
and principal on the Certificates and will be applied to the payment of
principal on the Notes before payment of principal on the Certificates. The
Certificateholders will not be entitled to any payments of principal until the
Notes are paid in full. If amounts otherwise allocable to the Certificates are
used to fund payments of interest or principal on the Notes, distributions with
respect to the Certificates may be delayed or reduced and Certificateholders may
suffer a loss. Notwithstanding the foregoing, distributions of principal to
Certificateholders will not be subordinated to the payment of Deferred Interest
to Noteholders, if any. The Certificateholders bear directly the credit and
other risks associated with an undivided interest in the Trust. See "THE 1996
CERTIFICATES-Subordination."
LIMITED ASSETS OF THE TRUST
The Trust does not have, nor is it permitted or expected to have, any
significant assets or sources of funds other than the Financed Loans, the
Revenue Fund, the Pre-Funding Account and the Debt Service Reserve Fund. The
Notes represent obligations solely of the Trust, and the Certificates represent
interests solely in the Trust and its assets. Neither the Notes nor the
Certificates will be insured or guaranteed by the Seller, the Servicer, Nellie
Mae, Inc., the Owner Trustee or any governmental agency. Consequently, Holders
of the Notes and the Certificates must rely for repayment upon payments made
with respect to the Financed Loans and, to the extent available under
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the circumstances described herein, amounts on deposit in the Funds and Accounts
described above. The 1996-A Pre-Funding Account will only be available during
the Funding Period to cover obligations of the Trust relating to Subsequent
Loans or the prepayment of Notes as required herein, and is not intended to
cover losses on the Financed Loans. Similarly, amounts to be deposited in the
Debt Service Reserve Fund are limited in amount and will be reduced, subject to
the Debt Service Reserve Requirement. If the Debt Service Reserve Fund is
exhausted, the Trust will depend solely on payments made with respect to the
Financed Loans to make payments on the Notes and the Certificates and
Noteholders and Certificateholders could suffer a loss. Noteholders and
Certificateholders will have no claim to any amounts properly distributed to the
Seller, NMELC, the Administrator or the Servicer from time to time as described
herein and the Seller, NMELC, the Administrator and the Servicer shall in no
event be required to refund such distributed amounts. See "DESCRIPTION OF THE
INDENTURE-Flow of Funds."
PREPAYMENT OF THE 1996 SECURITIES FROM MONEYS IN THE 1996-A PRE-FUNDING
SUBACCOUNT
On the Closing Date, the Trust will own the Initial Financed Loans and
the Pre-Funded Amount on deposit in the 1996-A Pre-Funding Subaccount. If the
aggregate principal amount of the 1996 Financed Loans sold by the Seller to the
Trust during the Funding Period is less than the 1996 Pre-Funded Amount, the
Trust will prepay principal to Noteholders. To the extent that amounts on
deposit in the 1996-A Pre-Funding Account have not been fully committed by the
Commitment Cut-off Date or fully applied to purchase Subsequent Loans by the
Trust by the end of the 1996 Funding Period, the Holders of the Class of Notes
with the earliest Maturity Date that funded the 1996-A Pre-Funding Subaccount
will receive as prepayments of principal an amount equal to the amount in the
1996-A Pre-Funding Subaccount in excess of that needed to acquire Subsequent
Loans. See DESCRIPTION OF THE INDENTURE-Pre-funding Account."
In addition, any conveyance of Subsequent Loans is subject to the
following conditions, among others: (i) each such Subsequent Loan must satisfy
the eligibility criteria specified in the Sales Agreement and (ii) the Seller
will not select such Subsequent Loans in a manner that it believes is adverse to
the interests of the Noteholders or the Certificateholders.
PREPAYMENT OF THE 1996 SECURITIES FROM MONEYS RECEIVED AS PREPAYMENTS OF THE
FINANCED LOANS
Financed Loans may be prepaid by borrowers at any time. For this
purpose the term "prepayments" includes prepayments in full or in part from any
source, including with respect to Financed Loans payments from Guarantors, if
any or if applicable, upon default. The rate of prepayments on the Financed
Loans cannot be predicted and may be influenced by a variety of economic, social
and other factors affecting borrowers, including interest rates, the
availability of alternative financing and the general job market for graduates
of institutions of higher education. In addition, under certain circumstances,
the Seller or Nellie Mae, Inc. will be obligated to repurchase Financed Loans
from the Trust as a result of breaches of their respective representations,
warranties or covenants in the Sales Agreement or the Purchase Agreement. The
proceeds to the Trust of such repurchase will be deposited in the Revenue Fund.
See "DESCRIPTION OF THE SALES AND PURCHASE AGREEMENTS."
In addition, because monthly payment schedules on certain of the
Financed Loans are fixed for certain periods of time, scheduled payments with
respect to, and maturities of, the Financed Loans will be extended if interest
rates on the Financed Loans rise, or shortened if the interest rates on the
Financed Loans fall. Any reinvestment risks resulting from a faster or slower
incidence of prepayment of Financed Loans will be borne entirely by the
Noteholders and the Certificateholders.
UNSECURED NATURE OF FINANCED STUDENTS LOANS
All of the Financed Loans are unsecured obligations of the borrowers.
The borrowers have not pledged any collateral to the repayment of the Financed
Loans.
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DIFFERENT RISK BETWEEN CLASSES OF NOTES AND THE CERTIFICATES
Because the Classes of Notes within a Series with a later Maturity Date
will receive no payment of principal until the Classes of Notes within that
Series with an earlier Maturity Date have been paid in full, the Classes of
Notes with an earlier Maturity Date bear relatively greater risk than each Class
with a later Maturity Date of an increased rate of principal prepayments with
respect to the Financed Loans (whether as a result of voluntary prepayments or
liquidations due to default or breach). In addition, the Class of Notes with the
earliest Maturity Date will generally bear the risk of principal prepayments as
a result of any remaining Pre-Funded Amount at each Commitment Cut-off Date or
the end of each Funding Period. On the other hand, Certificateholders and, to a
lesser extent, holders of Notes with a later Maturity Date would bear a greater
risk of loss of principal than do holders of Notes with an earlier Maturity Date
in the event of a shortfall in available funds and amounts on deposit in the
Revenue Fund because the Certificates do not receive principal distributions
until each Class of Notes of the corresponding Series of Notes is paid in full
and no Class of Notes within a Series will receive principal payments until each
Class of Notes within that Series with an earlier Maturity Date is paid in full.
RATINGS OF THE SECURITIES
It is condition of the issuance of the Notes and of the Certificates
that the Notes be rated in the highest investment rating category by at least
two nationally recognized rating agencies and that the Certificates be rated in
the "A" rating category by at least two such rating agencies. A rating is not a
recommendation to purchase, hold or sell the 1996 Securities, inasmuch as such
rating does not comment as to market price or suitability for a particular
investor. The ratings of the 1996 Securities address the likelihood of the
ultimate payment of principal of and interest on the 1996 Securities pursuant to
their respective terms. However, the Rating Agencies do not evaluate, and the
ratings of the 1996 Securities do not address, the likelihood of payment of the
Noteholders' Deferred Interest or the Certificateholders' Deferred Interest.
There can be no assurance that a rating will remain for any given period of time
or that a rating will not be lowered or withdrawn entirely by a rating agency
if, in its judgement, circumstances in the future so warrant. There can be no
assurance as to whether any additional rating agency will rate the Notes or the
Certificates or, if one does, what rating would be assigned by such rating
agency.
ISSUANCE OF ADDITIONAL SECURITIES; ACCELERATION OF 1996 SECURITIES
The Issuer may from time to time issue additional Securities to acquire
additional Loans. Additional Notes would be secured by the Indenture Trust
Estate equally and ratably with the 1996 Notes, and additional Certificates
would rank equally with the 1996 Certificates as described herein. While the
Indenture requires that the Issuer satisfy certain conditions, including, but
not limited to, the condition that the issuance of the additional Securities
will not adversely affect the ratings on the then outstanding Securities, if
additional Securities are issued and the Financed Loans acquired with the
proceeds of such additional Securities do not produce sufficient revenue to pay
principal of and interest on those additional Securities, it may result in a
delay in or reduction of distributions on the 1996 Securities. Moreover, if
additional Notes are issued and Event of Default occurs with respect to such
additional Notes and such Event of Default is not cured or waived, then all
Notes which are then outstanding, including the 1996 Notes, are subject to
acceleration. A registration statement for such additional Securities will be
filed with the Commission if and when such additional Securities are offered to
the public. This Prospectus relates only to the 1996 Securities.
LEGAL ASPECTS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Also, some state laws impose finance charge ceilings and
other restrictions on consumer transactions and require contract disclosures in
addition to those required under federal law. These requirements impose specific
statutory liability that could affect an assignee's ability to enforce consumer
finance contracts such as the Loans. In addition, the remedies available to the
Indenture Trustee or the Holders of the 1996 Notes upon an Event of Default
under the Indenture may not be readily available
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or may be limited by applicable state and federal laws. See "CONSUMER PROTECTION
LAWS" and "DESCRIPTION OF SALES AND PURCHASE Agreements-Representations, and
Warranties of Loan Seller."
Nellie Mae, Inc. and the Seller have taken steps in structuring the
transactions contemplated hereby that are intended to ensure that the voluntary
application for relief by Nellie Mae, Inc. under the Bankruptcy Code will not
result in the substantive consolidation of some or all of the assets and
liabilities of the Trust or the Seller with those of Nellie Mae, Inc. However,
there can be no assurance that the activities of Nellie Mae, Inc. or the Seller
or the Trust would not result in a court concluding that some or all of the
assets and liabilities of the Seller or of the Trust should be substantively
consolidated with or restored to or made a part of those of Nellie Mae, Inc. in
a proceeding under the Bankruptcy Code. If a court were to reach such a
conclusion or a filing were made under the Bankruptcy Code, or if an attempt
were made to litigate any of the foregoing issues, then delays in distributions
on the 1996 Securities could occur or reductions in the amounts of such
distributions could result.
It is intended by Nellie Mae, Inc. and the Seller that the transfer of
Financed Loans by Nellie Mae, Inc. to the Seller constitute a true sale of the
Financed Loans to the Seller. If the transfer constitutes such a true sale, the
Financed Loans and the proceeds thereof would not be property of Nellie Mae,
Inc. should it become the subject of the Bankruptcy Code subsequent to the
transfer of the Financed Loans to the Seller. Nellie Mae, Inc. will warrant to
the Seller in the related Purchase Agreement that the sale of the Financed Loans
by Nellie Mae, Inc. to the Seller is a valid sale of the Financed Loans by
Nellie Mae, Inc. to the Seller. Notwithstanding the foregoing, if Nellie Mae,
Inc. were to become subject to the Bankruptcy Code and a creditor or
trustee-in-bankruptcy of Nellie Mae, Inc. itself were to take the position that
the sale of Financed Loans by Nellie Mae, Inc. to the Seller should instead be
treated as a pledge of such Financed Loans to secure a borrowing of Nellie Mae,
Inc., delays in distributions on the 1996 Securities could occur or (should the
court rule in favor of Nellie Mae, Inc. or such trustee or creditor) reductions
in the amounts of such distributions could result. If the transfer of Financed
Loans by Nellie Mae, Inc. to the Seller is treated as a pledge instead of a
sale, a tax or government lien on the property of Nellie Mae, Inc. arising
before the transfer of such Financed Loans to the Seller may have priority over
the Trust's interest in such Financed Loans.
FORMATION OF THE TRUST
GENERAL
The Issuer is a business trust formed under the laws of The
Commonwealth of Massachusetts pursuant to the Trust Agreement between the Seller
and Owner Trustee. After its formation, the Trust will not engage in any
activity other than (i) issuing the Notes and the Certificates, (ii) purchasing
the Financed Loans, (iii) assigning all of its assets (other than the
Certificate Fund) to the Indenture Trustee, and (iv) engaging in other
activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith.
The Issuer will initially be capitalized with equity equal to $1.00
contributed by the Seller, which will be deposited in the Revenue Fund. The
Seller shall retain beneficial and record ownership of the 1996 Certificates in
an amount such that the aggregate amount of the 1996 Certificates then owned by
the Seller represents at least one percent (1%) of the outstanding 1996
Certificates. NMI Education Loan Corporation ("NMELC") shall obtain and retain
beneficial and record ownership of the 1996 Certificates in an amount such that
the aggregate amount of the 1996 Certificates then owned by NMELC represents at
least one ninety-ninth (1/99th) of the aggregate amount of the 1996 Certificates
then owned by the Seller. The remaining Certificates will be sold to third party
investors that are expected to be unaffiliated with the Seller, Nellie Mae, Inc.
or their affiliates. See "ORGANIZATIONAL CHART." The initial Trust Estate,
together with the proceeds from the initial sale of the 1996 Securities, will be
used by the Trust to purchase the Initial Financed Loans from the Seller
pursuant to the Sales Agreement and to fund the deposit of the 1996 Pre-Funded
Amount in the 1996-A Subaccount of the Pre-Funding Account.
Upon the consummation of such purchases, the property of the Trust will
consist of (i) a pool of Financed Loans, (ii) all funds collected in respect
thereof, and (iii) all moneys and investments on deposit in the Services
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<PAGE> 21
Fund, Debt Service Reserve Fund, Student Loan Acquisition Fund, Student Loan
Portfolio Fund, Note Fund and Certificate Fund. The 1996 Notes will be
collateralized by the property of the Trust (other than the Certificate Fund).
To facilitate servicing and to minimize administrative burden and expense, the
Servicer will be appointed custodian of the promissory notes representing the
Financed Loans owned by the Issuer.
The Issuer will use funds on deposit in the 1996-A Subaccount of the
Pre-Funding Account during the 1996 Funding Period to purchase Subsequent Loans,
which will constitute property of the Trust. The Pool Balance will be increased
during the 1996 Funding Period by the principal amount of Subsequent Loans
purchased by the Trust. The Seller expects that the amount of Subsequent Loans
will approximate 100% of the 1996 Pre-Funded Amount by the last day of the 1996
Funding Period; however, there can be no assurance that a sufficient amount of
Loans will be available for purchase by such date. If the entire 1996 Pre-Funded
Amount has not been expended by the end of the Funding Period, the Holders of
the A-1 Notes will receive any remaining amounts as payments of principal, and,
if such Holders of the A-1 Notes have been paid in full, the Holders of the A-2
Notes will receive the residual amounts as payments of principal.
The Trust's principal offices are in Boston, Massachusetts, in care of
the Owner Trustee.
THE OWNER TRUSTEE
Fleet National Bank is the Owner Trustee under the Trust Agreement. The
Owner Trustee is a national banking association organized under the laws of the
United States. The principal offices of the Owner Trustee are located at its
corporate trust department, One Federal Street, Boston, Massachusetts 02211 and
its telephone number is (617) 346-5508. The Owner Trustee, on behalf of the
Trust, will acquire legal title to all the Financed Loans from time to time
pursuant to the Sales Agreement.
RESIGNATION AND REMOVAL OF OWNER TRUSTEE
The Owner Trustee may at any time resign by giving written notice
thereof to the Administrator. The Administrator may dismiss the Owner Trustee at
any time for failure to act in accordance with the terms of the Trust Agreement;
PROVIDED, however, that prior to any such dismissal, the Administrator must give
the Owner Trustee notice identifying such failure and shall have given the Owner
Trustee two Business Days to cure such failure, if such failure relates to the
distribution of funds to Certificateholders, and 30 days to cure all other
failures. Upon receiving such notice of resignation or dismissal of the Owner
Trustee, the Administrator shall promptly appoint a successor Owner Trustee
meeting the applicable eligibility requirements.
The Owner Trustee's liability in connection with the issuance and sale
of the Certificates and the Notes is limited solely to the express obligations
of the Owner Trustee as set forth in the Trust Agreement and the Sales
Agreement.
INSOLVENCY EVENT
If an Insolvency Event occurs with respect to the Seller, the Trust
will dissolve and the Trust Agreement will be terminated 90 days after the date
of such Insolvency Event, unless, before the end of such 90-day period, the
Owner Trustee shall have received written instructions from the
Certificateholders (other than the Seller and NMELC) representing more than half
of the Certificate Balance (not including the principal amount of Certificates
held by the Seller and NMELC), to the effect that each such party disapproves of
the liquidation of the Financed Loans and termination of the Trust, in which
event the Trust shall continue. Upon such termination of the Trust, the Owner
Trustee shall direct the Indenture Trustee promptly to sell the assets of the
Trust (other than the Funds and Accounts) in a commercially reasonable manner
and on commercially reasonable terms. The proceeds of such a sale of the assets
of the Trust will be deposited in the Revenue Fund.
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<PAGE> 22
In the Trust Agreement, the Owner Trustee agrees not to institute
against the Seller or the Trust, or join, in any action against the Seller or
the Trust, any bankruptcy, reorganization, arrangement, insolvency, receivership
or liquidation proceedings, or other proceedings under any Federal or state
bankruptcy or similar law.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes and the satisfaction
and discharge of the Indenture, the Indenture Trustee will transfer to the Owner
Trust for the benefit of the Certificateholders the remaining Indenture Trust
Estate.
SELLER LIABILITY
Under the Trust Agreement, the Seller will agree to be liable directly
to and indemnify an injured party for all losses, claims, damages, liabilities
and expenses of the Trust (other than in respect of amounts payable by the Trust
on the Securities) to the extent that the Seller would be liable if the Trust
were a partnership under the Massachusetts Uniform Limited Partnership Act in
which the Seller were a general partner of the Trust; provided however, that the
Seller shall not be liable for any losses incurred by a beneficial owner of a
Note in its capacity as a Noteholder or to any Certificateholder. In addition,
any third party creditors of the Trust (other than in connection with the
obligations to Noteholders excepted above) shall be deemed third party
beneficiaries of the indemnification provisions of this paragraph.
THE TRUST ESTATE
GENERAL
The 1996 Notes are an obligation of the Issuer and will be secured by
the assets of the Issuer (other than the Certificate Fund). Each 1996
Certificate represents an undivided interest in the Issuer. The Issuer's assets
will include, among other things, (i) a pool of student loans; (ii) all moneys
received under the Financed Loans; (iii) such amounts as from time to time may
be held in one or more accounts established and maintained by the Servicer
pursuant to the Servicing Agreement as described herein; (iv) all moneys on
deposit in the Pre-Funding Account and the Debt Service Reserve Fund (including
all investments in such accounts and all income from the funds therein and all
proceeds thereof); (v) the rights of the Issuer under the Sales Agreement, the
Servicing Agreement, any Guaranty Agreement and the Administration Agreement;
and (vi) any and all proceeds of the foregoing.
THE LOAN POOL
The Loan Pool will initially consist of Loans (collectively, the
"Initial Loans") having an aggregate unpaid principal balance as of April 30,
1996 (the "Initial Cut-off Date") of $64,934,152 (the "Initial Pool Balance").
In addition to the Initial Loans sold by the Seller to the Issuer on
the Closing Date, the Issuer is expected to use the moneys in the 1996-A
Subaccount of the Pre-Funding Account to purchase from the Seller additional
student loans from time to time on or before January 10, 1997 (collectively, the
"Subsequent Loans" and, together with the Initial Loans, the "1996 Financed
Loans"). The Subsequent Loans to be purchased by the Issuer, if available, will
be purchased by the Seller from Nellie Mae, Inc. and sold by the Seller to the
Issuer. In addition, the Issuer may from time to time issue additional Notes and
Certificates to finance the acquisition of additional Loans for the Loan Pool
(collectively with the 1996 Financed Loans, the "Financed Loans"). Accordingly,
the statistical characteristics of the Loan Pool will vary upon the acquisition
of additional Financed Loans.
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<PAGE> 23
Nellie Mae, Inc. will sell the Initial Loans to the Seller pursuant to
the Purchase Agreement, and the Seller will sell the Initial Loans to the Issuer
pursuant to the Sales Agreement. Nellie Mae, Inc. will sell any Subsequent Loans
to the Seller pursuant to a Supplemental Purchase Agreement, and the Seller will
sell any Subsequent Loans to the Issuer pursuant to a Supplemental Sales
Agreement.
The obligation of the Issuer to purchase the Subsequent Loans is
subject to the following requirements:
1. Each Loan is not more than sixty (60) days delinquent in the
payment of principal and interest;
2. Each Loan will be fully disbursed by January 10, 1997;
3. Each Loan is accompanied by the loan application and the original
promissory note and any addendum thereto, or a certified copy
thereof.
In addition, pursuant to the Sales Agreement, the Seller is required
to make representations and warranties concerning the Loans. See "DESCRIPTION OF
THE SALES AND PURCHASE AGREEMENTS."
Because the Subsequent Loans will be originated or purchased by Nellie
Mae, Inc. after the Initial Loans, following the conveyance to the Issuer of
such Loans, the characteristics of the Loans, including the Subsequent Loans,
may vary from those of the Initial Loans. Among other things, in order to
acquire Loans with an initial principal balance of $6,000 or less, the Issuer
must obtain a small loan license from the Massachusetts Commissioner of Banks or
written assurance from the Massachusetts Commissioner of Banks that such a
license is not necessary. The Initial Loans will not include any Loans with an
initial principal balance of $6,000 or less. On July 3, 1996, the Issuer
received written assurance from the Massachusetts Commissioner of Banks to the
effect that a small loan license is not necessary. Accordingly, the Issuer
expects to purchase from amounts in the 1996-A Subaccount of the Pre-Funding
Account approximately $17,000,000 of Loans currently held by Nellie Mae, Inc.
with initial principal balance of $6,000 or less.
NELLIE MAE, INC.'S LOAN PROGRAM
The Loans which the Issuer purchases from the Seller were originated
or purchased by Nellie Mae, Inc. pursuant to Nellie Mae, Inc.'s private,
nongovernmental education loan program. Nellie Mae, Inc. has offered a student
loan program for undergraduate and graduate students since 1986, providing over
$600 million in loans to help students and their families bridge the gap between
the total cost of higher education and other financial aid received. Nellie Mae,
Inc. offers private loans throughout the country.
Applicants for Nellie Mae, Inc.'s student loans apply directly to
Nellie Mae, Inc. Upon review and approval of the applicant for credit
qualification, Nellie Mae, Inc. confirms with the student's school that the
requested loan amount is within the student's costs of education that have not
been met through other sources of financial aid. Proceeds of the loan are then
disbursed either by Nellie Mae, Inc., or by a commercial bank on its behalf,
directly to the student's school on behalf of the student. When the loan is in
repayment, the borrower makes monthly payments to the Servicer as agent for
Nellie Mae, Inc. which is the owner of the loan. The Servicer deposits these
payments into the designated Nellie Mae, Inc. account. In addition to student
loans that are originated under Nellie Mae, Inc.'s loan program, from time to
time, Nellie Mae, Inc. has purchased existing portfolios of student loans from
banks ("Purchased Loans"). Undergraduate and graduate Purchased Loans have the
same repayment terms and meet the same credit standards as described below for
Nellie Mae, Inc.'s newly originated student loans.
Marketing
Nellie Mae, Inc.'s private, nongovernmental undergraduate and graduate
education loan program is marketed nationally, both through the financial aid
office of educational institutions as well as directly to prospective borrowers.
Nellie Mae, Inc. works closely with schools around the country and seeks to
provide the "full-service"
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<PAGE> 24
complement of Nellie Mae, Inc. origination, debt planning and advisory services
to each college or university throughout the entire loan process.
In particular, Nellie Mae, Inc. has worked closely with the 32-member
Consortium on Financing Higher Education ("COFHE") schools to market its
private, nongovernmental loan program since the inception of the program in
1986. Members of COFHE include the following institutions:
Amherst College Pomona College
Barnard College Princeton University
Brown University Radcliffe College
Bryn Mawr College Rice University
Carleton College Smith College
Columbia University Stanford University
Cornell University Swarthmore College
Dartmouth College Trinity College
Duke University The University of Chicago
Georgetown University University of Pennsylvania
Harvard University The University of Rochester
The Johns Hopkins University Washington University
Massachusetts Institute Wellesley College
of Technology Wesleyan University
Mount Holyoke College Williams College
Northwestern University Yale University
Oberlin College
In addition, Nellie Mae, Inc. sponsors and participates in numerous
advisory sessions for high school students and their parents on college
financial planning and debt counseling issues; advertises in selected
educational publications; and targets major consumer media markets to broaden
awareness of its capabilities as an attractive source for education loans.
In some cases, Nellie Mae, Inc.'s collaboration with schools has led to
exclusive lending relationships with Nellie Mae, Inc., either for all or a
portion of the institutions' educational financing needs. Nellie Mae, Inc.
offers these colleges and universities a tailored loan package to meet their
unique needs.
Nellie Mae, Inc. has also developed "affinity" relationships with
large organizations such as the National Education Association ("NEA"), offering
its two million members access to student loan financing. Nellie Mae, Inc. has
been named the exclusive student loan provider to NEA members through its
sponsored Member Benefits Programs.
UNDERGRADUATE LOAN PROGRAM
Undergraduate loans are primarily made to parents of students attending
four-year, degree granting institutions. Parents may borrow from $2,000 up to
the cost of education, less other financial aid received, per academic year. The
student's school determines the maximum annual loan need amount.
Borrowers may choose from the following two interest options: a monthly
variable rate which is equal to 0 to 2 percent over the Prime Rate or a one-year
adjustable rate which, when set, approximates the Prime Rate plus 2 to 4
percent. Upon origination, a fee charged on the loans ranges from 5 to 7
percent, depending on the specific type selected. Loan proceeds are disbursed to
the institution on behalf of the borrower.
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<PAGE> 25
Undergraduate Repayment Terms and Options
While the student is continuously enrolled in school, borrowers may
choose from the following two repayment options: payment of principal and
interest or payment of interest only. Depending on the option selected, the
borrower begins full amortization either within 45 days of disbursement or upon
graduation. The borrower's monthly payment amount is initially fixed based on
the following repayment terms:
Principal Balance Outstanding Repayment Term
----------------------------- --------------
Less than $ 3,001 48 months
$3,001 to $4,000 72 months
$4,001 to $10,000 120 months
$10,001 to $50,000 180 months
Over $50,000 240 months
Thereafter, as the interest rate on the loan changes, the monthly
payment amount remains constant, with the repayment period lengthened or
shortened, and the interest accrual adjusted accordingly. However, if rates rise
such that the loan will not be fully amortized within 20 years of the
commencement of repayment or within a period twice the initial repayment period,
whichever is less, the monthly payment amount is adjusted to allow amortization
within the required time period. The monthly payment for loans which bear
interest at the one year adjustable rate is changed with the annual rate
adjustment.
One educational institution also sponsors Nellie Mae, Inc. loans
available only to students approved by the school's financial aid office and
guaranteed in full by the university. Loan terms are similar to Nellie Mae,
Inc.'s other undergraduate loans, with some minor exceptions. Loan amounts may
be as small as $1,000 and participating borrowers may select repayment on a
deferred principal and interest basis in which no payment is made until six
months after the student graduates. While in school, interest on the loan is
capitalized either on a quarterly or one-time basis at repayment. Loans
capitalizing at repayment incur a one-time fee equal to 2 percent of the
outstanding balance of such loan including unpaid interest. This fee is added to
the then outstanding loan balance. All credit decisions are made by the school.
Undergraduate Credit Standards
All undergraduate applications received by Nellie Mae, Inc., and all
undergraduate Purchased Loans prior to their purchase by Nellie Mae, Inc.,
undergo a full credit analysis to determine the creditworthiness of the
applicant(s) or the Purchased Loan.
Once the application or Purchased Loan is reviewed for completeness,
Nellie Mae, Inc.'s credit analysts perform the following steps:
1. Income listed on the application is verified with a recent pay
voucher, W-2 Form, Federal Income Tax Return or CPA-prepared
financial statements.
2. A national credit bureau report is obtained for each applicant
and reviewed for timely fulfillment of previous and existing debt
obligations.
3. Each applicant's current credit information is compared to the
applicant's credit bureau report for completeness. Applicants
must have a satisfactory two-year credit history.
4. A debt to income ratio measuring the applicant's obligations
(including the new undergraduate loans) to the gross monthly
income is calculated. Generally, an applicant with a clean credit
history cannot exceed a debt to income ratio of 40 percent. An
applicant's extremely high annual income, exceptional credit
history and other mitigating factors such as length of employment
and
23
<PAGE> 26
home ownership may allow the debt to income ratio to exceed 40
percent but in no case to exceed 50 percent.
5. Applicant information is entered into Nellie Mae, Inc.'s custom
credit scoring model. Depending on where the score generated
ranks the applicant, Nellie Mae, Inc. may approve, deny or
recommend that the application receive further review.
Nellie Mae, Inc.'s credit underwritten undergraduate loan portfolio
originated in 1995 has the following general characteristics:
Average Individual Average Combined Median Debt to
Applicant Salary Applicant Salary Income Ratio
---------------- ---------------- ------------
$41,232 $74,280 31.78%
Historical Default Trends
The following chart, as of March 31, 1996, shows historical cumulative
default trends for Nellie Mae, Inc.'s undergraduate loan portfolio since the
program's inception in 1986. These cumulative default rates represent gross
defaults and do not reflect amounts subsequently recovered through post-default
collection and litigation efforts. Each borrower cohort is shown in the chart,
along with the original disbursed and defaulted amounts by year.
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<PAGE> 27
<TABLE>
NELLIE MAE, INC.
CUMULATIVE DEFAULTS BY PROGRAM YEAR
UNDERGRADUATE LOANS
<CAPTION>
Disbursement 1986 1987 1988 1989 1990 1991 1992
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1986 ORIGINAL BALANCE $10,424,427
DEFAULTS $0 $0 $24,419 $55,474 $8,450 $30,784 $16,307
% OF BALANCE 0.00% 0.00% 0.23% 0.53% 0.08% 0.30% 0.16%
1987 ORIGINAL BALANCE $17,362,667
DEFAULTS $0 $15,539 $138,496 $205,520 $215,088 $208,526
% OF BALANCE 0.00% 0.09% 0.80% 1.18% 1.24% 1.20%
1988 ORIGINAL BALANCE $24,944,806
DEFAULTS $0 $35,238 $167,120 $301,818 $349,210
% OF BALANCE 0.00% 0.14% 0.67% 1.21% 1.40%
1989 ORIGINAL BALANCE $34,514,193
DEFAULTS $0 $72,292 $341,634 $546,650
% OF BALANCE 0.00% 0.21% 0.99% 1.58%
1990 ORIGINAL BALANCE $52,209,404
DEFAULTS $5,027 $176,941 $501,003
% OF BALANCE 0.01% 0.34% 0.96%
1991 ORIGINAL BALANCE $54,756,578
DEFAULTS $41,869 $294,827
% OF BALANCE 0.08% 0.54%
1992 ORIGINAL BALANCE $52,147,101
DEFAULTS $4,336
% OF BALANCE 0.01%
1993 ORIGINAL BALANCE
DEFAULTS
% OF BALANCE
1994 ORIGINAL BALANCE
DEFAULTS
% OF BALANCE
1995 ORIGINAL BALANCE
DEFAULTS
% OF BALANCE
1996 ORIGINAL BALANCE
DEFAULTS
% OF BALANCE
TOTALS $0 $0 $39,958 $229,208 $458,409 $1,108,134 $1,920,859
<CAPTION>
March TOTALS
Disbursement 1993 1994 1995 1996
Year
<S> <C> <C> <C> <C> <C> <C>
1986 ORIGINAL BALANCE
DEFAULTS $43,070 $2,082 $24,117 $0 $204,703
% OF BALANCE 0.41% 0.02% 0.23% 0.00% 1.96%
1987 ORIGINAL BALANCE
DEFAULTS $146,069 $130,900 $35,403 $0 $1,095,541
% OF BALANCE 0.84% 0.75% 0.20% 0.00% 6.31%
1988 ORIGINAL BALANCE
DEFAULTS $288,030 $120,331 $229,700 $0 $1,491,447
% OF BALANCE 1.15% 0.48% 0.92% 0.00% 5.98%
1989 ORIGINAL BALANCE
DEFAULTS $578,304 $261,426 $460,142 $4,454 $2,264,903
% OF BALANCE 1.68% 0.76% 1.33% 0.01% 6.56%
1990 ORIGINAL BALANCE
DEFAULTS $632,936 $458,176 $598,123 $27,568 $2,399,774
% OF BALANCE 1.21% 0.88% 1.15% 0.05% 4.60%
1991 ORIGINAL BALANCE
DEFAULTS $287,610 $311,485 $553,048 $20,646 $1,509,485
% OF BALANCE 0.53% 0.57% 1.01% 0.04% 2.76%
1992 ORIGINAL BALANCE
DEFAULTS $149,762 $310,843 $725,093 $74,287 $1,264,321
% OF BALANCE 0.29% 0.60% 1.39% 0.14% 2.42%
1993 ORIGINAL BALANCE $46,001,887
DEFAULTS $0 $143,093 $364,313 $54,172 $561,578
% OF BALANCE 0.00% 0.31% 0.79% 0.12 1.22%
1994 ORIGINAL BALANCE $28,367,703
DEFAULTS $12,102 $17,847 $3,574 $33,523
% OF BALANCE 0.04% 0.06% 0.01% 0.12%
1995 ORIGINAL BALANCE $15,811,144
DEFAULTS $22,255 $0 $22,255
% OF BALANCE 0.14% 0.00% 0.14%
1996 ORIGINAL BALANCE $1,908,370
DEFAULTS $0 $0
% OF BALANCE 0.00% 0.00%
TOTALS $2,125,783 $1,750,438 $3,030,041 $184,701 $10,847,530
</TABLE>
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<PAGE> 28
GRADUATE LOAN PROGRAM
Nellie Mae, Inc. offers graduate loans to students pursuing advanced
degrees. Since 1988, Nellie Mae, Inc. has offered supplemental loans to graduate
and professional students in need of funds beyond federal limits to finance the
cost of their education. These loans are made to creditworthy students
themselves or to the students and an eligible co-borrower. Depending on the
program of study, and the particular Nellie Mae, Inc. loan, graduate students
may borrow from $1,500 up to $20,000 annually. In addition, a graduate student
may borrow up to the cost of attendance per academic year, less other financial
aid received, provided that a creditworthy co-borrower is also an obligor on the
loan. The student's graduate or professional institution certifies the annual
loan need. The chart below shows the maximum annual loan amount available
without a co-borrower, depending on the particular Nellie Mae, Inc. loan
program, by academic discipline:
Maximum Annual Loan
Degree Program Without an Eligible Co-Borrower
-------------- -------------------------------
Medicine $ 7,500-20,000
Dentistry $ 7,500-20,000
Law $12,000-15,000
Business/Management $ 7,500-12,000
Engineering $ 7,500-12,000
Physical Sciences $ 7,500-12,000
All Others $ 7,500-12,000
In addition, maximum cumulative education debt limits apply to graduate
student borrowing, depending on the academic discipline, the particular Nellie
Mae, Inc. loan and whether a creditworthy co-borrower participates.
The chart below shows the maximum debt limits by academic discipline:
Maximum Cumulative
Degree Program Education Debt Limit
-------------- --------------------
Medicine $110,000-120,000
Dentistry $ 40,000-135,000
Law $ 70,000-105,000
Business/Management $ 45,000- 80,000
Engineering $ 40,000- 65,000
Physical Science $ 30,000- 50,000
All Others $ 25,000- 50,000
Graduate borrowers may choose from the following two interest options:
a monthly variable rate which is equal to 0 to 2 percent over the Prime Rate or
a one-year adjustable rate which, when set, approximates the Prime Rate plus 2
to 4 percent. Upon origination, the fees charged on the loans vary from 5 to 10
percent based on the academic discipline, Nellie Mae, Inc. loan selected and
whether the loan is borrowed with an eligible co-borrower.
Graduate Repayment Terms and Options
While the student is continuously enrolled in school, he or she may
select one of the following three repayment options: (i) payment of principal
and interest, (ii) payment of interest only and (iii) deferment of principal and
interest while in school and for an additional six months. During interest
deferment periods, interest continues to accrue and is capitalized either
quarterly or once at repayment. Those students that select the one-time
capitalization option are charged a fee equal to 2 percent of the outstanding
balance of such loan including unpaid interest. This fee is added to the
outstanding loan balance at the time of repayment. Full amortization begins
after the six month "grace" period. Under the interest only option, the borrower
is required to make monthly payments while in school equal to the interest
accrued. Six months after graduation, the student must begin full amortization.
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<PAGE> 29
Regardless of the repayment option, once payments of principal and
interest commence, the borrower's monthly payment amount is fixed based upon the
following repayment schedule:
Outstanding Principal Balance Repayment Term
----------------------------- --------------
Less than $3,001 48 months
$3,001 to $4,000 72 months
$4,001 to $10,000 120 months
$10,001 to $50,000 180 months
Over $50,000 240 months
Thereafter, as the interest rate on the loan changes, the monthly
payment amount remains the same, with the repayment period lengthened or
shortened, and the interest accrual adjusted accordingly. However, if rates rise
such that the loan will not be fully amortized within 20 years from the
commencement of repayment or within a period twice the initial repayment period,
whichever is less, the monthly payment amount is adjusted to allow amortization
within the required time period. The monthly payment for loans which bear
interest at the one year adjustable rate is changed with the annual rate
adjustment.
Graduate Credit Standards
Graduate student loans which are originated or purchased by Nellie
Mae, Inc. are underwritten based on the following criteria:
1. A national credit bureau report showing no current delinquencies
or prior defaults for both the graduate student and an eligible
co-borrower.
2. Each applicant's current credit information is compared to the
applicant's credit bureau report for completeness. While graduate
students are not required to meet the income verification
standards of Nellie Mae, Inc.'s undergraduate credit approval
process for parents, they must demonstrate good credit history.
3. If applicable, eligible co-borrowers must be verified to have a
minimum two-year continuous employment history and a two-year
credit history with no current delinquencies. In addition,
co-borrowers must demonstrate sufficient current income to meet
the obligations of this and other debt, similar to the
requirements applicable to undergraduate loans.
4. Applicant information is entered into Nellie Mae, Inc.'s custom
credit scoring model that specifically evaluates graduate student
credit. Depending on where the generated score ranks the
applicant, Nellie Mae, Inc. may approve, deny or recommend that
the application receive further review.
Historical Default Trends
Cumulative historical default trends for Nellie Mae, Inc.'s graduate
loan portfolio since the program's inception in 1988 are shown in the following
chart, as of March 31, 1996. These cumulative default rates represent gross
defaults and do not reflect subsequent recoveries from collection and litigation
activities. Each borrower cohort is shown in the chart, along with the original
disbursed and actual defaulted amounts by year.
27
<PAGE> 30
<TABLE>
NELLIE MAE, INC.
CUMULATIVE DEFAULTS BY PROGRAM YEAR
GRADUATE LOANS
<CAPTION>
Disbursement
Year 1988 1989 1990 1991 1992 1993
<S> <C> <C> <C> <C> <C> <C> <C>
1988 ORIGINAL BALANCE $3,900,000
DEFAULTS $0 $0 $22,963 $59,418 $120,398 $118,574
% OF BALANCE 0.00% 0.00% 0.59% 1.62% 3.09% 3.04%
1989 ORIGINAL BALANCE $15,068,527
DEFAULTS $0 $84,848 $244,193 $603,987 $598,323
% OF BALANCE 0.00% 0.56% 1.62% 4.01% 3.97%
1990 ORIGINAL BALANCE $28,646,835
DEFAULTS $15,180 $112,937 $432,902 $861,237
% OF BALANCE 0.05% 0.39% 1.51% 3.01%
1991 ORIGINAL BALANCE $35,361,678
DEFAULTS $15,192 $143,922 $528,028
% OF BALANCE 0.04% 0.41% 1.49%
1992 ORIGINAL BALANCE $47,493,128
DEFAULTS $0 $124,320
% OF BALANCE 0.00% 0.26%
1993 ORIGINAL BALANCE $47,092,701
DEFAULTS 2,264
% OF BALANCE 0.00%
1994 ORIGINAL BALANCE
DEFAULTS
% OF BALANCE
1995 ORIGINAL BALANCE
DEFAULTS
% OF BALANCE
1996 ORIGINAL BALANCE
DEFAULTS
% OF BALANCE
TOTALS $0 $0 $122,991 $431,740 $1,301,209 $2,232,746
<CAPTION>
Disbursement
Year 1994 1995 1996 TOTALS
<S> <C> <C> <C> <C> <C>
1988 ORIGINAL BALANCE
DEFAULTS $70,266 $31,045 $0 $422,664
% OF BALANCE 1.80% 0.80% 0.00% 10.84%
1989 ORIGINAL BALANCE
DEFAULTS $462,808 $395,432 $0 $2,389,591
% OF BALANCE 3.07% 2.62% 0.00% 15.86%
1990 ORIGINAL BALANCE
DEFAULTS $1,172,106 $677,831 $38,644 $3,310,837
% OF BALANCE 4.09 2.37% 0.13% 11.56%
1991 ORIGINAL BALANCE
DEFAULTS $985,676 $755,421 $52,617 $2,480,756
% OF BALANCE 2.79% 2.14% 0.15% 7.02%
1992 ORIGINAL BALANCE
DEFAULTS $416,372 $505,062 $42,676 $1,088,430
% OF BALANCE 0.88% 1.06% 0.09% 2.29%
1993 ORIGINAL BALANCE
DEFAULTS 192,847 248,063 67,830 511,004
% OF BALANCE 0.41% 0.53% 0.14% 1.09%
1994 ORIGINAL BALANCE $42,156,237
DEFAULTS $10,477 $77,664 $44,751 $132,892
% OF BALANCE 0.02% 0.18% 0.11% 0.32%
1995 ORIGINAL BALANCE $37,356,049
DEFAULTS $0 $2,134 $2,134
% OF BALANCE 0.00% 0.01% 0.01%
1996 ORIGINAL BALANCE $3,476,828
DEFAULTS 0 0
% OF BALANCE 0.00% 0.00%
TOTALS $3,310,452 $2,690,518 $248,652 $10,338,308
</TABLE>
28
<PAGE> 31
Nellie Mae, Inc. Delinquency and Default Rates
Since 1986, Nellie Mae, Inc. has originated or purchased over $600
million in loans under its private, nongovernmental education loan program. As
of March 31, 1996, approximately $21.7 million or 3.6 percent of these loans had
entered default. Shown below is a delinquency summary for all loans owned by
Nellie Mae, Inc.
as of April 30, 1996:
Number of Days Delinquent % (of Principal Balance Outstanding)
------------------------- ------------------------------------
30-60 Days 3.96%
61-90 Days 1.18
91-120 Days 0.88
Over 120 Days* 1.99
* The number of days delinquent is measured as the number of days elapsed
since the first missed payment date. Loans included in this category
include loans which have been declared to be in default and are in the
precollection period, a period which generally continues until loans
are approximately 180 days delinquent. This category does not include
loans submitted for collection activity and/or litigation.
Recovery Data
The following chart shows the cumulative recoveries, as of April 30,
1996, for Nellie Mae, Inc.'s undergraduate loan portfolio by year of default
since 1993.
Year of Default Cumulative Percent Recovered
--------------- ----------------------------
1993 29.6%
1994 37.7
1995 13.4
1996 4.1
The following chart shows the cumulative recoveries, as of April 30,
1996, for Nellie Mae, Inc.'s graduate loan portfolio by year of default since
1993.
Year of Default Cumulative Percent Recovered
--------------- ----------------------------
1993 30.3%
1994 27.0
1995 17.6
1996 1.2
The Initial Loans
The following table provides information on the composition of the 1996
Financed Loans as of the Initial Cut-off Date (April 30, 1996):
Aggregate Outstanding Principal Balance $64,934,152
Number of Borrowers 5,787
Average Outstanding Principal Balance Per Borrower $11,221
Weighted Average Annual Interest Rate (%) 10.39%
Weighted Average Remaining Term in Repayment (in months) 142
29
<PAGE> 32
<TABLE>
The following table shows the distribution of the 1996 Financed Loans
by outstanding balance as of the Initial Cut-off Date (April 30, 1996):
<CAPTION>
Percent of Loans by
Outstanding Balance Number of Borrowers Outstanding Balance Outstanding Balance
- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Less than $1,000 67 $ 14,182 0.0%
$1,000 - $2,000 19 27,083 0.0
$2,000 - $3,000 27 68,346 0.1
$3,000 - $4,000 60 210,376 0.3
$4,000 - $5,000 75 339,994 0.5
$5,000 - $6,000 104 579,274 0.9
$6,000 - $7,000 523 3,401,136 5.2
$7,000 - $8,000 854 6,453,995 9.9
$8,000 - $9,000 898 7,537,540 11.7
$9,000 - $10,000 451 4,261,346 6.6
$10,000 - $11,000 596 6,230,592 9.6
$11,000 - $12,000 307 3,485,948 5.4
$12,000 - $13,000 316 3,950,813 6.1
$13,000 - $14,000 292 3,914,856 6.0
$14,000 - $15,000 144 2,088,812 3.2
$15,000 - $16,000 173 2,693,543 4.1
$16,000 - $17,000 112 1,846,896 2.8
$17,000 - $18,000 97 1,692,219 2.6
$18,000 - $19,000 84 1,557,173 2.4
Over $19,000 588 14,580,028 22.6
----- ----------- -----
TOTAL 5,787 $64,934,152 100.0%
===== =========== =====
</TABLE>
The terms of the Financed Loans allow qualified borrowers of
undergraduate loans (see "THE TRUST ESTATE-Undergraduate Loan Program") to defer
payments of principal and qualified borrowers of graduate loans (see "THE TRUST
ESTATE-Graduate Loan Program") to defer payments of both principal and interest
during periods when the student is continuously enrolled in school. In either
the Undergraduate or Graduate loan program, the student may extend the period of
continuous enrollment, thereby extending the term of the loan and, in the case
of Graduate loans, may further delay the payment of interest. However, once a
student is no longer enrolled, such student cannot return to a continuous
enrollment status.
Borrowers are also eligible for periods of forbearance at the
discretion of Nellie Mae, Inc., whereby payments of principal and interest may
be reduced or deferred. Nellie Mae, Inc.'s policy is to permit up to two, six
month periods of forbearance in cases of demonstrated financial hardship.
<TABLE>
The following table shows the distribution of the 1996 Financed Loans
by borrower payment status as of the Initial Cut-off Date (April 30, 1996):
<CAPTION>
Borrower Percent of Loans by
Payment Status Outstanding Balance Outstanding Balance
- -------------- ------------------- -------------------
<S> <C> <C>
Deferred Principal and Interest $30,112,078 46.4%
Interest Only 14,925,787 23.0
Repayment 18,326,938 28.2
Forbearance 1,569,349 2.4
----------- -----
TOTAL $64,934,152 100.0%
=========== =====
</TABLE>
30
<PAGE> 33
<TABLE>
The following table shows the geographic distribution of the 1996
Financed Loans as of the Initial Cut-off Date (April 30, 1996):
Percent of Loans
Location Number of Borrowers Outstanding Balance Outstanding Balance
- -------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
New York 1,485 $16,700,961 25.72%
California 755 8,708,874 13.41
Massachusetts 611 6,700,299 10.32
New Jersey 315 3,859,581 5.94
Pennsylvania 308 3,404,059 5.24
Illinois 270 2,965,345 4.57
Connecticut 169 2,052,014 3.16
Maryland 166 1,802,966 2.78
Texas 128 1,697,269 2.61
Virginia 145 1,619,434 2.49
Florida 125 1,421,152 2.19
District of Columbia 109 1,169,766 1.80
Ohio 85 950,495 1.46
Georgia 79 837,321 1.29
Michigan 69 740,845 1.14
All Others 968 10,303,772 15.88
----- ----------- ------
TOTAL 5,787 $64,934,152 100.00%
===== =========== ======
</TABLE>
<TABLE>
The following table shows distribution of the 1996 Financed Loans by
year of disbursement as of the Initial Cut-off Date (April 30, 1996):
<CAPTION>
Percent of
Disbursement Date Outstanding Balance Outstanding Balance
----------------- ------------------- -------------------
<S> <C> <C>
1987 $ 43,520 0.07%
1988 165,776 0.26
1989 463,409 0.71
1990 950,236 1.46
1991 1,325,921 2.04
1992 1,807,982 2.78
1993 4,761,671 7.33
1994 9,156,130 14.10
1995 41,714,669 64.25
1996 4,544,838 7.00
----------- ------
TOTAL $64,934,152 100.00%
=========== =======
</TABLE>
31
<PAGE> 34
<TABLE>
The following table shows the distribution of the 1996 Financed Loans
by the interest rate as of the Initial Cut-off Date (April 30, 1996):
<CAPTION>
Percent of Loans by
Interest Rate Number of Borrowers Outstanding Balance Outstanding Balance
- ------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
9.00% - 9.99% 1,317 14,942,103 23.0
10.00% - 10.99% 3,036 34,116,592 52.6
11.00% - 11.99% 1,434 15,875,457 24.4
----- ----------- -----
TOTAL 5,787 $64,934,152 100.0%
===== =========== =====
</TABLE>
<TABLE>
The following table shows the distribution of 1996 Financed Loans as of
the Initial Cut-off Date (April 30, 1996) by school for the fifteen schools with
the highest outstanding balances:
<CAPTION>
Number of Percent of Loans
School Borrowers Outstanding Balance Outstanding Balance
- ------ --------- ------------------- -------------------
<S> <C> <C> <C>
New York University 1,400 $15,868,284 24.4%
Columbia University 276 3,205,660 4.9
University of Southern California 195 2,230,245 3.4
Harvard University 156 1,897,620 2.9
University of Pennsylvania 171 1,825,081 2.8
University of Chicago 128 1,333,528 2.1
Boston University 96 1,135,123 1.7
Georgetown University 109 1,133,537 1.7
University of Health Sciences Chicago Medical 94 1,063,473 1.6
University of the Pacific 87 919,091 1.4
George Washington University 68 781,220 1.2
Duke University 68 664,064 1.0
Cornell University 52 632,014 1.0
Johns Hopkins 61 618,492 1.0
New England Culinary Institute 50 575,907 0.9
----- ----------- ----
TOTAL 3,011 $33,883,339 52.0%
===== =========== ====
</TABLE>
<TABLE>
The following table shows the distribution of 1996 Financed Loans as of
the Initial Cut-off Date (April 30, 1996) by loan program:
Percent of Loans by
Loan Program Outstanding Balance Outstanding Balance
- ------------ ------------------- -------------------
<S> <C> <C>
Graduate $38,731,457 59.6%
Undergraduate 26,202,695 40.4
----------- -----
TOTAL $64,934,152 100.0%
=========== =====
</TABLE>
32
<PAGE> 35
TRADING INFORMATION
The weighted average life of the 1996 Notes and the 1996 Certificates
will generally be influenced by the rate at which the principal balances of the
1996 Financed Loans are paid, which payment may be in the form of scheduled
amortization or prepayments. For this purpose, the term "prepayments" includes
prepayments in full or in part, as a result of refinancing, death, disability or
bankruptcy and subsequent liquidation and as a result of Financed Loans being
repurchased by the Seller or Nellie Mae, Inc. as required or as permitted by the
Indenture, Sales Agreement or the Purchase Agreement. All of the Financed Loans
are prepayable at any time without penalty to the borrower. The rate of
prepayment of Financed Loans is influenced by a variety of economic, social and
other factors. In general, the rate of prepayments may tend to increase to the
extent that alternative financing becomes available at prevailing interest rates
which fall significantly below the interest rates applicable to the Financed
Loans. Under certain circumstances, the Seller or Nellie Mae, Inc. will be
obligated to repurchase Financed Loans from the Trust pursuant to the Indenture,
Sales Agreement or Purchase Agreement as a result of breaches of representations
and warranties.
In light of the above considerations, there can be no assurance as to
the amount of principal payments to be made on the 1996 Notes or 1996
Certificates on each Distribution Date. Any reinvestment risks resulting from a
faster or slower incidence of prepayment of 1996 Financed Loans will be borne
entirely by the 1996 Noteholders and the 1996 Certificateholders.
Principal Factor and Trading Information
In connection with each prepayment of 1996 Notes of any Class, the
Indenture Trustee shall compute the Principal Factor for such Class. The
Principal Factor shall be a seven-digit decimal indicating the principal balance
of each 1996 Note of a Class as of a Distribution Date (after giving effect to
any prepayments made on such date) as a fraction of the original principal
amount of the 1996 Note. The principal balance of any 1996 Note can be
determined by multiplying the original principal amount of the 1996 Notes by the
Principal Factor applicable to the 1996 Notes.
In connection with each prepayment of 1996 Certificates, the Owner
Trustee shall compute the Principal Factor for the 1996 Certificates. The
Principal Factor shall be a seven-digit decimal indicating the principal balance
of each 1996 Certificate as of a Distribution Date (after giving effect to any
prepayments made on such date) as a fraction of the original principal amount of
the 1996 Certificate. The principal balance of any 1996 Certificate can be
determined by multiplying the original principal amount of the 1996 Certificate
by the Principal Factor applicable to such 1996 Certificate.
The Holders of the Notes and Certificates will receive reports on or
about each Distribution Date concerning the payments received on the Financed
Loans, the Pool Balance, the applicable Principal Factors and various other
items of information. Holders of record during any calendar year will be
furnished information for tax reporting purposes not later than the latest date
permitted by law. See "INFORMATION REGARDING THE SECURITIES--Reports to
Securityholders."
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Also, unless preempted by federal law, some state laws
impose finance charge ceilings and other restrictions on consumer transactions
and require contract disclosures in addition to those required under Federal
law. Specifically, Nellie Mae, Inc., as originator and owner of education loans,
and as Administrator for the Financed Loans, must comply with the requirements
of consumer protection laws including, but not limited to, Massachusetts
consumer protection laws and Federal consumer protection laws such as the
Consumer Credit Protection Act, which includes the Equal Credit Opportunity Act,
the Truth-in-Lending Act, the Fair Credit Reporting Act and the Fair Debt
Collections Act, together with the regulations
33
<PAGE> 36
promulgated thereunder. These requirements impose specific statutory liabilities
upon lenders who fail to comply with their provisions. In certain circumstances,
the Seller or the Trust may be liable for certain violations of consumer
protection laws that apply to the Loans, either as assignee from Nellie Mae,
Inc. or the Seller or as the party directly responsible for obligations arising
after the sale. Nellie Mae, Inc. and the Seller are obligated pursuant to the
Purchase Agreement and the Sales Agreement, respectively, to repurchase any
Financed Loan which was not made or serviced in accordance with applicable
Federal or state law if the failure has a material adverse affect on the
Issuer's interest in the Loan. For a description of the Seller's and the Trust's
rights if the Financed Loans were not made and serviced in compliance in all
material respects with all applicable laws, see "DESCRIPTION OF THE SALES AND
PURCHASE AGREEMENTS - Representations and Warranties of Loan Seller."
TREATMENT OF NELLIE MAE LOANS IN BANKRUPTCY
Under existing law, educational loans generally are not subject to
discharge by the student borrower in bankruptcy if such loans are made under a
program funded in whole or in part by a nonprofit institution.
Title 11 of the United States Code at Section 523(a) (8) provides as
follows:
(a) A discharge under Section 727, 1141, 1228(a), 1228(b), or 1328(b)
of this title does not discharge an individual debtor from any
debt --
(8) for an educational . . . loan made, insured, or guaranteed
by a governmental unit or made under any program funded in
whole or in part by a governmental unit or a nonprofit
institution . . . , unless --
(A) such loan . . . first became due before 7 years
(exclusive of any applicable suspension of the
repayment period) before the date of the filing of the
petition; or
(B) excepting such debt from discharge under this paragraph
will impose an undue hardship on the debtor and the
debtor's dependents.
The 1990 Budget Reconciliation Act included language amending the
Bankruptcy Code to clarify the nondischargeability of educational loans under
Chapter 13 bankruptcy filings.
Concurrent with the issuance of the Notes and Certificates, the Trust
will receive an opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
stating that the Financed Loans generally would be non-dischargeable as to the
student borrower to the extent set forth in 11 U.S.C. [Section] 523(a)(8).
USE OF PROCEEDS
The Seller will sell the Initial Loans to the Issuer concurrently with
the sale of the 1996 Securities and a portion of the net proceeds from the sale
of the 1996 Securities will be applied by the Indenture Trustee (i) to the
purchase of the Initial Loans, (ii) to the payment of certain expenses connected
with issuing the 1996 Securities, (iii) to the deposit in the amount of the 1996
Pre-Funded Amount to the 1996-A Subaccount of the Pre-Funding Account and (iv)
to the deposit in the amount of $926,250 to the 1996-A Debt Service Reserve
Account. Such net proceeds less the payment of such expenses, the 1996
Pre-Funded Amount and the initial deposit into the 1996-A Debt Service Reserve
Account represent the purchase price paid by the Issuer to the Seller for the
sale of the Initial Loans to the Issuer. Such amount will be determined as a
result of the pricing of the 1996 Securities, through the offering described in
this Prospectus. The purchase price to be received by the Seller from the sale
of the Initial
34
<PAGE> 37
Loans will be paid to Nellie Mae, Inc. as the purchase price for the Initial
Loans and will be used to repay debt of Nellie Mae, Inc. and for other corporate
purposes.
<TABLE>
FUND BALANCES AT CLOSING
Upon delivery of the 1996 Notes, the Fund Balances under the Indenture,
derived from the proceeds of the 1996 Securities will be as follows:
<S> <C>
1996-A Subaccount within the Cost of Issuance Account in the Services Fund $ 100,000
1996-A Subaccount within the Note Interest Account in the Note Fund 750,000
1996-A Subaccount within the Acquisition Account in the Student
Loan Acquisition Fund 66,397,718
1996-A Subaccount within the Pre-Funding Account in the Student
Loan Acquisition Fund 54,523,282*
1996-A Debt Service Reserve Account 926,250
TOTAL FUND BALANCES $122,697,250
============
<FN>
- ----------------------
* Within ten days of the delivery of the 1996 Securities, Nellie Mae, Inc. and
the Seller expect that approximately $16,600,000 of the amount in the 1996-A
Subaccount within the Pre-Funding Account in the Student Loan Acqusition Fund
will be used to acquire Loans currently held by Nellie Mae, Inc. See "THE TRUST
ESTATE-The Loan Pool."
</TABLE>
NELLIE MAE EDUCATION FUNDING, LLC
Nellie Mae Education Funding, LLC (the "Seller") was organized under
the laws of the State of Delaware on June 11, 1996. The Seller is a limited
liability company owned 99% by Nellie Mae, Inc. and 1% by NMI Education Loan
Corporation, a Massachusetts non-profit corporation of which Nellie Mae, Inc. is
the sole member. The Seller maintains its principal office at 50 Braintree Hill
Park, Suite 300, Braintree, Massachusetts 02184. Its telephone number is (617)
849-1325.
Nellie Mae, Inc. and the Seller have taken steps in structuring the
transactions contemplated hereby, which are intended to ensure that the
voluntary application for relief by Nellie Mae, Inc. under the Bankruptcy Code
will not result in the substantive consolidation of some or all of the assets
and liabilities of the Trust or the Seller with those of Nellie Mae, Inc. In
order to limit the likelihood of any voluntary or involuntary application for
relief by the Seller under any applicable insolvency law, and thereby reduce the
possibility of termination of the Trust, the Seller has been created as a
separate, limited-purpose limited liability company pursuant to an operating
agreement. The operating agreement contains provisions that prohibit the Seller
from engaging in any activity or business other than those related to its
limited purposes, which include (i) the acquisition and holding of education
loans, (ii) the sale of education loans to trusts, (iii) the sale of
certificates issued by such trusts, (iv) the sale of notes collateralized by
pools of education loans, (v) the holding of certificates issued by the trusts
and (vi) such other activities as are incidental to or connected to the
foregoing purposes.
In addition, the Seller is required to have, at all times as any
Certificates or Notes are outstanding, at least one independent manager, who is
required to take into account the interests of the creditors of the Seller as
well as the interests of the Seller. Pursuant to the Operating Agreement, the
independent manager shall not owe a fiduciary or other obligation to the members
of the Seller. The Seller cannot, without the affirmative vote of 100% of its
board of managers, including the affirmative vote of each independent manager,
do any of the following: (i) engage in any business or activity other than its
limited purposes (described above) (ii) incur any indebtedness other than in
certain limited circumstances, (iii) dissolve or liquidate, in whole or in part,
(iv) consolidate with or merge into any other entity or convey or transfer its
properties and assets substantially as an entirety to any entity, or (vi)
institute proceedings to be adjudicated bankrupt or insolvent, or consent to the
institution of bankruptcy or insolvency proceedings against it, or file a
petition seeking or consenting to, reorganization or relief under any
35
<PAGE> 38
applicable federal or state law relating to bankruptcy, or consent to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator of the
Seller or a substantial property, or make any assignment for the benefit of
creditors, or admit in writing its ability to pay its debts generally as they
become due, or take any action in furtherance of any of the above.
There can be no assurance that the activities of Nellie Mae, Inc. or
the Seller or the Trust would not result in a court concluding that some or all
of the assets and liabilities of the Seller or of the Trust should be
substantively consolidated with or restored to or made a part of those of Nellie
Mae, Inc. in a proceeding under the Bankruptcy Code. If a court were to reach
such a conclusion or a filing were made under the Bankruptcy Code, or if an
attempt were made to litigate any of the foregoing issues, then delays in
distributions on the 1996 Securities could occur or reductions in the amounts of
such distributions could result.
It is intended by Nellie Mae, Inc. and the Seller that the transfer of
Financed Loans by Nellie Mae, Inc. to the Seller constitute a true sale of the
Financed Loans to the Seller. If the transfer constitutes such a true sale, the
Financed Loans and the proceeds thereof would not be property of Nellie Mae,
Inc. should it become the subject of the Bankruptcy Code subsequent to the
transfer of the Financed Loans to the Seller. Nellie Mae, Inc. will warrant to
the Seller in the related Purchase Agreement that the sale of the Financed Loans
by Nellie Mae, Inc. to the Seller is a valid sale of the Financed Loans by
Nellie Mae, Inc. to the Seller. Notwithstanding the foregoing, if Nellie Mae,
Inc. were to become subject to the Bankruptcy Code and a creditor or
trustee-in-bankruptcy of Nellie Mae, Inc. itself were to take the position that
the sale of Financed Loans by Nellie Mae, Inc. to the Seller should instead be
treated as a pledge of such Financed Loans to secure a borrowing of Nellie Mae,
Inc., delays in distributions on the 1996 Securities could occur or (should the
court rule in favor of Nellie Mae, Inc. or such trustee or creditor) reductions
in the amounts of such distributions could result. If the transfer of Financed
Loans by Nellie Mae, Inc. to the Seller is treated as a pledge instead of a
sale, a tax or government lien on the property of Nellie Mae, Inc. arising
before the transfer of such Financed Loans to the Seller may have priority over
the Trust's interest in such Financed Loans.
NELLIE MAE, INC.
Nellie Mae, Inc. is a Massachusetts private, nongovernmental,
non-profit corporation established in 1986 to develop and administer programs of
student financial aid and institutional aid through which students are assisted
in financing their education costs. Nellie Mae, Inc. makes and purchases
private, nongovernmental student loans to students and their families. Nellie
Mae, Inc. qualifies as a tax-exempt organization under the Internal Revenue Code
of 1986, as amended (the "Code"), having received an Internal Revenue Service
determination letter to the effect that it is a tax-exempt organization under
Section 501(c)(3) of the Code and that it is not a private foundation within the
meaning of Section 509(a) of the Code because it is an organization of the type
described in Section 509(a)(1) of the Code.
Nellie Mae, Inc. was organized in 1986 at the request and direction
of the Board of Directors of The New England Education Loan Corporation. Nellie
Mae, Inc. is permitted to create and administer education loan programs that are
private and unrelated to the federal loan programs. The need for such unrelated
programs arose as student and parent educational loan requirements were not
fully met by the federal loan programs.
Through December 31, 1995, Nellie Mae, Inc. has originated and/or
purchased over $600 million in education loans to over 75,000 students and
families. As of December 31, 1995, Nellie Mae, Inc. had education loan
receivables of over $387 million.
Nellie Mae, Inc. maintains its principal office at 50 Braintree Hill
Park, Suite 300, Braintree, Massachusetts 02184. Its telephone number is (617)
849-1325.
36
<PAGE> 39
SERVICER
GENERAL
USA Group Loan Services, Inc. (the "Servicer" or "Loan Services"),
which will act as Servicer of the Financed Loans, is a private, nonprofit,
nonstock membership corporation which was organized in 1982 under and pursuant
to the provisions of the General Corporation Law of the State of Delaware. The
sole member of Loan Services is USA Group, Inc., a nonprofit corporation. As of
March 31, 1996, Loan Services provided loan servicing for in excess of 2,848,196
student and parent loans with outstanding balances of over $9.4 billion for
approximately 160 different lenders and secondary market corporations. Loan
Services' principal office is located in Indianapolis, Indiana where it
currently has over 800 full-time employees.
SERVICING AGREEMENT
The Issuer and Loan Services have entered into an agreement (the
"Servicing Agreement") under which Loan Services will service those Financed
Loans that are acquired by the Issuer and delivered to the custody of Loan
Services.
Loan Services will produce an audit trail for each Financed Loan
serviced by Loan Services to comply with the reporting, servicing and operating
standards set forth in the Servicing Agreement. Loan Services is required to
provide to the Issuer weekly and monthly reports as set forth in the Servicing
Agreement. Loan Services is required to keep information and documents with
respect to the Financed Loans serviced by Loan Services in strictest confidence
and maintain a disaster recovery plan for the storage of data and loan
documentation.
Loan Services is entitled to be compensated on a monthly basis pursuant
to a fee schedule attached to the Servicing Agreement.
The Servicing Agreement, which is dated as of June 1, 1996, is to
remain effective until all Financed Loans serviced by Loan Services have been
paid in full or otherwise discharged. The Servicing Agreement may be terminated
(a) by either the Issuer or Loan Services, (i) without cause, upon 90 days'
written notice, after the Servicing Agreement is in effect for seventy-two (72)
months, or (ii) upon the occurrence of certain events set forth in the Servicing
Agreement and (b) by the Issuer, upon a material breach by Loan Services or upon
the filing of a bankruptcy petition by or against Loan Services.
THE 1996 NOTES
GENERAL
Each Series of Notes will represent obligations of the Issuer secured
by the assets of the Issuer (other than the Certificate Fund). The Issuer will
issue (i) $67,000,000 aggregate principal amount of LIBOR Rate Asset Backed
Class A-1 Notes, with a Maturity Date of December 15, 2004 (the "A-1 Notes") and
(ii) $48,800,000 aggregate principal amount of LIBOR Rate Asset Backed Class A-2
Notes, with a Maturity Date of December 15, 2018 (the "A-2 Notes"), each
pursuant to the terms of a Master Trust Indenture to be dated as of June 1, 1996
(the "Master Indenture") and the First Terms Supplement (together with the
Master Indenture and any other amendments or supplements thereto, the
"Indenture") between the Issuer and the Indenture Trustee, a form of which has
been filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. A copy of the Indenture will be available from the Seller, upon
request, to the Holders of the 1996 Notes or 1996 Certificates. The following
summary describes certain terms of the 1996 Notes. The summary does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all of the provisions of the 1996 Notes and the Indenture. Where particular
provisions or terms used in the Indenture are referred to, the actual provisions
or terms used in the Indenture (including definitions of terms) are incorporated
by reference as part of such summary.
37
<PAGE> 40
The 1996 Notes will be offered for purchase in minimum denominations of
$20,000 and integral multiples of $1,000 in excess thereof in book-entry form
only. Each Class of 1996 Notes will initially be represented by a single note
registered in the name of the nominee of The Depository Trust Company ("DTC"
and, together with any successor depository, the "Depository"), except as
provided below. The Issuer has been informed by DTC that DTC's nominee will be
Cede & Co. ("Cede"). No person acquiring an interest in the 1996 Notes through
the facilities of DTC will be entitled to receive a note representing such
person's interest in the Notes, except as set forth below under "INFORMATION
REGARDING THE 1996 SECURITIES--Definitive Securities" and such persons will hold
their interests in the 1996 Notes through DTC. Unless and until definitive 1996
Notes are issued under the limited circumstances described herein, all
references to actions by Noteholders shall refer to actions taken by DTC upon
instructions from its Participants, and all references herein to distributions,
notices, reports and statements to Noteholders shall refer to distributions,
notices, reports and statements to DTC in accordance with DTC procedures. See
"INFORMATION REGARDING THE 1996 SECURITIES--Definitive Securities" below.
INTEREST ON THE NOTES
The A-1 Notes will bear interest from the date of original delivery to,
but not including, August 15, 1996 (such period being the "Initial Period") at
an interest rate equal to 5.6739%, and the A-2 Notes will bear interest for such
Initial Period at an interest rate equal to 5.7639%. Thereafter, the 1996 Notes
will bear interest at interest rates determined as described below. Interest on
the 1996 Notes will be payable on the 15th day of each month, commencing August
15, 1996 (each a "Distribution Date").
The interest rate on the 1996 Notes after the Initial Period will be
reset on the 15th day of each month thereafter (each a "Rate Adjustment Date").
For each Interest Period (i.e., the period commencing on each Rate Adjustment
Date and ending on the day before the next Rate Adjustment Date), the interest
rate on the 1996 Notes shall be equal to the LIBOR Rate determined by the
Indenture Trustee (in such capacity, the "Calculation Agent") on the second
Business Day preceding each Rate Adjustment Date (a "Rate Determination Date")
plus in the case of the A-1 Notes, 0.17%, or in the case of the A-2 Notes,
0.26%. "LIBOR Rate" means the rate per annum equal to (a) the annual rate of
interest published or reported by the Telerate Service (by reference to the
screen page currently designated as "Page 3750" on that service or such other
service as may be nominated by the British Bankers' Association as the
information vendor for the purpose of displaying British Bankers' Association
Interest Settlement Rates for U.S. dollar deposits) as of 11:00 a.m., London
time, on the Rate Determination Date for a one-month period, or (b) if such a
rate does not appear on Telerate Page 3750, the "LIBOR Rate" for the given day
shall be the arithmetic mean of the offered rates for dollar deposits for a
one-month period commencing on the Rate Determination Date, which rate appears
on Reuters LIBO Page as of 11:00 a.m., London time, on the Rate Determination
Date. If the rate described above does not appear on Telerate Page 3750 and
fewer than two rates appear on Reuters LIBO Page, the "LIBOR Rate" for the
applicable Rate Determination Date shall be determined in good faith by the
Calculation Agent from such source as it shall determine to be comparable to
Telerate Page 3750 and Reuters LIBO Page.
The determination of the interest rate by the Calculation Agent shall
be conclusive and binding on the Noteholders, the Issuer and the Indenture
Trustee absent manifest error. If the Calculation Agent shall fail or refuse to
determine the interest rate on any Rate Determination Date, the interest rate
shall be determined by the Indenture Trustee in accordance with the provisions
of the Indenture. If the Indenture Trustee shall fail or refuse to determine the
interest rate on any Rate Determination Date, the interest rate most recently
determined for each Class of Notes shall remain in effect with respect thereto.
In the event that the interest rate on the 1996 Notes for any Interest
Period exceeds the Net Loan Rate (which rate is equal to the weighted average
interest rate on the Financed Loans minus one and eight-tenths percent (1.8%))
for such Interest Period, the Holders of such 1996 Notes will receive interest
payments on such 1996 Notes for such Interest Period in an amount equal to the
applicable Net Loan Rate; the difference between the interest rate and the
applicable Net Loan Rate for such an Interest Period shall be deferred and paid
to the Holders of the 1996 Notes on the next succeeding Distribution Date on
which funds are available therefor. The 1996 Notes that have matured or that
have been otherwise paid pursuant to the Indenture shall only receive Deferred
Interest, to the extent
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<PAGE> 41
due on the date of such maturity or payment, to the extent funds are available
for payment thereof. No interest accrues on unpaid Deferred Interest.
Notwithstanding the foregoing, the rate of interest on any 1996 Note
for any Interest Period shall not be in excess of the maximum rate of interest
which may be charged or collected pursuant to provisions of applicable Federal
or state law. The rate of interest on any 1996 Note shall never exceed 18% per
annum for any Interest Period. Currently, there is no maximum lawful rate of
interest applicable to the 1996 Notes.
<TABLE>
STATED MATURITIES
The stated maturity dates of the respective classes of 1996 Notes are
as follows:
<CAPTION>
Stated
Class Maturity Date
----- -------------
<S> <C>
A-1 December 15, 2004
A-2 December 15, 2018
</TABLE>
Principal of the 1996 Notes is, however, subject to payment prior to
maturity. Principal of the 1996 Notes is expected to be paid in full prior to
their stated Maturity Dates. See "THE 1996 NOTES--Prepayment."
PREPAYMENT
MANDATORY PRINCIPAL DISTRIBUTIONS. The Indenture provides that, except
as provided below, principal payments on or with respect to the 1996 Financed
Loans be transferred from the 1996-A Revenue Account to the 1996-A Subaccount of
the Note Payment Account in the Note Fund on a regular basis. See "DESCRIPTION
OF THE INDENTURE--Flow of Funds." Such amounts include principal payments on the
Financed Loans, whether paid by the borrowers or by a Guarantor, and also
include excess amounts transferred from the Debt Service Reserve Fund. To the
extent that payments of principal on the 1996 Financed Loans are characterized
as Capitalized Interest, however, any such amount shall remain in the 1996-A
Revenue Account and be applied in accordance with the terms of the Indenture.
The 1996 Notes shall be subject to mandatory principal distribution on each
Distribution Date from amounts deposited to the credit of the 1996-A Subaccount
of the Note Payment Account; provided, however, that no principal of A-2 Notes
may be distributed unless, after such distribution, no A-1 Notes remain
outstanding. It is anticipated that mandatory distributions of principal of 1996
Notes will occur on a regular basis on each Distribution Date. Accelerated
receipt of principal from the sources described above or deposit of interest
payments into the 1996-A Subaccount of the Note Payment Account could cause the
distribution of principal of the 1996 Notes earlier than might otherwise be
expected. See "TRADING INFORMATION."
In addition, all payments of interest and late charges on or with
respect to the 1996 Financed Loans and all investment earnings on Funds held
under the Indenture, are required to be deposited in the 1996-A Revenue Account
of the Revenue Fund created under the Indenture. Moneys therein are to be
distributed to the Funds, Accounts and Subaccounts or transferred to the Owner
Trustee as described under "DESCRIPTION OF THE INDENTURE--Flow of Funds," on the
Business Day preceding each Distribution Date, but, subject to the following
paragraphs, any money remaining therein after distributions to the applicable
subaccount within the Administration Account, to pay interest on the 1996
Securities, to replenish the Debt Service Reserve Fund, to pay Deferred Interest
on the 1996 Securities, to make distributions to the Seller and NMELC, and to
pay principal of the 1996 Certificates, may be deposited in the 1996-A
Subaccount of the Note Payment Account.
If the Primary Parity Trigger is less than 104% on any Distribution
Date after the payment of the Administration Requirement and interest on the
Notes, then any remaining interest payments on the 1996 Financed Loans are to be
deposited in the 1996-A Subaccount of the Note Payment Account and shall be used
to pay principal of the 1996 Notes in lieu of being used to replenish the Debt
Service Reserve Fund, to pay interest on the 1996
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<PAGE> 42
Certificates, to pay Deferred Interest on the 1996 Securities, to make
distributions to the Seller and NMELC, and to pay principal of the 1996
Certificates.
Likewise, if the Primary Parity Trigger is less than 112.78% on any
Distribution Date after the payment of the Administration Requirement, interest
on the 1996 Notes, interest on the 1996 Certificates and replenishment of the
1996-A Debt Service Reserve Account, then any remaining interest payments on the
1996 Financed Loans are to be deposited in the 1996-A Subaccount of the Note
Payment Account and shall be used to pay principal of 1996 Notes in lieu of
being used to pay Deferred Interest on the 1996 Securities, to make
distributions to the Seller and NMELC and to pay principal of the 1996
Certificates.
"Primary Parity Trigger" means, as of any date of determination, an
amount (expressed as a percentage) equal to the sum of (i) the Balances then on
deposit in all 1996-A Subaccounts and 1996-A Accounts under the Indenture (other
than Balances attributable to 1996 Defaulted Loans), and (ii) amounts on deposit
in the lockbox account and allocable to 1996 Financed Loans, divided by an
amount equal to the principal amount of the 1996 Notes then Outstanding plus all
accrued and unpaid interest thereon (excluding Deferred Interest) plus any
unpaid portion of the Administration Requirement. See "DESCRIPTION OF THE
INDENTURE--Flow of Funds."
Mandatory distributions of principal of 1996 Notes shall occur as
described above on Distribution Dates, but only at such times as there shall be
amounts in excess of $5,000 in the 1996-A Subaccount of the Note Payment Account
on the third Business Day preceding the Distribution Date on which such
distribution will occur as described above.
Amounts in the 1996-A Subaccount of the Pre-Funding Account in the
Student Loan Acquisition Fund that are uncommitted (as evidenced by a
certificate of the Issuer) to the purchase of Loans on November 15, 1996 (the
"Commitment Cut-off Date"), or unspent for the purchase of Loans on January 10,
1997 are required to be transferred to the 1996-A Subaccount of the Note Payment
Account. Amounts in the 1996-A Subaccount of the Pre-Funding Account may be
transferred earlier than on November 15, 1996 or January 10, 1997, if the Issuer
certifies to the Indenture Trustee the amount in such 1996-A Subaccount that
will not be committed prior to November 15, 1996 or the amount that will not be
used to acquire Loans on or before January 10, 1997. See "DESCRIPTION OF THE
INDENTURE--Flow of Funds."
OPTIONAL PURCHASE PREPAYMENT. The Seller may repurchase all remaining
1996 Financed Loans, and thus effect the prepayment of the A-2 Notes and the
1996 Certificates, on any Distribution Date on or after which the Balance in the
1996-A Account of the Student Loan Portfolio Fund is equal to or less than 10%
of the Initial Pool Balance with respect to the 1996 Financed Loans, at a price
equal to the outstanding principal balance of the 1996 Financed Loans, plus
accrued and unpaid interest. Such purchase price shall be deposited in the
1996-A Subaccount of the Note Payment Account of the Note Fund and used on that
Distribution Date to make mandatory principal distributions on the A-2 Notes as
described in "THE 1996 NOTES--Prepayment--Mandatory Principal Distributions," or
to the extent no A-2 Notes remain Outstanding, to make mandatory principal
distributions on the 1996 Certificates as described in "THE 1996
CERTIFICATES--Prepayment--Mandatory Principal Distributions."
PRINCIPAL FACTOR. All prepayments and mandatory distributions of
principal of 1996 Notes of either Class shall be made pro rata within that
Class. In connection with each optional prepayment or principal distribution of
1996 Notes of either Class, the Indenture Trustee shall compute a factor (the
"Principal Factor") for that Class. The Principal Factor shall be a seven-digit
decimal indicating the principal balance of each 1996 Note of a Class as of a
Distribution Date (after giving effect to any optional prepayment or principal
distribution made or to be made on that date) as a fraction of the original
principal amount of the 1996 Note. The Principal Factor for each Class of 1996
Notes shall be initially 1.0000000 and will thereafter decline to reflect the
reduction in the principal balance of the 1996 Notes of that Class after any
optional prepayment or principal distribution. The principal balance of any 1996
Note can be determined by multiplying the original principal amount of the 1996
Note by the applicable Principal Factor for that Class of 1996 Notes.
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<PAGE> 43
NOTICE OF OPTIONAL PURCHASE PREPAYMENT; EFFECT. Notice of optional
purchase prepayment of Notes shall be given by the Indenture Trustee in the name
and for and on behalf of the Issuer not less than thirty (30) days prior to the
date of prepayment. Notice shall be given by first-class mail, postage prepaid
to the Holder of each affected Note at the address of such Holder as it appears
on the books of registry or by transmitting such notice by telex or telecopier
to any Holder of any affected Note who shall have submitted a written request to
the Indenture Trustee for notice of prepayments by such means, to the telex or
telecopier number set forth in such request. A copy of any notice so transmitted
shall also be mailed to such Holder at the address of such Holder set forth on
the books of registry; provided, however, that neither failure by the Indenture
Trustee to so mail a copy of such notice nor any defect in such copy shall
affect the validity of such notice so transmitted in accordance with the
Indenture; and, provided further, that neither failure by the Indenture Trustee
to so transmit a copy of such notice by telex or telecopier nor any defect
therein shall affect the validity of such notice so mailed in accordance with
the Indenture.
Each such notice shall state (i) the Class of the affected Notes, the
prepayment or principal distribution date and the applicable Principal Factor
(after giving effect to such prepayment or distribution); (ii) that the interest
on the principal of the Notes to be prepaid or distributed shall cease to accrue
from and after such optional purchase prepayment or Distribution Date; and (iii)
that on the prepayment or principal distribution date there will become due and
payable on each said Note the principal amount thereof to be prepaid or
distributed and the interest accrued, including Deferred Interest but only to
the extent funds are available therefor.
THE 1996 CERTIFICATES
The Certificates offered hereby will be issued pursuant to the Trust
Agreement, a form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The following summary describes
certain terms of the 1996 Certificates. The summary does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all of the provisions of the Certificates and the Trust Agreement and the First
Trust Supplement. Where particular provisions or terms used in the Trust
Agreement are referred to, the actual provisions or terms used in the Trust
Agreement (including definitions of terms) are incorporated by reference as part
of such summary. A copy of the Trust Agreement will be available from the
Seller, upon request, to Holders of the 1996 Notes or 1996 Certificates.
GENERAL
The 1996 Certificates will represent undivided interests in the Issuer.
The Issuer will issue $7,700,000 aggregate principal amount of 1996 Certificates
pursuant to the Trust Agreement and the First Trust Supplement. Payments in
respect to the 1996 Certificates will be subordinated to payments on the 1996
Notes to the limited extent described herein.
The 1996 Certificates (excluding the 1996 Certificates issued to the
Seller and NMELC) will be offered for purchase in minimum denominations of
$20,000 and integral multiples of $1,000 in excess thereof in book-entry form
only. The 1996 Certificates will initially be represented by a single 1996
Certificate registered in the name of Cede, the nominee of DTC. No person
acquiring an interest in the 1996 Certificates through the facilities of DTC
will be entitled to receive a certificate representing such person's interest in
the 1996 Certificates, except as set forth below under "INFORMATION REGARDING
THE 1996 SECURITIES--Definitive Securities." Unless and until definitive 1996
Certificates are issued under the limited circumstances described herein, all
references to actions by Certificateholders shall refer to actions taken by DTC
upon instructions from its Participants, and all references herein to
distributions, notices, reports and statements to Certificateholders shall refer
to distributions, notices, reports and statements to DTC in accordance with DTC
procedures. See "INFORMATION REGARDING THE 1996 SECURITIES--Definitive
Securities" below.
Payments of interest and principal on the 1996 Certificates with
respect to each Interest Period will be made on each Distribution Date,
commencing August 15, 1996. Payments on the 1996 Certificates on each
Distribution Date will be made to the holders of record of the related 1996
Certificates on the related Record Date.
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<PAGE> 44
INTEREST ON THE 1996 CERTIFICATES
The 1996 Certificates in the initial principal amount of $7,700,000
will bear interest from the date of original delivery to, but not including,
August 15, 1996 (such period being the "Initial Period") at an interest rate
equal to 6.1289%. Thereafter, the 1996 Certificates will bear interest at
interest rates determined as described below. Interest on the 1996 Certificates
will be payable on the 15th day of each month, commencing August 15, 1996 (each
a "Distribution Date").
The interest rate on the 1996 Certificates after the Initial Period
will be reset on the 15th day of each month thereafter (each a "Rate Adjustment
Date"). For each Interest Period (i.e., the period commencing on each Rate
Adjustment Date and ending on the day before the next Rate Adjustment Date), the
interest rate on the 1996 Certificates shall be equal to the LIBOR Rate
determined by the Owner Trustee (in such capacity, the "Calculation Agent") on
the second Business Day preceding each Rate Adjustment Date (a "Rate
Determination Date") plus 0.625%. "LIBOR Rate" means the rate per annum equal to
(a) the annual rate of interest published or reported by the Telerate Service
(by reference to the screen page currently designated as "Page 3750" on that
service or such other service as may be nominated by the British Bankers'
Association as the information vendor for the purpose of displaying British
Bankers' Association Interest Settlement Rates for U.S. dollar deposits) as of
11:00 a.m., London time, on the Rate Determination Date for a one-month period,
or (b) if such a rate does not appear on Telerate Page 3750, the "LIBOR Rate"
for the given day shall be the arithmetic mean of the offered rates for dollar
deposits for a one-month period commencing on the Rate Determination Date, which
rate appears on Reuters LIBO Page as of 11:00 a.m., London time, on the Rate
Determination Date. If the rate described above does not appear on Telerate Page
3750 and fewer than two rates appear on Reuters LIBO Page, the "LIBOR Rate" for
the applicable Rate Determination Date shall be determined in good faith by the
Calculation Agent from such source as it shall determine to be comparable to
Telerate Page 3750 and Reuters LIBO Page.
The determination of the interest rate by the Calculation Agent shall
be conclusive and binding on the Holders of the 1996 Certificates, the Issuer
and the Owner Trustee absent manifest error. If the Calculation Agent shall fail
or refuse to determine the interest rate on any Rate Determination Date, the
interest rate shall be determined by the Owner Trustee in accordance with the
provisions of the Trust Agreement. If the Owner Trustee shall fail or refuse to
determine the interest rate on any Rate Determination Date, the interest rate
most recently determined for the 1996 Certificates shall remain in effect with
respect thereto.
In the event that the interest rate on the 1996 Certificates for any
Interest Period exceeds the Net Loan Rate (which rate is equal to the weighted
average interest rate on the 1996 Financed Loans minus one and eight-tenths
percent (1.8%)) for such Interest Period, the Holders of such 1996 Certificates
will receive interest payments on such 1996 Certificates for such Interest
Period in an amount equal to the applicable Net Loan Rate; the difference
between the interest rate and the applicable Net Loan Rate for such an Interest
Period shall be deferred and paid to the Holders of the 1996 Certificates on the
next succeeding Distribution Date on which funds are available therefor. The
1996 Certificates which have matured or which have been otherwise paid pursuant
to the Trust Agreement shall only receive Deferred Interest, to the extent due
on the date of such maturity or payment, to the extent funds are available for
payment thereof. No interest accrues on unpaid Deferred Interest.
Notwithstanding the foregoing, the rate of interest on any 1996
Certificate for any Interest Period shall not be in excess of the maximum rate
of interest which may be charged or collected pursuant to provisions of
applicable Federal or state law. The rate of interest on any 1996 Certificate
shall never exceed 18% per annum for any Interest Period. Currently, there is no
maximum lawful rate of interest applicable to the 1996 Certificates which is
lower than the maximum rate of interest payable on the 1996 Certificates.
STATED MATURITIES
The 1996 Certificates have a stated maturity date of December 15, 2018.
Principal of the 1996 Certificates is however, subject to payment prior to
maturity. Principal of the 1996 Certificates is expected to be paid in full
prior to their stated maturity date. See "THE 1996 CERTIFICATES-Prepayment."
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<PAGE> 45
PREPAYMENT
MANDATORY PRINCIPAL DISTRIBUTIONS. The Indenture provides that, except
as provided below, principal payments on or with respect to the Financed Loans
be transferred from the 1996-A Revenue Account to the 1996-A Subaccount of the
Note Payment Account within the Note Fund established under the Indenture, or if
no 1996 Notes are outstanding, to the Owner Trustee for deposit in the 1996-A
Subaccount of the Certificate Payment Account in the Certificate Fund. Such
amounts include principal payments on the 1996 Financed Loans, whether paid by
the borrowers or by a Guarantor, and also include excess amounts transferred
from the Debt Service Reserve Fund. To the extent that payments of principal of
the 1996 Financed Loans are characterized as Capitalized Interest, however, any
such amount shall remain in the 1996-A Revenue Account and be applied in
accordance with the terms of the Indenture.
In addition, all payments of interest and late charges on or with
respect to the 1996 Financed Loans and all investment earnings on Funds held
under the Indenture are required to be deposited in the 1996-A Account in the
Revenue Fund created under the Indenture. Moneys therein are to be distributed
to the Funds, Accounts and Subaccounts or transferred to the Owner Trustee as
described under "DESCRIPTION OF THE INDENTURE--Flow of Funds" on the Business
Day preceding each Distribution Date, but subject to the exceptions described
under "THE 1996 NOTES--Prepayment--Mandatory Principal Distributions," any money
remaining therein after distributions to the Administration Account, to pay
interest on the 1996 Securities, to replenish the Debt Service Reserve Fund, to
pay Deferred Interest on the 1996 Securities, and to make distributions to the
Seller and NMELC, may be transferred to the Owner Trustee for deposit in the
1996-A Subaccount of the Certificates Payment Account in the Certificate Fund.
It is not expected that any such moneys will be so deposited in the 1996-A
Subaccount of the Certificate Payment Fund.
Mandatory distributions of principal of 1996 Certificates shall occur
on Distribution Dates after all 1996 Notes have been paid, but only at such
times as there shall be amounts in excess of $5,000 on deposit in the 1996-A
Subaccount of the Certificate Payment Account on the third Business Day
preceding the Distribution Date on which such distribution will occur as
described above.
OPTIONAL PURCHASE PREPAYMENT. The Seller may repurchase all remaining
1996 Financed Loans, and thus effect the prepayment of the A-2 Notes and the
1996 Certificates, on any Distribution Date on or after which the Balance in the
1996-A Account of the Student Loan Portfolio Fund is equal to or less than 10%
of the Initial Pool Balance with respect to the 1996 Financed Loans, at a price
equal to the outstanding principal balance of the 1996 Financed Loans, plus
accrued and unpaid interest. Such purchase price shall be deposited in the
1996-A Subaccount of the Note Payment Account of the Note Fund and used on that
Distribution Date to make mandatory principal distributions on the A-2 Notes as
described in "THE 1996 NOTES--Prepayment--Mandatory Principal Distributions," or
to the extent no A-2 Notes remain Outstanding, to make mandatory principal
distributions on the 1996 Certificates as described in "THE 1996
CERTIFICATES--Prepayment--Mandatory Principal Distributions."
PRINCIPAL FACTOR. All optional prepayments and mandatory distributions
of principal of the 1996 Certificates shall be made pro rata among such 1996
Certificates. In connection with each optional prepayment or principal
distribution of 1996 Certificates, the Owner Trustee shall compute a factor (the
"Principal Factor"). The Principal Factor shall be a seven-digit decimal
indicating the principal balance of each 1996 Certificate as of a Distribution
Date (after giving effect to any optional prepayment or principal distribution
made or to be made on that date) as a fraction of the original principal amount
of the 1996 Certificate. The Principal Factor for 1996 Certificates shall be
initially 1.0000000 and will thereafter decline to reflect the reduction in the
principal balance of the 1996 Certificates after any optional prepayment or
principal distribution. The principal balance of any 1996 Certificate can be
determined by multiplying the original principal amount of the 1996 Certificate
by the applicable Principal Factor for the 1996 Certificates.
NOTICE OF OPTIONAL PURCHASE PREPAYMENT; EFFECT. Notice of optional
purchase prepayment of Certificates shall be given by the Owner Trustee in the
name and for and on behalf of the Issuer not less than thirty (30) days prior to
the date of prepayment. Notice shall be given by first-class mail, postage
prepaid to the Holder of each
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<PAGE> 46
affected Certificate at the address of such Holder as it appears on the books of
registry or by transmitting such notice by telex or telecopier to any Holder of
any affected Certificate who shall have submitted a written request to the Owner
Trustee for notice of prepayments by such means, to the telex or telecopier
number set forth in such request. A copy of any notice so transmitted shall also
be mailed to such Holder at the address of such Holder set forth on the books of
registry; provided, however, that neither failure by the Owner Trustee to so
mail a copy of such notice nor any defect in such copy shall affect the validity
of such notice so transmitted in accordance with the Trust Agreement; and,
provided further, that neither failure by the Owner Trustee to so transmit a
copy of such notice by telex or telecopier nor any defect therein shall affect
the validity of such notice so mailed in accordance with the Trust Agreement.
Each such notice shall state (i) the prepayment or principal
distribution date and the applicable Principal Factor (after giving effect to
such prepayment or distribution); (ii) that the interest on the principal of the
Certificates to be prepaid or distributed shall cease to accrue from and after
such prepayment or principal distribution date; and (iii) that on the prepayment
or principal distribution date there will become due and payable on each said
Certificate the principal amount thereof to be prepaid or distributed and the
interest accrued, including Deferred Interest but only to the extent funds are
available therefor.
SUBORDINATION
Payment of the principal of and interest on the 1996 Certificates is
subordinate to payment of the principal of and interest on the 1996 Notes as and
to the extent provided in the Indenture. Such subordination provisions include
the following:
(1) No payment of interest on any Certificates shall be made
on any Distribution Date unless interest on all Notes due to and
including such date shall have been paid.
(2) No payment of interest on the 1996 Certificates shall be
made if the Primary Parity Trigger is less than one hundred four
percent (104%).
(3) No payment of principal on the 1996 Certificates shall
be made if any of the 1996 Notes remain Outstanding.
(4) Non-payment of interest on the Certificates shall not
constitute an Event of Default under the Indenture.
(5) Upon an Event of Default under the Indenture, if the Notes
are accelerated, the Indenture Trust Estate will be applied first to
the Notes and then to the Certificates. Absent such acceleration, the
Indenture Trust Estate will be applied to interest then principal due
on the Notes, then to interest then principal on the Certificates, then
to Deferred Interest on the Notes and then to Deferred Interest on the
Certificates. The Holders of two-thirds in aggregate principal amount
of the Notes Outstanding or the Indenture Trustee may direct an
acceleration.
INFORMATION REGARDING THE 1996 SECURITIES
BOOK ENTRY REGISTRATION
The Depository Trust Company ("DTC") is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York UCC
and a "clearing agency" registered pursuant to Section 17A of the Exchange Act.
DTC was created to hold securities for its Participants and to facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entries, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations.
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<PAGE> 47
Indirect access to the DTC system also is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Securityholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, securities may do so only through Participants and Indirect Participants. In
addition, Securityholders will receive all distributions of principal and
interest from the Indenture Trustee or the Owner Trustee, as applicable (the
"Applicable Trustee"), through Participants and Indirect Participants. DTC will
forward such payments to its Participants, which thereafter will forward them to
Indirect Participants or Securityholders. It is anticipated that the only
"Securityholder," "Certificateholder" and "Noteholder" will be Cede, as nominee
for DTC. Securityholders will not be recognized by the Indenture Trustee or the
Owner Trustee as Securityholders as such terms are used in the Indenture and the
Trust Agreement, respectively, and Securityholders will be permitted to exercise
the rights of Securityholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Securities among Participants on whose behalf its acts with respect to the
Securities and to receive and transmit distributions of principal of, and
interest on, the Securities. Participants and Indirect Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the Rules provide a mechanism by
which Participants will receive payments and will be able to transfer their
interests.
Because DTC can only act on behalf of its Participants, who in turn act
on behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Securities, may be limited due to lack of a physical certificate for such
Securities.
DTC has advised the Administrator that it will take any action
permitted to be taken by a Securityholder under the Indenture or the Trust
Agreement, as the case may be, only at the direction of one or more Participants
to whose accounts with DTC the Securities are credited. DTC may take conflicting
actions with respect to other undivided interests to the extent that such
actions are taken on behalf of Participants whose holdings include such
undivided interests.
Except as required by law, neither the Administrator, the Owner Trustee
nor the Indenture Trustee will have any liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests of the
Securities held by Cede, as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
DEFINITIVE SECURITIES
The Notes and the Certificates will be issued in fully registered,
certificated form ("Definitive Notes" and Definitive Certificates,"
respectively, and collectively referred to herein as "Definitive Securities") to
Noteholders or Certificateholders or their respective nominees, rather than to
DTC or its nominee, only if (i) the Administrator advises the applicable Trustee
in writing that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the Securities and the
Administrator is unable to locate a qualified successor, (ii) the Administrator,
at its option, elects to terminate the book-entry system through DTC or (iii)
after the occurrence of an Event of Default, a Servicer Default or an
Administrator Default, Securityholders representing at least a majority of the
outstanding principal amount of the Notes or the Certificates, as the case may
be, advises the Applicable Trustee through DTC in writing that the continuation
of a book-entry system through DTC (or a successor thereto) with respect to such
Notes or Certificates is no longer in the best interest of the holders of such
Securities.
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Upon the occurrence of any event described in the immediately preceding
paragraph, the Applicable Trustee will be required to notify all applicable
Securityholders through Participants of the availability of Definitive
Securities. Upon surrender by DTC of the definitive security representing the
corresponding Securities and receipt of instructions for re-registration, the
Applicable Trustee will reissue such Securities as Definitive Securities to such
Securityholders.
Distributions of principal of, and interest on, such Definitive
Securities will thereafter be made by the Applicable Trustee in accordance with
the procedures set forth in the Indenture or the Trust Agreement, as the case
may be, directly to holders of Definitive Securities in whose names the
Definitive Securities were registered at the close of business on the Record
Date. Such distributions will be made by check mailed to the address of such
holder as it appears on the register maintained by the Applicable Trustee. The
final payment on any such Definitive Security, however, will be made only upon
presentation and surrender of such Definitive Security at the office or agency
specified in the notice of final distribution to Securityholders.
Definitive Securities will be transferable and exchangeable at the
offices of the Applicable Trustee or of a registrar named in a notice delivered
to the holders of Definitive Securities. No service charge will be imposed for
any registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection with therewith.
LIST OF SECURITYHOLDERS
If Definitive Certificates have been issued, the Owner Trustee will,
upon written request by three or more Certificateholders or by holders of
Certificates evidencing not less than 25% of the Certificate Balance, within
five (5) Business Days afford such Certificateholders access during business
hours to the current list of Certificateholders for purposes of communicating
with other Certificateholders with respect to their rights under the Purchase
Agreements and the Basic Documents (provided such Certificateholders (i) state
that they wish to communicate with other Certificateholders with respect to
their rights under the Purchase Agreement, the Basic Documents or under the
Certificates and (ii) provide the Owner Trustee, the Administrator and the
Servicer with a copy of the proposed communication). The Purchase Agreement and
Basic Documents will not provide for the holding of any annual or other meeting
of Certificateholders.
If Definitive Notes have been issued, the Indenture Trustee will, upon
written request by three or more Noteholders or by holders of Notes evidencing
not less than 25% of the aggregate principal outstanding balance of the Notes,
within five (5) Business Days afford such Noteholders access during business
hours to the current list of Noteholders for purposes of communicating with
other Noteholders with respect to their rights under the Indenture (provided
such Noteholders (i) state that they wish to communicate with other Noteholders
with respect to their rights under the Indenture and (ii) provide the Indenture
Trustee, the Administrator and the Servicer with a copy of the proposed
communication). The Indenture will not provide for the holding of any annual or
other meetings of Noteholders.
REPORTS TO SECURITYHOLDERS
On each Distribution Date, the Indenture Trustee will provide to the
applicable Noteholders of record as of the related Record Date, and the Owner
Trustee will provide to the Certificateholders of the related Record Date, a
statement setting forth substantially the same information as is required to be
provided on the report provided to the Indenture Trustee and the Issuer
described under "DESCRIPTION OF ADMINISTRATION AGREEMENT."
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during the term of the Indenture or the Trust
Agreement, as the case may be, the Applicable Trustee will mail to each person
who at any time during such calendar year was a Securityholder and received any
payment thereon, a statement containing information for the purposes of such
Securityholder's preparation of federal income tax returns.
See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
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DESCRIPTION OF THE INDENTURE
In order to secure the payment of the principal of and interest on the
1996 Notes, and in order to secure the performance and observance of all the
covenants and conditions contained in the Indenture and in the Notes, the Issuer
pledged, and granted a first lien on and a security interest in, the Indenture
Trust Estate to the Indenture Trustee, as security for the performance of all of
the obligations of the Issuer under the Indenture, and for the equal and ratable
benefit and security of the Holders of the Notes, without preference priority or
distinction as to lien or otherwise, except as otherwise provided in the
Indenture. Forms of the Master Indenture and First Terms Supplement have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part. The following summary describes provisions of the Indenture (consisting of
the Master Indenture and the First Terms Supplement). The summary does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all of the provisions of the Indenture. Where particular
provisions or terms used in the Indenture are referred to, the actual provisions
or terms used in the Indenture (including definitions of terms) are incorporated
by reference as part of such summary. A copy of the Master Indenture and First
Terms Supplement will be available from the Issuer, upon request, to Holders of
the 1996 Notes or 1996 Certificates.
INDENTURE TRUST ESTATE
The Indenture Trust Estate is comprised of substantially all the assets
of the Issuer (other than the Certificate Fund), including the following:
REVENUES. The Revenues include all revenues, receipts and moneys
payable into or to the credit of the Revenue Fund pursuant to the Indenture and
any interest earnings on Investment Securities credited to any other Fund,
Account or Subaccount. See "--Flow of Funds" below.
FINANCED LOANS. The Financed Loans include all Loans purchased by the
Issuer from the Seller and designated on the certificate delivered to the
Indenture Trustee pursuant to the Indenture and financed by the Issuer with
proceeds of the Notes and Certificates, but excluding such Financed Loans as are
released from the lien of the Indenture in exchange for payment therefor. See
"--Flow of Funds--Student Loan Portfolio Fund" below. Payments on or with
respect to the Financed Loans are included within the Revenues and are credited
to the Revenue Fund. See "THE TRUST ESTATE."
SERVICING AGREEMENT. Under the Indenture, the Issuer has pledged all
of its rights, title and interest in the Servicing Agreement to the Indenture
Trustee. See "SERVICER."
ADMINISTRATION AGREEMENT. Under the Indenture, the Issuer has
pledged all of its rights, title and interest in the Administration Agreement to
the Indenture Trustee. See "DESCRIPTION OF THE ADMINISTRATION AGREEMENT."
PURCHASE AND SALES AGREEMENTS. Under the Indenture, the Issuer has
pledged all of rights, title and interest in the Purchase Agreement and the
Sales Agreement to the Indenture Trustee. See "DESCRIPTION OF THE PURCHASE AND
SALES AGREEMENTS."
FUNDS AND ACCOUNTS. The Indenture establishes the following Funds
and Accounts:
(a) Services Fund, containing a Cost of Issuance Account and
Administration Account therein;
(b) Debt Service Reserve Fund;
(c) Student Loan Acquisition Fund, containing a Pre-Funding
Account and an Acquisition Account;
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(d) Student Loan Portfolio Fund;
(e) Revenue Fund; and
(f) Note Fund, containing a Note Interest Account and a Note
Payment Account.
Within each Fund and Account, there shall be established an Account or
a Subaccount for each Series of Notes, including a 1996-A Account or 1996-A
Subaccount for the 1996 Notes. All moneys in the Funds and Accounts are pledged
to payment of the Notes, subject, however, to particular application of amounts
therein as provided in the Indenture. See "DESCRIPTION OF THE INDENTURE--Flow of
Funds" below. Moneys in the Funds and Accounts are to be invested only in
Investment Securities.
FLOW OF FUNDS
Student Loan Acquisition Fund.
(a) ACQUISITION ACCOUNT. The Indenture Trustee shall deposit to the
credit of the applicable subaccount of the Acquisition Account in the Student
Loan Acquisition Fund a portion of the proceeds of the applicable Series of
Notes and Class of Certificates as described in the applicable Terms Supplement.
Such deposits to the 1996-A Subaccount from the 1996 Securities shall be as
described under "FUND BALANCES AT CLOSING." Such amount shall be paid to or upon
the order of the Issuer on the Closing Date to finance the Initial Loans.
(b) PRE-FUNDING ACCOUNT. The Indenture Trustee shall deposit to the
credit of the applicable subaccount of the Pre-Funding Account in the Student
Loan Acquisition Fund a portion of the proceeds of the applicable Series of
Notes and Class of Certificates. The Indenture Trustee shall deposit to the
credit of the 1996-A Subaccount of the Pre-Funding Account in the Student Loan
Acquisition Fund a portion of the proceeds of the 1996 Notes and Certificates as
described under "FUND BALANCES AT CLOSING." Such amount shall be applied from
time to time, but in any event before January 10, 1997, to the acquisition of
Subsequent Loans from the Seller. At anytime prior to January 10, 1997, to the
extent amounts in the 1996-A Subaccount of the Pre-Funding Account will not be
committed to the acquisition of Subsequent Loans, upon certification by the
Trust, such amounts shall be transferred to the 1996-A Subaccount within the
Note Payment Account of the Note Fund.
STUDENT LOAN PORTFOLIO FUND. All Financed Loans shall be included in
the Balances of the Student Loan Portfolio Fund. All principal of, interest on
and other Revenues in respect of Financed Loans shall be deposited upon receipt
to the credit of the Revenue Fund as described below. Financed Loans included in
the Balances of the Student Loan Portfolio Fund may be removed therefrom by the
Indenture Trustee only upon an Event of Default or as described in the next
paragraph. Nothing in the Indenture shall be deemed to preclude the Servicer or
other custodian, including the Administrator, from maintaining possession of the
notes evidencing, and other documentation relating to, Financed Loans on behalf
of the Indenture Trustee in accordance with the Custody Agreement provided the
same is consistent with the creation and maintenance of the first lien and
security interest in the Financed Loans created by the Indenture and does not
impair the perfection of such security interest.
The Indenture provides that Defaulted Loans may be removed from the
Student Loan Portfolio Fund in return for payment in full by a Guarantor,
Servicer, the Seller or the Administrator. Financed Loans which are so
transferred from the Student Loan Portfolio Fund shall no longer constitute a
part of the Indenture Trust Estate and shall be free and clear of the lien of
the Indenture. The Indenture Trustee shall deposit the proceeds of any such
disposition of Financed Loans which are allocable to principal to the credit of
the appropriate subaccount within the Note Payment Account and the remainder of
such proceeds to the credit of the appropriate Revenue Account.
REVENUE FUND. There shall be deposited in the Revenue Fund (a) all
amounts received in respect of all Financed Loans, whether as principal,
interest, late charges or in payment or repurchase of principal of Financed
Loans, amounts received on cancellation of Financed Loans and any amounts
received as recoveries from a
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Guarantor; and (b) amounts received as earnings on or income from Investment
Securities included in the Balances of the Funds and Accounts to the extent
provided in the Indenture.
The Indenture Trustee shall maintain within the Revenue Fund a separate
Account for each Series. The Issuer shall, and shall cause the Servicer to,
transfer all Revenues received by it or by the Servicer on its behalf to the
Indenture Trustee, promptly or otherwise in accordance with the Servicing
Agreement, and the Indenture Trustee shall upon receipt of any Revenues
immediately deposit and credit such Revenues to the applicable Revenue Account;
PROVIDED, HOWEVER, that the Issuer shall remit directly to a Guarantor or
Collector any amount received in respect of a Financed Loan which is owed to the
Guarantor or Collector as a collection fee pursuant to a Guaranty Agreement. On
any Business Day, as directed by the Issuer, and, in any case, on the Business
Day prior to each Distribution Date, the Indenture Trustee shall transfer to the
applicable subaccount of the Note Payment Account, to be applied to the
prepayment or mandatory distribution of principal of Notes or transferred to the
Owner Trustee pursuant to the Indenture, all amounts then on deposit in the
applicable Revenue Account which can then be identified, based upon information
furnished to the Indenture Trustee by the Issuer, as allocable to payments of
principal of corresponding Financed Loans and amounts transferred on account of
principal pursuant to the Indenture, less the amount of any increase in
Capitalized Interest during the prior Interest Period.
By 12:00 noon on the last Business Day prior to any Distribution Date,
the Indenture Trustee shall, except as otherwise provided by the related Terms
Supplement, transfer or apply all amounts then on deposit in each Revenue
Account, after the transfers described above, in the following order of
priority, the requirement of each clause at the time of transfer to be satisfied
before any transfer is made to any purpose subsequent in priority:
FIRST, to the applicable subaccount in the Administration
Account in the Services Fund to the extent required to increase the
Balance on deposit in such subaccount to the Administration
Requirement, calculated as of the date of such transfer.
SECOND, to the applicable subaccount in the Note Interest
Account to the extent required to increase the amount in such
subaccount to the amount of interest (excluding Deferred Interest)
which will have accrued and be unpaid on the applicable Notes to but
not including such Distribution Date.
THIRD, to the Owner Trustee, the amount, as certified in
writing by the Owner Trustee, of any interest then accrued and unpaid
on the Class of Certificates identified with the applicable Series of
Notes (excluding Deferred Interest) to but not including such
Distribution Date.
FOURTH, any remainder to the applicable Debt Service Reserve
Account in order to increase the amount therein to the applicable Debt
Service Reserve Requirement.
FIFTH, any remainder to the applicable subaccount within the
Note Interest Account to the extent required to pay any amounts due to
Holders of Notes in respect of Deferred Interest on Notes calculated in
accordance with the related Terms Supplement.
SIXTH, any remainder to the Owner Trustee to the extent
required, as certified by the Owner Trustee, to pay any amounts due to
the Holders of Certificates in respect of Deferred Interest applicable
to the Class of Certificates identified with the applicable Series of
Notes calculated in accordance with the related Trust Supplement.
SEVENTH, any remainder, ratably with available moneys in all
other Revenue Accounts, to the Debt Service Reserve Fund to increase
the amount in any other Debt Service Reserve Account to its applicable
Debt Service Reserve Requirement.
EIGHTH, any remainder to the Owner Trustee for distribution to
the Depositor and NMELC to the extent specified in the related Terms
Supplement.
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NINTH, any remainder to the applicable subaccount of the Note
Payment Account for the payment or prepayment of the Notes.
TENTH, any remainder to the Owner Trustee for the payment of
principal of Certificates or prepayment of Certificates identified with
the applicable Series of Notes.
ELEVENTH, any remainder to the Owner Trustee.
Pursuant to the First Terms Supplement the above transfers are subject
to the following limitations:
(a) After the transfers required by clauses FIRST through SEVENTH have
been satisfied, an amount equal to one-twelfth of 0.80% of the principal of the
Financed Loans Outstanding as of the end of the prior month shall be transferred
to the Owner Trustee for distribution to the Depositor and NMELC, provided,
however, that no such transfer shall occur if, after the transfers required by
clauses FIRST through SEVENTH have been satisfied, the Primary Parity Trigger is
less than 114.78% or the Secondary Parity Trigger is less than 105.74% and
provided, further, that if, after the transfers required by clauses FIRST
through SEVENTH have been satisfied, the Primary Parity Trigger is equal to or
greater than 125%, then any funds remaining in the 1996-A Revenue Account, after
the transfers required by clauses FIRST through SEVENTH have been satisfied,
shall be transferred to the Owner Trustee for distribution to the Depositor and
NMELC.
(b) If the Primary Parity Trigger is less than 104% after the transfer
described in clause SECOND has been completed, then all remaining amounts shall
be transferred to the 1996-A Subaccount within the Note Payment Account in lieu
of the transfers described in clauses THIRD through ELEVENTH.
(c) If the Primary Parity Trigger is less than 112.78% after the
transfer described in clause FOURTH has been completed, then all remaining
amounts shall be transferred to the 1996-A Subaccount within the Note Payment
Account in lieu of the transfers described in clauses FIFTH through ELEVENTH.
DEBT SERVICE RESERVE FUND. On the Closing Date for any Series of Notes,
the Indenture Trustee shall deposit to the credit of the applicable Account in
the Debt Service Reserve Fund an amount specified in the applicable Terms
Supplement, which amount may be equal to or less than the Debt Service Reserve
Requirement for that Series. The initial deposit to the 1996-A Debt Service
Reserve Account is as described under "FUND BALANCES AT CLOSING." The Debt
Service Reserve Requirement for each Series shall be established in the
applicable Terms Supplement. The Debt Service Reserve Requirement for the 1996
Notes shall be an amount equal to two percent (2%) of the aggregate principal
amount of 1996 Notes and 1996 Certificates Outstanding on any date of
determination. If on any Distribution Date the Balances of any Account in the
Debt Service Reserve Fund are in excess of the Debt Service Reserve Requirement,
the amount of such excess shall be transferred to the corresponding Account of
the Revenue Fund.
Other than the transfer of excess Balances pursuant to the preceding
paragraph, or in the case of an Event of Default, the amounts in any Account of
the Debt Service Reserve Fund shall be used solely for the following purposes in
the following order of priority: FIRST, to make up any deficiency in the
corresponding subaccount of the Administration Account; SECOND, to increase the
amount in the corresponding subaccount of the Note Interest Account to the
amount of interest then accrued and unpaid on the Notes (excluding Deferred
Interest) on any Distribution Date or on any other date on which interest is due
upon prepayment or payment of any Notes of the corresponding Series, by transfer
and deposit by the Indenture Trustee to the credit of the corresponding
subaccount of the Note Interest Account on any such date; THIRD, on a Maturity
Date, to provide for payment of the principal of the Notes of the corresponding
Series, by transfer and deposit by the Indenture Trustee to the credit of the
corresponding subaccount of the Note Payment Account on the Maturity Date;
FOURTH, to the Owner Trustee to the extent necessary to pay the amount of
interest then accrued and unpaid on the corresponding Class of Certificates
(excluding Deferred Interest) on any Distribution Date or on any other date on
which interest is due upon prepayment or payment of any corresponding Class of
Certificates; and FIFTH, at such time as there are no longer
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any Notes of the corresponding Series Outstanding to provide for payment of the
principal of the corresponding Class of Certificates at the Maturity Date
thereof by transfer to the Owner Trustee.
NOTE FUND. The Note Fund shall consist of two Accounts designated the
"Note Interest Account" and the "Note Payment Account." The Note Fund shall be
used only for the payment of the principal of and interest on the Notes.
(a) NOTE INTEREST ACCOUNT. Moneys shall be deposited in each subaccount
in the Note Interest Account from the corresponding Revenue Account, from the
corresponding subaccount in the Administration Account, from the corresponding
Subaccount in the Note Payment Account and from the Debt Service Reserve Fund in
accordance with the terms of the Indenture. Moneys on deposit in each subaccount
in the Note Interest Account shall be applied by the Indenture Trustee to the
payment of the interest on the Notes of the corresponding Series when due
(whether on a Distribution Date or upon the prepayment or payment of such Notes
in accordance with the terms of the Indenture).
(b) NOTE PAYMENT ACCOUNT. Moneys shall be deposited in each subaccount
in the Note Payment Account from the corresponding Revenue Account, from the
Debt Service Reserve Fund and from any other source received by the Indenture
Trustee for deposit therein. Moneys on deposit in the corresponding subaccount
in the Note Payment Account shall be applied by the Indenture Trustee to payment
of principal of the Notes of the corresponding Series in accordance with the
terms of the Indenture.
SERVICES FUND. The Services Fund consists of two Accounts designated
the "Cost of Issuance Account" and the "Administration Account." The Services
Fund shall be used for and applied only to the payment of Administrative
Expenses and Costs of Issuance.
The Trustee shall deposit to the credit of the applicable subaccount of
the Cost of Issuance Account the amount, if any, specified in the related Terms
Supplement. The Trustee shall deposit to the credit of the applicable subaccount
within the Administration Account amounts from the Revenue Fund as described
above.
EXECUTION AND DELIVERY OF NOTES
Prior to the execution and delivery of any Series of Notes, the Issuer
shall deliver to the Indenture Trustee:
(a) Opinions of Counsel addressed to the Indenture Trustee to the
effect that:
(i) all instruments furnished to the Indenture Trustee in
connection with such Notes conform to the requirements of the
Indenture and constitute all the documents required to be
delivered hereunder for the Indenture Trustee to authenticate and
deliver such Notes;
(ii) all conditions precedent provided for in the Indenture
relating to the authentication and delivery of such Notes have
been complied with;
(iii) the Trust Agreement authorizes the Issuer to execute
and deliver the Terms Supplement relating to such Notes, and to
issue such Notes, and the Issuer has duly taken all necessary
action under the Trust Agreement for those purposes;
(iv) the Issuer is a Massachusetts business trust and the
issuance of the Notes is in conformity with the terms of and duly
authorized by the Trust Agreement;
(v) assuming due execution and delivery thereof by the
Indenture Trustee, the Indenture and the related Terms
Supplement, as executed and delivered by the Issuer, are the
valid, legal and binding obligations of the Issuer, enforceable
in accordance with their terms, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance
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and other similar laws relating to or affecting creditors' rights
generally and court decisions with respect thereto, and such
counsel need express no opinion with respect to the availability
of equitable remedies, and the execution of such Terms Supplement
is authorized or permitted by the Indenture;
(vi) the Notes, when issued, delivered, authenticated and
paid for, will be the valid, legal and binding obligations of the
Issuer, entitled to the benefits of the Indenture and the related
Terms Supplement, equally and ratably with all other Notes of
such Series, if any, theretofore issued, authenticated, delivered
and paid for and then Outstanding, and enforceable in accordance
with their terms, subject to the effect of bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance and
other similar laws relating to or affecting creditors' rights
generally and court decisions with respect thereto, and such
counsel need express no opinion with respect to the availability
of equitable remedies;
(vii) the Issuer has granted to the Indenture Trustee a lien
and first perfected security interest in all of its right, title
and interest in each Financed Loan;
(viii) the Trust Agreement authorizes the Issuer to grant
the Indenture Trust Estate to the Indenture Trustee as security
for the Notes of such Series and all previously issued and
Outstanding Series and the Issuer has taken all necessary action
under the Trust Agreement to grant the Indenture Trust Estate to
the Indenture Trustee;
(ix) the Terms Supplement delivered to the Indenture Trustee
with such Opinion of Counsel subjects the Financed Loans securing
such Series and all previously issued and Outstanding Series and
all proceeds therefrom and the Trust Accounts or Funds for such
Series and all previously issued and Outstanding Series to the
lien and security interest of the Indenture;
(x) such action has been taken with respect to delivery of
possession of the Indenture Trust Estate and with respect to the
recording and filing of the Indenture, the Terms Supplement for
such Series, any other indentures supplemental hereto and any
other requisite documents and with respect to the execution and
filing of any financing statements as is necessary to perfect a
security interest in the Indenture Trust Estate for such Series
and all previously issued and Outstanding Series, with either the
details of such action being recited therein, or the absence of
any such action being necessary to make such lien and security
interest effective being stated therein; and, with any recording,
filing, re-recording and re-filing of the Indenture, the Terms
Supplement for such Series, any other indentures supplemental
hereto and any other requisite documents and any execution and
filing of any financing statements and continuation statements
that will, in the opinion of such counsel, be required to
maintain the lien and security interest created by the Indenture
and the related Terms Supplements in the Indenture Trust Estate
for such Series and all previously issued and Outstanding Series;
(xi) the Indenture and the Terms Supplements for such Series
have been duly qualified under the TIA, or that no qualification
of such Terms Supplement under the TIA is necessary; the
execution of the Terms Supplement for such Series requires the
requalification of the Indenture under the TIA, or that no
requalification of the Indenture under the TIA is necessary by
virtue of the execution of such Terms Supplement; and
(xii) no authorization, approval or consent of any
governmental body having jurisdiction over the Issuer which has
not been obtained by the Issuer is required for the valid
issuance and delivery of the Notes.
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(b) an Officer's Certificate of the Issuer stating that:
(i) the Issuer is not in default under the Indenture and the
issuance of such Notes will not result in the breach of any of
the terms, conditions or provisions of, or constitute a default
under, the Trust Agreement, any indenture, mortgage, deed of
trust or other agreement or instrument to which the Issuer is a
party or by which it is bound, or any order of any court or
administrative agency entered in any proceeding to which the
Issuer is a party or by which it may be bound or to which it may
be subject, and that all conditions precedent provided in the
Indenture relating to the authentication and delivery of such
Notes have been complied with;
(ii) the Issuer is the owner of each Financed Loan securing
such Series and any previously issued Series, has not assigned
any interest or participation in any such Financed Loans (or, if
any such interest or participation has been assigned, it has been
released) and has the right to pledge such Financed Loans to the
Indenture Trustee;
(iii) the Issuer has granted to the Indenture Trustee a lien
and first perfected security interest in all of its right, title
and interest in each such Financed Loan; and
(iv) attached thereto are true and correct copies of letters
signed by each Rating Agency confirming that the Notes of such
new Series have been rated in the highest ratings category by
such Rating Agency and that the issuance of such Notes will not
adversely affect the rating on any Outstanding Notes or
Certificates.
COVENANTS TO SECURE NOTES
PERFORMANCE OF COVENANTS; THE ISSUER. The Issuer has covenanted that it
will faithfully perform at all times any and all covenants, undertakings,
stipulations and provisions contained in the Indenture, in any and every Note
executed, authenticated and delivered under the Indenture and in all of its
proceedings pertaining thereto. The Issuer has covenanted and agreed that,
except as provided in the Indenture, it will not sell, convey, assign, pledge,
encumber or otherwise dispose of any part of the Indenture Trust Estate.
COMPLIANCE WITH AND ENFORCEMENT OF FINANCED LOANS, CUSTODY AGREEMENT,
SERVICING AGREEMENT, THE SALES AGREEMENT AND ADMINISTRATION AGREEMENT. The
Issuer has agreed that it (i) shall cause to be diligently taken all reasonable
steps, actions and proceedings necessary for the compliance with and the
enforcement of all terms, covenants and conditions of all Financed Loans, the
Custody Agreement, the Servicing Agreement, the Sales Agreement, and the
Administration Agreement, (ii) shall at all times, to the extent permitted by
law, defend, enforce, preserve and protect the rights and privileges of the
Issuer, the Indenture Trustee and the Holders of the Notes under or with respect
to each Financed Loan, the Custody Agreement, the Sales Agreement, the Servicing
Agreement and the Administration Agreement and (iii) shall not consent, or agree
to or permit any amendment or modification of any Financed Loan, the Custody
Agreement, the Servicing Agreement, the Sales Agreement or the Administration
Agreement which will in any manner materially adversely affect the rights or
security of the Holders of the Notes under the Indenture. Nothing in the
Indenture prevents the Issuer or the Indenture Trustee from permitting a
borrower to settle a default or cure a delinquency or any Financed Loan on such
terms as the Issuer or the Indenture Trustee, as applicable, shall deem
reasonable or as shall be required by law.
SERVICING OF FINANCED LOANS. The Issuer has agreed to service all
Financed Loans and enforce the payment and collection of all payments of
principal of and interest on such Financed Loans or to cause such servicing to
be done by one or more servicers, each evidencing, in the judgment of the
Issuer, the capability and experience necessary to adequately service such
Financed Loans.
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THE INDENTURE TRUSTEE
DUTIES OF INDENTURE TRUSTEE; QUALIFICATION; RESIGNATION; REMOVAL;
SUCCESSOR.
If an Event of Default has occurred and is continuing, the Indenture
Trustee shall exercise the rights and powers vested in it by the Indenture and
use the same degree of care and skill in its exercise as a prudent person would
exercise or use under the circumstances in the conduct of such person's own
affairs.
Except during the continuance of an Event of Default:
(i) the Indenture 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 Indenture Trustee; and
(ii) in the absence of bad faith on its part, the Indenture
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 Indenture Trustee and
conforming to the requirements of this Indenture; PROVIDED,
HOWEVER, that the Indenture Trustee shall examine the
certificates and opinions to determine whether or not they
conform to the requirements of the Indenture.
The Indenture Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own willful
misconduct, except that:
(i) the Indenture Trustee shall not be liable for any error
of judgment made in good faith by a responsible officer unless it
is proved that the Indenture Trustee was negligent in
ascertaining the pertinent facts; and
(ii) the Indenture Trustee shall not be liable with respect
to any action it takes or omits to take in good faith in
accordance with a direction received by it.
No provision of the Indenture shall require the Indenture Trustee to
expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties thereunder or in the exercise of any of its
right of powers, if it shall have reasonable grounds to believe that repayments
of such funds or adequate indemnity satisfactory to it against any loss,
liability or expense is not reasonably assured to it; provided, however, that
the Indenture Trustee shall not refuse or fail to perform any of its duties
hereunder solely as a result of nonpayment of its normal fees and expenses and
further provided that nothing in this paragraph shall be construed to limit the
exercise by the Indenture Trustee of any right or remedy permitted under the
Indenture or otherwise in the event of the Issuer's failure to pay the Indenture
Trustee's fees and expenses.
Except as expressly provided, the Indenture Trustee shall have no
obligation to administer, service or collect the Financed Loans or to maintain,
monitor or otherwise supervise the administration, servicing or collection of
the Financed Loans.
RIGHTS OF INDENTURE TRUSTEE. The Indenture Trustee may rely on any
document believed by it to be genuine and to have been signed or presented by
the proper person. The Indenture Trustee need not investigate any fact or matter
stated in such document. Before the Indenture Trustee acts or refrains from
acting, it may require an Officer's Certificate of the Issuer or an Opinion of
Counsel. The Indenture Trustee shall not be liable for any action it takes or
omits to take in good faith in reliance on such Officer's Certificate or Opinion
of Counsel. The Indenture Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys or a custodian or nominee, and the Indenture Trustee shall
not be responsible for any misconduct or negligence on the part of, or for the
supervision of, any such agent, attorney, custodian or nominee appointed with
due care by it hereunder.
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NOTICE OF DEFAULTS. If an Event of Default occurs and is continuing and
if it is either actually known or written notice of the existence thereof has
been delivered to the Indenture Trustee, the Indenture Trustee shall mail notice
of the Event of Default to each Noteholder within 90 days after it occurs.
Except in the case of an Event of Default in payment of principal of or interest
on any Note, the Indenture Trustee may withhold the notice to the Noteholders if
and so long as a committee of its Responsible Officers in good faith determines
that withholding the notice is in the interests of Noteholders of such Series.
If the Indenture Trustee receives notice from the Owner Trustee of the
occurrence of an Insolvency Event with respect to the Seller pursuant to the
Trust Agreement, the Indenture Trustee shall give prompt written notice to the
Noteholders of the occurrence of such event and of the effect of such event
under the Trust Agreement. Upon termination of the Trust pursuant to the Trust
Agreement, the Indenture Trustee shall, if so directed by the Owner Trustee,
sell the Indenture Trust Estate (other than the Trust Funds and Accounts) in a
commercially reasonable manner and on commercially reasonable terms. The
proceeds of any such sale shall be treated as Revenues under the Indenture.
COMPENSATION AND INDEMNITY. The Issuer shall pay to the Indenture
Trustee for its services, a fee equal to the amount agreed to in writing between
the Indenture Trustee and the Administrator (the "Indenture Trustee Fee") at the
times set forth in the Administration Agreement and shall or shall cause the
Administrator from its own funds to reimburse the Indenture Trustee for all
reasonable out-of-pocket expenses incurred or made by it in accordance with any
provision of this Indenture. The Indenture Trustee's compensation shall not be
limited by any law on compensation of a trustee of an express trust. The Issuer
shall or shall cause the Administrator from its own funds to indemnify the
Indenture Trustee against any and all loss, liability or expense (including
attorneys' fees) incurred by it in connection with the administration of this
trust and the performance of its duties under the Indenture and the other Basic
Documents. The Indenture Trustee shall notify the Issuer and the Administrator
promptly of any claim for which it may seek indemnity. Failure by the Indenture
Trustee to so notify the Issuer and the Administrator shall not relieve the
Issuer or the Administrator of its obligations under the Indenture and under the
other Basic Documents. The Issuer shall or shall cause the Administrator to
defend the claim and the Administrator shall not be liable for the legal fees
and expenses of the Indenture Trustee after it has assumed such defense;
PROVIDED, HOWEVER, that, in the event that there may be a conflict between the
positions of the Indenture Trustee and the Administrator in conducting the
defense of such claim, the Indenture Trustee shall be entitled to separate
counsel the fees and expenses of which shall be paid by the Administrator from
its own funds on behalf of the Issuer. Neither the Issuer nor the Administrator
need reimburse any expense or indemnify against any loss, liability or expense
incurred by the Indenture Trustee through the Indenture Trustee's own willful
misconduct, negligence or bad faith.
REPLACEMENT OF INDENTURE TRUSTEE. No resignation or removal of the
Indenture Trustee and no appointment of a successor Indenture Trustee shall
become effective until the acceptance of appointment by the successor Indenture
Trustee. The Indenture Trustee may resign at any time by so notifying the
Issuer. The Noteholders of a majority in Outstanding Amount of the Notes may
remove the Indenture Trustee by so notifying the Indenture Trustee and may
appoint a successor Indenture Trustee. The Issuer shall remove the Indenture
Trustee if:
(i) the Indenture Trustee fails to comply with the eligibility
requirements of the Indenture;
(ii) an Insolvency Event occurs with respect to the Indenture
Trustee;
(iii) a receiver or other public officer takes charge of the
Indenture Trustee or its Property;
(iv) the Indenture Trustee otherwise becomes incapable of acting.
If the Indenture Trustee resigns or is removed or if a vacancy exists
in the office of Indenture Trustee for any reason, the Issuer shall promptly
appoint a successor Indenture Trustee.
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A successor Indenture Trustee shall deliver a written acceptance of its
appointment to the retiring Indenture Trustee and to the Issuer. Thereupon the
resignation or removal of the retiring Indenture Trustee shall become effective,
and the successor Indenture Trustee shall have all the rights, powers and duties
of the Indenture Trustee. The successor Indenture Trustee shall mail a notice of
its succession to Noteholders. The retiring Indenture Trustee shall promptly
transfer all property held by it as Indenture Trustee to the successor Indenture
Trustee.
If a successor Indenture Trustee does not take office within 60 days
after the retiring Indenture Trustee resigns or is removed, the retiring
Indenture Trustee, the Issuer or the Noteholders of a majority in Outstanding
Amount of the Notes may petition any court of competent jurisdiction for the
appointment of a successor Indenture Trustee.
If the Indenture Trustee fails to comply with the eligibility
requirements of the Indenture, any Noteholder may petition any court of
competent jurisdiction for the removal of the Indenture Trustee and the
appointment of a successor Indenture Trustee.
SUCCESSOR INDENTURE TRUSTEE BY MERGER. If the Indenture Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Indenture Trustee; provided that such
corporation or banking association shall be otherwise qualified and eligible
under the Indenture.
APPOINTMENT OF CO-TRUSTEE OR SEPARATE OWNER TRUSTEE. Notwithstanding
any other provisions of the Indenture, at any time, for the purpose of meeting
any legal requirement of any jurisdiction in which any part of the Indenture
Trust Estate may at the time be located, the Indenture Trustee shall have the
power and may execute and deliver all instruments to appoint one or more persons
to act as co-trustee or co-trustees, or separate trustee or separate trustees,
of all or any part of the Indenture Trust Estate, and to vest in such person or
persons, in such capacity and for the benefit of the Noteholders.
ELIGIBILITY; DISQUALIFICATION. The Indenture Trustee shall at all
times satisfy the requirements of the Trust Indenture Act of 1939, as amended
(the "TIA").
DEFAULTS AND REMEDIES
EVENTS OF DEFAULT. The following shall constitute "Events of Default":
(a) Failure in the due and punctual payment of the principal of or
interest on any of the Notes, when the same shall become due and payable, either
at maturity or otherwise;
(b) A material failure by the Issuer in the observance and performance
of any other of the covenants, conditions and agreements of the Issuer contained
in the Indenture and the continuation of such failure for a period of thirty
(30) days after written notice thereof from the Indenture Trustee or from the
Holders of not less than two-thirds in aggregate principal amount of the Notes
then Outstanding; or
(c) An Insolvency Event with respect to the Issuer or the Seller.
Upon the occurrence of an Event of Default, so long as such Event of
Default shall not have been remedied, unless the principal of all of the Notes
shall have already become due and payable, the Indenture Trustee may, and upon
written request of the Holders of not less than two-thirds in aggregate
principal amount of the Notes then Outstanding, the Indenture Trustee shall, by
written notice to the Issuer, declare the principal of all the Notes then
Outstanding and the interest accrued thereon, excluding Deferred Interest, to be
due and payable immediately; and upon any such declaration the same shall become
and be due and payable on such date, anything contained in the Indenture or in
any of the Notes to the contrary notwithstanding. The right of the Indenture
Trustee to make any such declaration as aforesaid, however, is subject to the
condition that if, at any time after such declaration,
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but before any judgment or decree for the payment of moneys due shall have been
obtained or entered unless the same has been discharged, all overdue
installments of interest upon the Notes, together with the reasonable and proper
charges, expenses and liabilities of the Indenture Trustee and the Holders of
the Notes and their respective agents and attorneys and all other sums then
payable by the Issuer under the Indenture (except the principal of and interest
accrued since the next preceding Distribution Date on the Notes and due and
payable solely by virtue of such declaration) shall either be paid by or for the
account of the Issuer or provision satisfactory to the Indenture Trustee shall
be made for such payment, and all defaults under the Notes or under the
Indenture (other than the payment of principal and interest due and payable
solely by reason of such declaration) shall be cured to the satisfaction of the
Indenture Trustee or provision deemed by the Indenture Trustee to be adequate
shall be made therefor, or, to the extent any of such defaults cannot be cured,
such defaults shall have been waived by the Holders of not less than two-thirds
in aggregate principal mount of the Notes then Outstanding, then and in every
such case the Holders of two-thirds in principal amount of the Notes then
Outstanding, by written notice to the Issuer and to the Indenture Trustee, may
rescind such declaration with respect to the Notes and annul such Event of
Default with respect to the Notes, or, if the Indenture Trustee shall have acted
with respect to the Notes without a written request from the Holders of Notes as
provided for in this paragraph, and if there shall not have been theretofore
delivered to the Indenture Trustee written notice to the contrary by the Holders
of Notes as provided in this paragraph, then the Indenture Trustee may, by
written notice to the Issuer, annul such declaration and any such default with
respect to the Notes and its consequences shall be annulled; provided that no
such recision and annulment shall extend to or affect any subsequent Event of
Default or impair or exhaust any right or power consequent thereon.
Upon any declaration of acceleration of the Notes under the Indenture,
the Indenture Trustee shall give notice of such declaration and its consequences
to Noteholders. Notice of such acceleration having been given as aforesaid,
anything contained in the Indenture or in the Notes to the contrary
notwithstanding, interest shall cease to accrue on the Notes from and after the
date set forth in such notice (which shall be not more than five (5) days from
the date of such declaration).
APPLICATION OF MONEYS. In the event that an Event of Default shall have
occurred and be continuing and at any time the moneys held by the Indenture
Trustee shall be insufficient for the payment of the principal of and interest
then due on the Notes, such moneys and all Revenues received or collected from
the Indenture Trust Estate or otherwise for the benefit or for the account of
Holders of the Notes by the Indenture Trustee shall be applied first to the
payment of the reasonable and proper fees and expenses of the Indenture Trustee
and of such other expenses as are necessary in the judgment of the Indenture
Trustee to prevent loss of Revenues and to protect the interests of the Holders
of the Notes, and thereafter as follows:
(a) Unless the principal of all of the Notes shall have become or have
been declared due and payable,
FIRST, to the payment to the persons entitled thereto of all
installments of interest then due on the Notes (including any interest
on overdue principal at the rate borne by the respective obligations
but excluding Deferred Interest) in the order that such installments of
interest shall have become due, and, if the amounts available shall not
be sufficient to pay in full all installments of interest coming due on
the same date then to the payment thereof ratably, according to the
amount due thereon, to the persons entitled thereto, without any
discrimination or preference, and
SECOND, to the payment to the persons entitled thereto of the
unpaid principal due and unpaid on the Notes at the time of such
payment according to the amounts due for principal, to the persons
entitled thereto without any discrimination or preference, and
THIRD, to the payment to the persons entitled thereto of all
Deferred Interest on the Notes.
(b) If the principal of all of the Notes shall have become or have been
declared due and payable, to the payment of the principal of and interest then
due and unpaid on the Notes without preference or priority of principal over
interest or of interest over principal or of any installment of interest over
any other installment of
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interest, or of any Note over any other Note, ratably, according to the amounts
due respectively for principal and interest, to the persons entitled thereto
without any discrimination or preference, and then to the Owner Trustee.
Whenever moneys are to be applied pursuant to the foregoing paragraphs
such moneys shall be applied at such times, and from time to time, as the
Indenture Trustee in its sole discretion shall determine, having due regard to
the amount of such moneys available for application and the likelihood of
additional moneys becoming available for such application in the future.
Whenever the Indenture Trustee shall exercise such discretion, it shall fix the
date upon which application is to be made, and upon such date interest on the
amounts of principal to be paid on such date shall cease to accrue on the
affected Notes. The Indenture Trustee shall give such notice as it may deem
appropriate of the fixing of any such date and shall not be required to make
payment to the Holder of any unpaid affected Note unless such Note is presented
for appropriate endorsement.
Upon the occurrence of an Event of Default, the Indenture Trustee may
not cause any or all of the Indenture Trust Estate to be sold or otherwise
liquidated unless (A) the Noteholders of 100% of the Outstanding Amount of the
Notes of any affected Series consent thereto, (B) the proceeds of such sale or
liquidation distributable to the Noteholders are sufficient to discharge in full
all amounts then due and unpaid upon the Outstanding Notes for principal and
interest or (C) the Indenture Trustee determines that the Indenture Trust Estate
will not continue to provide sufficient funds for the payment of principal of
and interest on the Notes as they would have become due if the Outstanding Notes
had not been declared due and payable, and the Indenture Trustee obtains the
consent of Noteholders of two-third (2/3) of the Outstanding Amount of the
Outstanding Notes. In determining such sufficiency or insufficiency with respect
to Clause (B) and (C), the Indenture Trustee may, but need not, obtain and rely
upon an opinion of an independent banking or accounting firm of national
reputation as to the feasibility of such proposed action and as to the
sufficiency of the Indenture Trust Estate for such purpose.
So long as Notes are outstanding under the Indenture, if and whenever
all overdue installments of interest on all Notes, together with the reasonable
and proper charges, expenses and liabilities of the Indenture Trustee and the
Holders thereof, their respective agents and attorneys, and all other sums
payable by the Issuer under the Indenture, including the principal of and
accrued and unpaid interest on all Notes which shall then be payable by
declaration or otherwise, shall either be paid in full by or for the account of
the Issuer or provision satisfactory to the Indenture Trustee shall be made for
such payment, and all Events of Default under the Indenture or the Notes shall
be made good or secured to the satisfaction of the Indenture Trustee or
provision deemed by the Indenture Trustee to be adequate shall be made therefor,
thereupon the Issuer and the Indenture Trustee shall be restored, respectively,
to their former positions and rights under the Indenture, and all Revenues shall
thereafter be applied as provided in the Indenture. No such resumption of the
application of Revenues as provided in the Indenture shall extend to or affect
any subsequent Event of Default under the Indenture or impair any right
consequent thereon.
SUITS AT LAW OR IN EQUITY; DIRECTION OF ACTION BY HOLDERS. If an Event
of Default shall happen and shall not have been remedied, then and in every such
case, the Indenture Trustee shall be entitled and empowered to proceed forthwith
such suits, actions and proceedings at law or in equity for the collection of
all sums due in connection with the Notes and to protect and enforce its rights
and the rights of the Holders of the Notes under the Indenture for the specific
performance of any covenant contained in the Indenture, or in aid of the
execution of any power granted in the Indenture, or for an accounting as trustee
of any express trust or in the enforcement of any legal or equitable rights as
the Indenture Trustee, being advised by counsel, shall deem most effectual to
enforce any of its rights, or to perform any of its duties under the Indenture.
The Indenture Trustee shall be entitled and empowered either in its own name or
as a trustee of an express trust, or an attorney-in-fact for the Holders of the
Notes or in any one or more of such capacities, to file such proof of debt,
claim, petition or other document as may be necessary or advisable in order to
have the claims of the Indenture Trustee and of the Holders of the Notes allowed
in any equity, receivership, insolvency, bankruptcy, liquidations, readjustment,
reorganization or other similar proceedings. For this purpose, the Indenture
Trustee has been irrevocably appointed the true and lawful attorney-in-fact of
the respective Holders (and the successive Holders of the Notes by taking and
holding the same shall be conclusively deemed to have so appointed the Indenture
Trustee) with authority to make and file in the respective names of the Holders
of the Notes any such proof of debt, amendment of proof of debt, claim, petition
or other document in any such proceedings and to receive payment of any sums
becoming distributable on account
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thereof, and to execute any such other papers and documents and to do and
perform any and all acts and things for and on behalf of the Holders of the
Notes necessary or advisable in the opinion of the Indenture Trustee in order to
have the respective claims of the Indenture Trustee and of the Holders of the
Notes allowed in any such proceedings and to receive payment of any sums
becoming distributable on account thereof, and to execute any such other papers
and documents and to do and perform any and all acts and things for and on
behalf of the Holders of the Notes necessary or advisable in the opinion of the
Indenture Trustee in order to have the respective claims of the Indenture
Trustee and of the Holders of the Notes allowed in any such proceedings and to
receive payment of and on account of such claims.
The Indenture Trustee, at the request of the Holders of the Notes of
not less than two-thirds in aggregate principal amount of the Notes then
Outstanding, and upon being furnished with reasonable security and indemnity,
shall take such steps and institute such suits, actions or proceedings for the
protection and enforcement of the rights of the Holders of Notes, to collect any
amount due and owing from the Issuer or by injunction or other appropriate
proceeding in law or in equity to obtain other appropriate relief.
SUITS BY INDIVIDUAL HOLDERS. Except as otherwise specifically provided
below, no Holder of the Notes shall have any right to institute any suit, action
or proceeding in equity or at law for the enforcement of any provision of, or
the execution of any trust or for any remedy under the Indenture unless (i) such
Holder is a Holder of one or more Notes then Outstanding, and such Holder
previously shall have given to the Indenture Trustee notice of the Event of
Default on account of which such suit, action or proceeding is to be instituted,
(ii) the Holders of not less than two-thirds in aggregate principal amount of
the Notes then Outstanding, shall have filed a written request with the
Indenture Trustee after the right to exercise such powers or right of action, as
the case may be, shall have accrued that such suit, action or proceeding be
instituted, (iii) there shall have been offered to the Indenture Trustee
reasonable security and indemnity against the costs, expenses and liability to
be incurred therein or thereby, (iv) the Indenture Trustee for a period of
thirty (30) days after a receipt by it of such action, suit or proceeding, or
the Indenture Trustee shall at any time after such receipt have stated in
writing that it shall not so proceed, and (v) no direction described in the
heading "Suits at Law or in Equity; Direction of Action" above is inconsistent
with such written request shall have been given to the Indenture Trustee. Except
as otherwise above provided, no one or more Holders of the Notes shall have any
right in any manner whatsoever by its or their action to affect, disturb or
prejudice the pledge created by the Indenture, or to enforce any right under the
Indenture except in the manner provided in the Indenture.
NOTICE OF DEFAULT. The Indenture Trustee shall, within thirty (30) days
after the time the Indenture Trustee becomes aware of the occurrence of an Event
of Default, give notice to all Noteholders by registered mail of all Events of
Default known to the Indenture Trustee, unless such Event of Default shall have
been cured before the giving of such notice.
AMENDING AND SUPPLEMENTING OF INDENTURE
AMENDING AND SUPPLEMENTING OF INDENTURE WITHOUT CONSENT OF NOTEHOLDERS.
The Issuer and the Indenture Trustee, from time to time and at any time and
without the consent or concurrence of any Noteholder, may execute a Supplemental
Indenture, for any one or more of the following purposes:
(i) to correct or amplify the description of any property at
any time subject to the lien of each Terms Supplement, or better
to assure, convey and confirm unto the Indenture Trustee any
property subject or required to be subjected to the lien of each
Terms Supplement, or to subject to the lien of each Terms
Supplement additional property;
(ii) to evidence the succession, in compliance with the
applicable provisions of the Indenture, of another person to the
Issuer, and the assumption by any such successor of the covenants
of the Issuer in the Indenture and in the Notes contained;
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(iii) to add to the covenants of the Issuer, for the benefit
of the Noteholders of all Notes or of the Notes of any Series, or
to surrender any right or power in the Indenture conferred upon
the Issuer;
(iv) to convey, transfer, assign, mortgage or pledge any
property to or with the Indenture Trustee;
(v) to cure any ambiguity, to correct or supplement any
provision in the Indenture which may be inconsistent with any
other provision in the Indenture or to make any other provisions
with respect to matters or questions arising under the Indenture;
provided that such action shall not materially adversely affect
the interests of the Noteholders of any Series;
(vi) to evidence and provide for the acceptance of the
appointment under the Indenture by a successor Indenture Trustee
with respect to the Notes and to add to or change any of the
provisions of the Indenture as shall be necessary to facilitate
the administration of the trusts under the Indenture by more than
one trustee;
(vii) to add to the conditions, limitations and restrictions
on the authorized amount, terms and purposes of the issuance,
authentication and delivery of any Series of Notes, additional
conditions, limitations and restrictions thereafter to be
observed;
(viii) to set forth the terms of, and security for, any
Series that has not theretofore been authorized by a Terms
Supplement;
(ix) to modify or eliminate any of the terms of the
Indenture; provided, however, that:
(A) such supplemental indenture shall expressly provide
that any such modifications or eliminations shall not be
effective with respect to any Outstanding Note of any Series
created prior to the execution of such supplemental
indenture; and
(B) the Indenture Trustee may, in its discretion,
decline to enter into any such supplemental indenture which,
in its opinion, would adversely affect its own rights,
duties or immunities;
(x) to provide for the issuance of Notes of any Series
(including Notes of a Series theretofore authorized and then
Outstanding) or any Class within such Series in bearer form with
coupons ("Bearer Notes") and for the exchangeability of Bearer
Notes and Notes of the same Series and Class issued in registered
form ("Registered Notes"); and such supplemental indenture may
provide for payments on Bearer Notes only outside the United
States and for appointment of a foreign Paying Agent that is
acceptable to the Rating Agencies that rated the initial Series
of the Notes and may also contain any provisions as may in the
Issuer's judgment be necessary, appropriate or convenient (a) to
permit the Notes to be issued and sold to or held in bearer form
by non-United States persons, (b) to establish entitlement to an
exemption from United States withholding tax or reporting
requirements with respect to payment on the Notes, (c) to comply,
or facilitate compliance, with other applicable laws or
regulations, (d) to provide for usual and customary provisions
for communication (by notice, publication, maintenance of lists
of holders of Bearer Notes who have provided names and addresses
for such purpose, or otherwise) with holders of Bearer Notes, or
(e) to otherwise effectuate provisions of the issuance of Bearer
Notes and their exchangeability with Registered Notes; or
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(xi) to modify, eliminate or add to the provisions of the
Indenture to such extent as shall be necessary to effect the
qualification of the Indenture under the TIA or under any similar
Federal statute hereafter enacted and to add to the Indenture
such other provisions as may be expressly required by TIA.
The Issuer and the Indenture Trustee may, also without the consent of
any of the Noteholders but with prior notice to the Rating Agencies, enter into
an indenture or indentures supplemental to the Indenture for the purpose of
adding any provisions to, or changing in any manner or eliminating any of the
provisions of the Indenture or of modifying in any manner the rights of the
Noteholders under the Indenture; provided, however, that such actions shall not
adversely affect the ratings then assigned to any Notes or Certificates, as
evidenced by an Officer's Certificate to such effect delivered to the Indenture
Trustee (upon which the Indenture Trustee may conclusively rely), accompanied by
a letter from each Rating Agency (or other evidence satisfactory to the
Indenture Trustee) confirming that the adoption of such indenture or indentures
will not adversely affect the ratings then assigned by such Rating Agency to any
Notes or Certificates Outstanding.
AMENDMENT OF INDENTURE WITH CONSENT OF HOLDERS. The Issuer and the
Indenture Trustee also may, with prior notice to the Rating Agencies, and with
prior notice to and consent of the Noteholders of not less than a majority of
the Outstanding Amount of all the Notes in such case Outstanding Notes of all
Series are to be affected or with the consent of the Noteholders of not less
than a majority of the Outstanding Amount of the Notes to be affected in case
one or more, but less than all, of the Series of Outstanding Notes are to be
affected, by act of such Noteholders delivered to the Issuer and the Indenture
Trustee, enter into an indenture or indentures supplemental hereto for the
purpose of adding any provisions to, or changing in any manner or eliminating
any of the provisions of the Indenture relating to such Series or of modifying
in any manner the rights of the Noteholders of such Series under the Indenture;
provided, however, that no such supplemental indenture shall, without the
consent of the Noteholders of each Outstanding Note affected thereby;
(i) change the date of payment of any installment of
principal of or interest on any Note, or reduce the principal
amount thereof or the interest rate thereon, change the
provisions of the Indenture relating to the application of
collections on, or the proceeds of the sale of, the Indenture
Trust Estate to payment of principal of or interest on the Notes,
or change any place of payment where, or the coin or currency in
which any Note or the interest thereon is payable, or impair the
right to institute suit for the enforcement of the provisions of
the Indenture requiring the application of funds available
therefor to the payment of any such amount due on the Notes on or
after the respective due dates thereof;
(ii) reduce the percentage of the Outstanding Amount of the
Notes of any Series, the consent of the Noteholders of which is
required for any supplemental indenture, or the consent of the
Noteholders of which is required for any waiver of compliance
with certain provisions of the Indenture or certain defaults
hereunder and their consequences provided for in the Indenture;
(iii) modify or alter the provisions of the proviso to the
definition of the term "Outstanding";
(iv) reduce the percentage of the Outstanding Amount of the
Notes of any Series required to direct the Indenture Trustee to
direct the Issuer to sell or liquidate the Indenture Trust
Estate;
(v) modify any provision relating to the power to amend the
Indenture with Noteholders' consent except to increase any
percentage specified herein or to provide that certain additional
provisions of the Indenture or the other Basic Documents cannot
be modified or waived without the consent of the Noteholder of
each Outstanding Note affected thereby;
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(vi) modify any of the provisions of the Indenture in such
manner as to affect the calculation of the amount of any payment
of interest or principal due on any Note on any Distribution
Date; or
(vii) permit the creation of any lien ranking prior to or on
a parity with the lien of the Indenture with respect to any part
of the Indenture Trust Estate or, except as otherwise permitted
or contemplated herein, terminate the lien of the Indenture on
any property at any time subject hereto or deprive any Noteholder
of any Note of the security provided by the lien of the
Indenture.
The Indenture Trustee may in its discretion determine whether or not
any Notes of any particular Series would be affected by any supplemental
indenture and any such determination shall be conclusive upon the Noteholders of
all Notes, whether theretofore or thereafter authenticated and delivered
hereunder.
DISCHARGE OF INDENTURE; MONEYS HELD FOR PAYMENT OF NOTES
DISCHARGE OF INDENTURE. The Indenture shall cease to be of further
effect with respect to a Series of Notes except as to (i) rights of registration
of transfer and exchange, (ii) substitution of mutilated, destroyed, lost or
stolen Notes of such Series, (iii) rights of Noteholders to receive payments of
principal thereof and interest thereon, (iv) the rights, obligations and
immunities of the Indenture Trustee hereunder and (v) the rights of Noteholders
as beneficiaries of the Indenture with respect to the property so deposited with
the Indenture Trustee payable to all or any of them, and the Indenture Trustee,
on demand of and at the expense of the Issuer, shall execute proper instruments
acknowledging satisfaction and discharge of the Indenture with respect to the
Notes; when:
(A) either
(1) all Notes of such Series theretofore authenticated and
delivered (other than (i) Notes that have been destroyed, lost or
stolen and that have been replaced and (ii) Notes for whose
payment money has been deposited in trust) have been delivered to
the Indenture Trustee for cancellation; or
(2) all Notes of such Series not theretofore delivered to
the Indenture Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable within one year,
and the Issuer, in the case of (i) or (ii) above, has irrevocably
deposited or caused to be irrevocably deposited with the
Indenture Trustee cash or direct obligations of or obligations
guaranteed by the United States of America (which will mature
prior to the date such amounts are payable), in trust for such
purpose, in an amount sufficient to pay and discharge the entire
indebtedness on such Series of Notes not theretofore delivered to
the Indenture Trustee for cancellation when due to the applicable
Maturity Date;
(B) the Issuer has paid or caused to be paid all other sums
payable under the Indenture by the Issuer with respect to such Series; and
(C) the Issuer has delivered to the Indenture Trustee an
Officer's Certificate of the Issuer and an Opinion of Counsel (and if required
by the TIA or the Indenture Trustee an Independent Certificate from a firm of
certified public accountants), each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge or the Indenture with
respect to such Series have been complied with.
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NOTES NOT PRESENTED FOR PAYMENT WHEN DUE; MONEYS HELD FOR THE NOTES
AFTER DUE DATE THEREOF. If any Note shall not be presented for payment when the
principal thereof shall become due, whether at maturity or at the date fixed for
the prepayment thereof, or otherwise, and if moneys and/or Investment Securities
shall at such due date be held by the Indenture Trustee, in trust for that
purpose sufficient and available to pay the principal of such Note, together
with all interest due on such principal to the due date thereof, or to the date
fixed for prepayment thereof, as the case may be, all liability of the Issuer
for such payment shall forthwith cease, terminate and be completely discharged
and thereupon it shall be the duty of the Indenture Trustee, to hold said moneys
and/or Investment Securities without liability to the Holder of such Note for
interest thereof, in trust for the benefit of the Holder of such Note, who
thereafter shall be restricted exclusively to said moneys and/or Investment
Securities for any claim of whatever nature on its part on or with respect to
said Note, including for any claim for the payment thereof; provided however,
that any such moneys and/or Investment Securities held by the Indenture Trustee
remaining unclaimed by the Holders of such Notes for three (3) years after the
principal of the respective Notes with respect to which such moneys and or
Investment Securities have been so set aside has become due and payable (whether
at maturity or otherwise) shall be paid to the Issuer free from the trusts
created by the Indenture, and all liabilities of the Trustee with respect to
such moneys and or Investment Securities shall cease.
MISCELLANEOUS
INVESTMENTS. Moneys held by the Indenture Trustee for the credit of any
Fund or Account shall be invested by the Trustee to the fullest extent
practicable and reasonable, in accordance with the provisions of the Indenture,
in Investment Securities, as directed in writing by the Issuer, and in the
absence of any such directions, in Investment Securities selected by the
Indenture Trustee. Moneys shall be invested in Investment Securities with
respect to which payments of principal and interest are scheduled or otherwise
payable not later than the date on which it is estimated that such moneys will
be required by the Trustee for the purposes intended, and, in any event, with
respect to the Revenue Fund, the Debt Service Reserve Fund and the Note Fund not
later than the next succeeding Date. Investment Securities acquired as an
investment of moneys in any Fund or Account shall be credited to such Fund or
Account. Unless otherwise provided in the Indenture, any earnings on or income
from such Investment Securities shall be credited to the Revenue Fund, except
that an amount of interest received with respect to any Investment Security on
the first payment of interest after purchase equal to the amount of accrued
interest, if any, paid as part of the purchase price of such Investment Security
shall be credited to the Fund or Account from which such accrued interest was
paid. The Debt Service Reserve Fund shall be valued by the Indenture Trustee
monthly, in accordance with the definition of "Value of Investment Securities"
in the Indenture.
The Indenture Trustee may sell or present for redemption, any
Investment Security so purchased whenever it shall be necessary to provide
moneys to meet any required payment, transfer, withdrawal or disbursement from
the Fund or Account to which such Investment Security is credited. The Indenture
Trustee shall not be liable or responsible for any loss resulting from the
acquisition or disposition of any Investment Security in accordance with the
Indenture.
OWNERSHIP OF NOTES. The Issuer, the Indenture Trustee and the
Authenticating Agent may treat the registered owner of any Note as the absolute
owner of such Note for the purpose of receiving payment of the principal of and
interest on such Note and for all other purposes whatsoever and the Issuer, the
Indenture Trustee and the Authenticating Agent shall not be affected by any
notice to the contrary.
Any request or consent of the Holder of any Note shall bind every
future Holder of the same Note and the holder of any Note issued in exchange
therefor or in lieu thereof, in respect of anything done or suffered to be done
by the Indenture Trustee or the Issuer in pursuance of such request or consent.
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DESCRIPTION OF THE SALES AND PURCHASE AGREEMENTS
Nellie Mae, Inc. will sell Loans to the Seller as described herein
pursuant to a Master Terms Purchase Agreements and Supplemental Purchase
Agreements (the "Purchase Agreement") and the Seller will sell Loans to the
Issuer as described herein pursuant to a Master Terms Sales Agreement and
Supplemental Sales Agreements (the "Sales Agreement"). The Purchase Agreement
and the Sales Agreement are for the most part identical, and the provisions
thereof are summarized below. For purposes of the following summary, the entity
selling Loans (I.E., Nellie Mae, Inc. in the Purchase Agreement and the Seller
in the Sales Agreement) is identified as the "Loan Seller," and the entity
purchasing the Loans (I.E., the Seller in the Purchase Agreement and the Issuer
in the Sales Agreement) is identified as the "Loan Purchaser." Forms of the
Purchase Agreement and the Sales Agreement have been filed as Exhibits to the
Registration Statement of which this Prospectus is a part. The following summary
describes material provisions of these agreements. The summary does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all of the provisions of the Purchase Agreement and the Sales Agreement.
Where particular provisions or terms used in the Purchase Agreement and the
Sales Agreement are referred to, the actual provisions or terms used in the
Purchase Agreement and the Sales Agreement are referred to and the actual
provisions (including definitions of terms) are incorporated by reference as
part of such summary. A copy of the Purchase Agreement and the Sales Agreement
will be available from the Seller, upon request, to holders of the 1996 Notes or
1996 Certificates.
CONSUMMATION OF SALE AND PURCHASE. The sale and purchase of Loans shall
be consummated upon the Loan Purchaser's receipt from the Loan Seller of the
bill of sale and the payment by the Loan Purchaser to Loan Seller of the
purchase price, and when consummated such sale and purchase shall be effective
as of the date of the bill of sale. The Loan Purchaser on the date of the bill
of sale shall pay the Loan Seller the purchase price by wire transfer of
immediately available funds.
CONDITIONS PRECEDENT TO PURCHASE. The Loan Seller shall provide any
assistance requested by the Loan Purchaser in determining that all required
documentation on the Loans is present and correct. The Loan Seller shall
service, or cause to be serviced, all Loans until the date of the bill of sale.
ENDORSEMENT. The Loan Seller shall provide a blanket endorsement
transferring the entire interest of Seller in the Student Loans to the Owner
Trustee on behalf of the Loan Purchaser with the form of endorsement provided
for in the Purchase Agreement or Sales Agreement.
At the direction of and in such form as the Loan Purchaser may
designate, the Loan Seller also agrees to individually endorse any Qualified
Loan as the Loan Purchaser may request from time to time.
REPRESENTATIONS AND WARRANTIES OF LOAN SELLER. The Loan Seller
represents and warrants, among other things, to the Loan Purchaser that with
respect to a portfolio of Loans:
(i) The Loan Seller is duly organized and existing under the laws
of the applicable jurisdiction;
(ii) The Loan Seller has all requisite power and authority to
enter into and to perform the terms of the Sales Agreement;
(iii) The Loan Seller has good title to, and is the sole owner
of, the Loans, free and clear of all security interests, liens,
charges, claims or encumbrances of any nature and no right of
rescission, offsets, defenses, or counterclaims have been asserted or
threatened with respect to the Loans;
(iv) The description of the Loans provided to the Loan Purchaser
is true and correct;
(v) The Loan Seller is authorized to sell, assign, transfer and
repurchase the Loans, and the sale, assignment and transfer of such
Loans is or, in the case of a Loan repurchase by the Loan Seller, will
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be made pursuant to and consistent with the laws and regulations under
which the Loan Seller operates, and will not violate any decree,
judgment or order of any court or agency, or conflict with or result in
a beach of any of the terms, conditions or provisions of any agreement
or instrument to which the Loan Seller is a party or by which the Loan
Seller or its property is bound, or constitute a default (or an event
which could constitute a default with the passage of time or notice or
both);
(vi) The Loans are each in full force and effect in accordance
with their terms and are legal, valid and binding obligations of the
respective borrowers thereunder subject to no defenses;
(vii) Due diligence and reasonable care have been exercised in
the making, administering, servicing and collecting the Loans and, with
respect to any Loan for which repayment terms have been established,
all disclosures of information required to be made have been made;
(viii) Each Loan has been duly made and serviced in accordance
with the provisions of all applicable federal and state laws;
(ix) No Loan is more than 60 days delinquent and no default,
breach, violation or event permitting acceleration under the terms of
any Loan exists; and neither the Loan Seller nor any predecessor holder
of any Loan has waived any of the foregoing other than as permitted by
the Basic Documents;
(x) The Loan Seller warrants that the transfer and assignment
of the Loans constitute a valid sale of the Loans from the Loan Seller
to the Loan Purchaser and that the beneficial interest in and title to
such Loans not be part of the Loan Seller's estate in the event of the
bankruptcy of the Loan Seller or the appointment of a receiver with
respect to the Loan Seller;
(xi) There is only one original executed copy of the promissory
note evidencing each Loan;
(xii) No borrower of any Loan is known by the Loan Seller to be
currently involved in a bankruptcy proceeding.
REPURCHASE OF TRUST STUDENT LOANS; REIMBURSEMENT. Each party to the
agreement shall give notice to the other party, in writing, upon the discovery
of any breach of the Loan Seller's representations and warranties which has a
materially adverse effect on the interest of the Loan Purchaser in any Financed
Loan. In the event of such a material breach which is not curable, the Loan
Seller shall repurchase any affected Financed Loan not later than 120 days
following the date of discovery of such material breach. In the event of such a
material breach which is curable, unless the material breach shall have been
cured within 360 days following the date of discovery of such material breach,
the Loan Seller shall repurchase such Financed Loan not later than the sixtieth
day following the end of such 360-day period.
DESCRIPTION OF ADMINISTRATION AGREEMENT
Pursuant to the Administration Agreement, the Administrator agrees to
perform duties of the Issuer and the Owner Trustee. A form of the Administration
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The following summary describes material provisions
of the Administration Agreement. The summary does not purport to be complete and
is subject to, and is qualified in its entirety by reference to, all of the
provisions of the Administration Agreement. Where particular provisions or terms
used in the Administration Agreement are referred to, the actual provisions or
terms used in the Administration Agreement are referred to and the actual
provisions (including definitions of terms) are incorporated by reference as
part of such summary. A copy of the Administration Agreement will be available
from the Seller, upon request, to holders of the 1996 Securities.
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DUTIES WITH RESPECT TO THE INDENTURE. The Administrator shall exercise
the duties of the Issuer under the Indenture and the Trust Agreement. The
Administrator shall monitor the performance of the Issuer and shall advise the
Owner Trustee when action by the Issuer or the Owner Trustee is necessary to
comply with the Issuer's or the Owner Trustee's duties under the Indenture, the
Trust Agreement and any of the other Basic Documents. The Administrator shall
prepare for execution, if required, by the Issuer or shall cause the preparation
by other appropriate persons of all such documents, reports, filing,
instruments, certificates and opinions as it shall be the duty of the Issuer to
prepare, file or deliver pursuant to the Indenture, the Trust Agreement or any
of the other Basic Documents. In furtherance of the foregoing, the Administrator
shall take all appropriate action that is the duty of the Issuer to take
pursuant to the Trust Agreement and the Indenture.
DUTIES WITH RESPECT TO THE ISSUER. In addition to the duties of the
Administrator set forth above and in the other Basic Documents, the
Administrator shall perform such calculations and shall prepare for execution by
the Issuer or the Owner Trustee or shall cause the preparation by other
appropriate persons of all such documents, reports, filings, instruments,
certificates and opinions as it shall be the duty of the Issuer (except to the
extent that the Owner Trustee has expressly agreed to perform such duties in the
Trust Agreement), to prepare, file or deliver pursuant to the Basic Documents,
and at the request of the Owner Trustee shall take all appropriate action that
it is the duty of the Issuer to take pursuant to the Basic Documents.
In carrying out the foregoing duties or any of its other obligations
under the Administration Agreement, the Administrator may enter into
transactions with or otherwise deal with any of its affiliates; provided,
however, that the terms of any such transactions or dealings shall be, in the
Administrator's opinion, no less favorable to the Issuer than would be available
from unaffiliated parties.
STATEMENTS TO CERTIFICATEHOLDERS AND NOTEHOLDERS. On each Distribution
Date the Administrator will provide instructions as to the payments which will
take place on that day including:
a. The amount of principal to be prepaid on the Notes;
b. The amount of principal to be prepaid on the Certificates;
c. The amount of interest to be paid on the Notes;
d. The amount of interest to be paid on the Certificates;
e. The amount of the Administration Fees, if any, to be paid; and
f. The amount of Servicing Fee billed by the Servicer for the
preceding month to be transferred to the applicable subaccount
within the Administration Account.
Additionally, on the 20th of each month, or the next Business Day if
the 20th is not a Business Day, the Administrator will provide to the Owner
Trustee, the Indenture Trustee and the Rating Agencies the following
information, all as of the preceding month end:
g. The aggregate Outstanding principal balance of Notes;
h. The aggregate Outstanding principal balance of Certificates;
i. The balance of each Account in the Debt Service Reserve Fund;
j. The total Financed Loans outstanding;
k. Summary of delinquent Financed Loans;
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l. The Primary and Secondary Parity Triggers;
m. The weighted average interest rate on the Financed Loans;
n. The aggregate amount of Financed Loans repurchased by the
Seller or purchased by the Servicer during the preceding
month; and
o. The Administrator shall also provide instructions for payment
of fees to the Rating Agencies, the Indenture Trustee and the
Owner Trustee.
A copy of the statements referred to above may be obtained by any
Certificate Owner or Noteholder by a written request to the Owner Trustee or
Noteholder by a written request to the Owner Trustee or the Indenture Trustee,
respectively, addressed to the respective Corporate Trust Office.
NON-MINISTERIAL MATTERS. With respect to matters that in the reasonable
judgment of the Administrator are non-ministerial, the Administrator shall not
take any action unless within a reasonable time before the taking of such
action, the Administrator shall have notified the Owner Trustee and the Rating
Agencies of the proposed action and the Owner Trustee shall not have withheld
consent or provided an alternative direction.
LIABILITY OF ADMINISTRATOR; INDEMNITIES. The Administrator shall be
liable in accordance herewith only to the extent of the obligations specifically
undertaken by the Administrator under this Agreement.
The Administrator shall indemnify, defend and hold harmless the Issuer,
the Certificateholders and the Noteholders and any of the officers, directors,
employees and agents of the Issuer from and against any and all costs, expenses,
losses, claims, damages and liabilities to the extent that such cost, expense,
loss, claim, damage or liability arose out of, or was imposed upon any such
person through the gross negligence, willful misfeasance or bad faith of the
Administrator in the performance of its duties under the Administration
Agreement or by reason of reckless disregard of its obligations and duties
hereunder or thereunder.
The Administrator shall indemnify the Indenture Trustee in its
individual capacity and any of its officers, directors, employees and agents
against any and all loss, liability or expense (including attorneys' fees)
incurred by it in connection with the performance of its duties under the
Indenture and the other Basic Documents.
The Administrator shall indemnify the Owner Trustee in its individual
capacity and any of its officers, directors, employees and agents against any
and all loss, liability, claims, damages, costs, penalties, taxes (excluding
taxes payable by it on any compensation received by it for its services as
trustee) or expense (including attorneys' fees) incurred by it in connection
with the performance of its duties under the Trust Agreement and the other Basic
Documents.
RESIGNATION OF NELLIE MAE, INC. AS ADMINISTRATOR. Nellie Mae, Inc. may
resign from the obligations and duties imposed on it as Administrator under the
Administration Agreement only in accordance with the provisions of the
Administration Agreement. Nellie Mae, Inc. shall provide written notice of its
intention to resign to the Owner Trustee and the Indenture Trust at least 120
days prior to the effective time of the resignation and such written notice
shall be confirmed in writing at the earliest practicable time, provided however
that no such resignation shall become effective until the Indenture Trustee or a
successor Administrator shall have assumed the responsibilities and obligations
of Nellie Mae, Inc.
ADMINISTRATOR DEFAULT. If any one of the following events (an
"Administrator Default") shall occur and be continuing:
A. any failure by the Administrator to direct the Indenture Trustee to
make any required distributions from any of the Trust Funds and Accounts which
failure continues unremedied for five Business Days after written
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notice of such failure is received by the Administrator from the Indenture
Trustee or the Owner Trustee or after discovery of such failure by an officer of
the Administrator; or
B. any failure by the Administrator duly to observe or to perform in
any material respect any other covenant or agreement of the Administrator set
forth in the Administration Agreement or any other Basic Document, which failure
shall (i) materially and adversely affect the rights of Noteholders or
Certificateholders and (ii) continue unremedied for a period of 60 days after
the date on which written notice of such failure, requiring the sale to be
remedied, shall have been given (A) to the Administrator by the Indenture
Trustee or the Owner Trustee or (B) to the Administrator, the Indenture Trustee
and the Owner Trustee by the Noteholders or Certificateholders, as applicable,
representing not less than 25% of the Outstanding Amount of the Notes or 25% of
the Outstanding Certificate Balance (including any Certificates owned by the
Seller) or
C. an Insolvency Event occurs with respect to the Administrator;
then, in each and every case, so long as the Administrator Default shall not
have been remedied, either the Indenture Trustee, the Owner Trustee or the
Noteholders evidencing not less than 25% of the Outstanding Amount of the Notes
shall give written notice to the Administrator of such Administrator Default and
the Indenture Trustee and the Owner Trustee may terminate all the rights and
obligations of the Administrator under this Agreement.
Upon receipt by the Administrator of notice of termination or the
resignation by the Administrator in accordance with the terms of the
Administration Agreement, the predecessor Administrator shall continue to
perform its functions as Administrator under this Agreement in the case of
termination, only until the date specified in such termination notice or, if no
such date is specified in a notice of termination, until receipt of such notice
and, in the case of resignation, until the date 120 days from the delivery to
the Owner Trustee and the Indenture Trustee of written notice of such
resignation (or written confirmation of such notice) in accordance with the
terms of the Administration Agreement. In the event of the termination or
resignation of the Administrator, the Issuer shall appoint a successor
Administrator acceptable to the Indenture Trustee and the Owner Trustee, and the
successor Administrator shall accept its appointment by a written assumption in
form acceptable to the Indenture Trustee. In the event that a successor
Administrator has not been appointed at the time when the predecessor
Administrator has ceased to act as Administrator, the Indenture Trustee without
further action shall automatically be appointed the successor Administrator and
the Indenture Trustee shall be entitled to the Administration Fee.
Notwithstanding the above, the Indenture Trustee shall, if it shall be unwilling
or legally unable so to act, appoint or petition a court of competent
jurisdiction to appoint any established institution whose regular business shall
include the servicing of student loans, as the successor to the Administrator
under the Administration Agreement.
WAIVER OF PAST DEFAULT. The Noteholders of Notes evidencing a majority
of the Outstanding Amount of the Notes (or the Certificateholders of
Certificates evidencing a majority of the Outstanding Certificate Balance, in
the case of any default which does not adversely affect the Indenture Trustee or
the Noteholders) may, on behalf of all Noteholders and Certificateholders, waive
in writing any default by the Administrator in the performance of its
obligations and any consequences thereof, except a default in making any
required deposits to or payments from any of the Trust Funds and Accounts (or
giving instructions regarding the same) in accordance with the Administration
Agreement. Upon any such waiver of a past default, such default shall cease to
exist, and any Administration Agreement default arising therefrom shall be
deemed to have been remedied for every purpose. No such waiver shall extend to
any subsequent or other default or impair any right consequent thereto.
INSOLVENCY OF THE SELLER. Upon any sale of the assets of the Trust due
to the insolvency of the Seller, the Administrator shall instruct the Indenture
Trustee in writing to deposit the net proceeds from such sale after all payments
and reserves therefrom (including the expenses of such sale) have been made (the
"Insolvency Proceeds") in the Revenue Fund. On the first Distribution Date
following the date on which the Insolvency Proceeds are deposited in the Revenue
Fund, the Administrator shall instruct the Indenture Trustee and the Owner
Trustee to make the distributions in accordance with the Indenture and the Trust
Agreement.
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TRANSFER OF STUDENT LOANS
Nellie Mae, Inc. intends that the transfer of the Financed Loans by it
to the Seller, and the Seller intends that the transfer of the Financed Loans by
it to the Issuer, will constitute a valid sale and assignment of such Financed
Loans.
If the transfer of the Financed Loans is deemed to be an assignment as
security for the benefit of the Seller or the Issuer, there are limited
circumstances in which prior or subsequent transferees of Financed Loans could
have an interest in such Financed Loans with priority over the Indenture
Trustee's interest. A tax or other government lien on property of Nellie Mae,
Inc. or the Seller arising prior to the time a Loan comes into existence may
also have priority over the interest of the Seller or the Issuer in such Loan.
Under the related Purchase Agreement and Sales Agreement, however, Nellie Mae,
Inc. or the Seller, as applicable, will warrant that it has transferred the
Financed Loans to the Seller or the Issuer, as applicable, free and clear of the
lien of any third party. In addition, each of Nellie Mae, Inc. and the Seller
will covenant that it will not sell, pledge, assign, transfer or grant any lien
on any Loan (or any interest therein) other than to the Seller or on behalf of
the Issuer, respectively, except as provided below.
Pursuant to the Servicing Agreement, the Servicer as custodian on
behalf of the Issuer will have custody of the promissory notes evidencing the
Financed Loans following the sale of the Financed Loans to Seller and then to
the Issuer. Although the records of the Seller and Servicer will be marked to
indicate the sale and although Nellie Mae, Inc. and the Seller will cause UCC
financing statements to be filed with the appropriate authorities, the Financed
Loans will not be physically segregated, stamped or otherwise marked to indicate
that such Financed Loans have been sold to the Seller and to the Issuer. If,
through inadvertence or otherwise, any of such Financed Loans were sold to
another party that (i) purchased such Financed Loans in the ordinary course of
its business, (ii) took possession of such Financed Loans, and (iii) purchased
the Financed Loans for new value and without actual knowledge of the Issuer's
interest therein, then such purchaser would acquire an interest in the Financed
Loans superior to the interest of the Seller and the Issuer.
With respect to the Issuer, in the event of a Servicer Default
resulting solely from certain events of insolvency or bankruptcy that may occur
with respect to the Servicer, a court, conservator, receiver or liquidator may
have the power to prevent either the Indenture Trustee or Noteholders from
appointing a successor Servicer.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Set forth below is a description of Federal income tax consequences of
the purchase, ownership and disposition of the 1996 Securities. Mintz, Levin,
Cohn, Ferris, Glovsky and Popeo, P.C., counsel for the Issuer ("Counsel") is of
the opinion that the discussion hereunder fully and fairly discloses all
material Federal tax consequences associated with the purchase, ownership and
disposition of the 1996 Securities.
This description does not deal with all aspects of Federal income
taxation applicable to all categories of holders of the Securities, some of
which may be subject to special rules or special treatment under the Federal
income tax laws. For example, it does not discuss the specific tax treatment of
Securityholders that are insurance companies, banks and other financial
institutions, regulated investment companies, individual retirement accounts),
life insurance companies, tax-exempt organizations or dealers in securities.
This summary is based upon present provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the regulations promulgated thereunder, and
judicial or ruling authority, all of which are subject to change, which change
may be retroactive. Moreover, there are no cases or Internal Revenue Service
(the "IRS") rulings on similar transactions involving a trust that issues debt
and equity interests with terms similar to those of the 1996 Notes and the 1996
Certificates. As a result, the IRS may disagree with all or part of the
discussions below.
Prospective investors are advised to consult their own tax advisors
with regard to the Federal income tax consequences of the purchase, ownership
and disposition of the 1996 Securities, as well as the tax consequences
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arising under the laws of any state, foreign country or other jurisdiction. The
Issuer has been provided with an opinion of Counsel regarding the Federal income
tax matters discussed below. An opinion of counsel, however, is not binding on
the IRS, and no ruling on any of the issues discussed below will be sought from
the IRS.
FEDERAL TAX CONSEQUENCES WITH RESPECT TO THE NOTES
Tax Characterization of the Notes and the Issuer. Counsel is of the
opinion that based on the terms of the Notes and the transactions relating to
the Loans as set forth herein, the Notes will be treated as debt for Federal
income tax purposes. There is, however, no specific authority with respect to
the characterization for Federal income tax purposes of securities having the
same terms as the Notes.
Counsel is also of the opinion that based on the applicable provisions
of the Trust Agreement and related documents, the Issuer will not be classified
as an association or publicly traded partnership taxable as a corporation for
Federal income tax purposes. However, there are no authorities directly dealing
with similar transactions. If the I.R.S. were to successfully characterize the
Issuer as a corporation for Federal income tax purposes, the income from the
Loans (reduced by deductions, possibly including interest on the Notes) would be
subject to Federal income tax at corporate rates, which would reduce the amounts
available to make payments on the Notes.
If, contrary to the opinion of Counsel, the IRS successfully asserted
that the Notes were not debt for Federal income tax purposes, the Notes might be
treated as equity interests in the Issuer. If so, the Issuer might be taxable as
a corporation with the adverse consequences described above (and the taxable
corporation would not be able to deduct interest on the Notes). The remainder of
this discussion assumes that the Notes will be treated as debt and that the
Issuer will not be taxable as a corporation.
Interest Income on the Notes. The stated interest on the Notes will be
taxable to a Noteholder as ordinary income when received or accrued in
accordance with such Noteholder's method of tax accounting. It is not
anticipated that the Notes will be issued with "original issue discount" within
the meaning of Section 1273 of the Code ("OID"). A holder who purchases a Note
at a discount that exceeds a statutory defined de minimis amount will be subject
to the "market discount" rules of the Code, and a holder who purchased a Note at
a premium will be subject to the premium amortization rules of the Code.
Sale or Other Disposition. If a Noteholder sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any OID (if any), market discount and gain
previously included by such Noteholder in income with respect to the Note and
decreased by the amount of bond premium (if any) previously amortized and by the
amount of principal payments previously received by such Noteholder with respect
to such Note. Subject to the rules of the Code concerning market discount on the
Notes, any such gain or loss will be capital gain or loss if the note was held
as a capital asset. Capital losses generally may be deducted only to the extent
the Noteholder has capital gains for the taxable year, although under certain
circumstances non-corporate Noteholders can deduct losses in excess of available
capital gains.
Foreign Holders. If interest paid (or accrued) to a Noteholder who is
nonresident alien, foreign corporation or other non-United States person (a
"foreign person") is not effectively connected with the conduct of a trade or
business within the United States by the foreign person, the interest generally
will be considered "portfolio interest," and generally will not be subject to
United States Federal income tax and withholding tax, if the foreign person (i)
is not actually or constructively a "10 percent shareholder" of the Issuer
(including a holder of 10% of the outstanding Certificates) or a "controlled
foreign corporation" with respect to which the Issuer is a "related person"
within the meaning of the Code and (ii) provides the person otherwise required
to withhold U.S. tax with an appropriate statement, signed under penalties of
perjury, certifying that the beneficial owner of the Note is a foreign person
and providing the foreign person's name and address. If the information provided
in the statement changes, the foreign person must so inform the person otherwise
required to withhold U.S. tax within 30 days of such charge. The statement
generally must be provided in the year a payment occurs or in either of the two
preceding years.
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If a Note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide a signed
statement to the withholding agent. However, in that case, the signed statement
must be accompanied by a Form W-8 or substitute form provided by the foreign
person that owns the Note. If such interest is not portfolio interest, then it
will be subject to United States Federal income and withholding tax at a rate of
30%, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States Federal income and withholding tax, provided that (i) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign individual is not present in the United States for 183 days
or more in the taxable year or does not have a tax home in the United States.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt form the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States Federal income tax on the
interest, gain or income at regular Federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
Information Reporting and Backup Withholding. The Issuer will be
required to report annually to the IRS and each Noteholder of record, the amount
of interest paid on the Notes (and the amount of interest withheld for Federal
income taxes, if any) for each calendar year except as to exempt holders
(generally, holders that are corporations, tax-exempt organizations, qualified
pension and profit-sharing trusts, individual retirement accounts, or
nonresident aliens who provide certification as to their status as
nonresidents). Accordingly, each holder (other than exempt holders who are not
subject to the reporting requirements) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct Federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Issuer will be required to withhold 31%
of the amount otherwise payable to the holder, and remit the withheld amount to
the IRS as a credit against the holder's Federal income tax liability.
FEDERAL TAX CONSEQUENCES WITH RESPECT TO THE CERTIFICATES
Tax Characterization of the Issuer. The Seller, as general partner, and
the Servicer have agreed, and the Certificateholders will agree by their
purchase of Certificates, to treat the Issuer as a partnership for federal
income tax for purposes with the assets of the partnership being the assets held
by the Issuer, the partners of the partnership being the Certificateholders and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Issuer, the Certificates, the Notes, the Seller,
and the Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
If the Issuer were held to be an "association" taxable as a corporation
for Federal income tax purposes, rather than a partnership, the Issuer would be
subject to a corporate level income tax. Any such corporate income tax could
materially reduce or eliminate cash that would otherwise be distributable with
respect to the Certificates (and Certificateholders could be liable for any such
tax that is unpaid by the Issuer). See also the discussion above under "-Federal
Tax Consequences with Respect to the Notes--Tax Characterization of the Notes
and the Issuer." However, in the opinion of Counsel, the Issuer will not be
classified as an association taxable as a corporation because of the nature of
its income and because it will not have certain "corporate" characteristics
necessary for a business trust to be an association taxable as a corporation.
Nonetheless, because of the lack of cases or rulings on similar
transactions, a variety of alternative characterizations are possible in
addition to the position to be taken by Certificateholders that the Certificates
represent equity interests in a partnership. For example, because the
Certificates have certain features characteristic of debt, the Certificates
(other than those representing the initial interest of the Seller and NMELC)
might be
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considered debt of the Issuer or of the Seller. In such case, the discussion
above under "--Certain Federal Income Tax Consequences With Respect to the Note"
relating to Noteholders would also be generally applicable to Certificateholders
treated as holders of debt instruments. The remainder of this summary assumes
that the Certificates represent equity interests in a partnership that owns the
Loans.
Partnership Taxation. As a partnership, the Issuer will not be subject
to Federal income tax, but each Certificateholder will be required to separately
take into account such holder's allocated share of income, gains, losses,
deductions and credits of the Issuer. In certain instances, however, the Issuer
could have an obligation to make payments of withholding tax on behalf of a
Certificateholder. See "Backup Withholding" and "Tax Consequences to Foreign
Certificateholders" below. The Issuer's income will consists primarily of
interest accrued on the Loans, including appropriate adjustments for market
discount (as discussed below), and any original issue discount and bond premium,
investment income from investments in the Issuer Accounts and Certificate
Distribution Account and any gain upon collection or disposition of the Loans.
The Issuer's deductions will consist primarily of interest accruing with respect
to the Notes, servicing and other fees and losses or deductions upon collection
or disposition of the Loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and Related Documents). The Trust Agreement will
provide that the Certificateholders will be allocated taxable income of the
Issuer on a monthly basis as follows: first, items of gross income will be
allocated among Certificateholders until the Certificateholders have been
allocated income equal to the interest paid on their respective Certificates
plus interest accrued by the Issuer and reasonably expected to be paid during
the next month; remaining gross income items and all items of deduction and loss
are then allocated to the Depositor and NMELC. Counsel is of the opinion that
this allocation will be valid under applicable Treasury regulations, although no
assurance can be given that the IRS will not take a different view and assert
that a greater amount of income be allocated to Certificateholders. Moreover,
under the foregoing method of allocation, holders may be allocated income
greater than the amount of cash distributed to them.
Notwithstanding the opinion of Counsel that the allocation to
Certificateholders of items of gross income is valid under applicable Treasury
regulations, the IRS may assert that Certificateholders should report net income
consisting of a greater share of items of income offset by items of deduction
rather than simply reporting items of gross income in the "net" amount. In such
case, each Certificateholder would account on its own tax return for the items
of deduction as well as the items of income. An individual taxpayer may
generally deduct miscellaneous itemized deductions (which do not include
interest expenses) only to the extent they exceed two percent of the
individual's adjusted gross income. Those limitations would apply to an
individual Certificateholder's share of expenses of the Issuer (including fees
paid to the Servicer) and might result in such holder having net taxable income
that exceeds the amount of cash actually distributed to such holder over the
life of the Issuer. In addition, Section 68 of the Code provides that the amount
of certain itemized deductions otherwise allowable for the taxable year of an
individual whose adjusted gross income exceeds an inflation-adjusted threshold
amount specified in the Code ($114,700 for taxable years beginning in 1995, in
the case of a joint return) will be reduced by the lesser of (i) 3% of the
excess of adjusted gross income over the specified threshold amount or (ii) 80%
of the amount of itemized deduction otherwise allowable for such taxable year.
Counsel is of the opinion that such an assertion by the IRS would more likely
than not be reversed by a court if litigated.
Market Discounts. To the extent that the Loans are purchased by the
Issuer for a price that is less than the aggregate stated redemption price at
maturity of the Loans, the Issuer must account for "market discount" on the
Loans pursuant to Section 1276 of the Code. Any market discount will be
accounted for each of the Loans on an individual basis, and the Issuer will make
an election to calculate such market discount as it economically accrues. Any
income resulting from the accrual of market discount will be allocated to the
Certificateholders as described above.
Original Issue Discount and Bond Premium. The Loans were not and will
not be issued with OID or at a premium, and, therefore, the Issuer will not have
OID income or amortizable bond premium.
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Section 708 Termination. Under Section 708 of the Code, a partnership
will be deemed to terminate for Federal income tax purposes if 50% or more of
the capital and profits interests in the partnership are sold or exchanged
within a 12-month period. If such a termination occurs, a new partnership will
be treated as replacing the former partnership. The Issuer may not comply with
technical requirements that might apply when such a constructive termination
occurs. As a result, the Issuer may be subject to tax penalties and may incur
additional expenses if it is required to comply with those requirements.
Furthermore, the Issuer might not be able to comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of a Certificate in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificate sold.
A Certificateholder's tax basis in a Certificate will generally equal his cost
increased by his share of Issuer income that is includable in his gross income
and decreased by any distributions received with respect to such Certificate. In
addition, both the tax basis in the Certificate and the amount realized on a
sale of a Certificate would include the holder's share of the Notes and other
liabilities of the Issuer. A holder acquiring Certificates at different prices
may be required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a pro rata portion of such aggregate tax basis to the Certificates sold
(rather than maintaining a separate tax basis in each Certificate for purposes
of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Issuer does not expect to have any other assets that
would give rise to such special reporting requirements. Thus, to avoid these
special reporting requirements, the Issuer will elect to include any such market
discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including attributable to disallowed miscellaneous itemized
deductions described above) over the life of the Certificates that exceeds the
aggregate cash distributions with respect thereto, such excess will generally
give rise to a capital loss upon the retirement of the Certificates.
Allocations Between Transferor and Transferee. In general, the Issuer's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the last
day of such month. As a result, a holder purchasing Certificates may be
allocated tax items (which will affect the tax liability and tax basis of the
holder) attributable to periods before the actual purchase takes place.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or is allowed only for
transfers of less than all of the partner's interest), taxable income and losses
of the Issuer might be reallocated among the Certificateholders. The Affiliated
Purchaser is authorized to revise the Issuer's method of allocation between
transferors and transferees to conform to a method permitted by any future
authority.
Section 754 Election. In the event that a Certificateholder sells a
Certificate at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificate than the selling Certificateholder
had. The tax basis of the Issuer's assets will not be adjusted to reflect that
higher (or lower) basis unless the Issuer files an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Issuer will not make such an election.
As a result, Certificateholders might be allocated a greater or lesser amount of
Issuer income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Servicer, on behalf of the Issuer, is
required to keep or cause to be kept complete and accurate books of the Issuer.
Such books will be maintained for financial reporting and tax purposes on an
accrual basis and the taxable year of the Issuer will be the calendar year. A
partnership information return
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(IRS Form 1065) will be filed with the IRS for each taxable year of the Issuer
which will report to holders (and to the IRS) each Certificateholder's allocable
share of items of Issuer income and expense on Schedule K-1. The Issuer will
provide the Schedule K-1 information to nominees that fail to provide the Issuer
with the information statement described below and such nominees will be
required to force such information to the beneficial owners of the Certificates.
Generally, holders must file tax returns that are consistent with the
information returns filed by the Issuer or be subject to penalties unless the
holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee on behalf of another person at any time during a calendar year is
required to furnish the Issuer with a statement containing certain information
on the nominee, the beneficial owners and the Certificates so held. Such
information includes (i) the name, address and taxpayer identification number of
the nominee and (ii) as to each beneficial owner (x) the name, address and
taxpayer identification number of such person, (y) whether such person is a
United States person, a tax-exempt entity or a foreign government, an
international organization, or any wholly owned agency or instrumentality of
either of the foregoing and (z) certain information concerning Certificates that
were held, acquired or transferred on behalf of such person throughout the year.
In addition, brokers and financial institutions that hold Certificates through a
nominee are required to furnish directly to the Issuer information as to
themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act that holds Certificates as a nominee is
not required to furnish any such information statement to the Issuer. The
information referred to above for any calendar year must be furnished to the
Issuer on or before the following January 31. Nominees, brokers and financial
institutions that fail to provide the Issuer with the information described
above may be subject to penalties. The Issuer will provide the Schedule K-1
information to nominees that fail to provide the Issuer with the information
described above and such nominees will be required to forward such information
to the beneficial owners of the Certificates.
The Seller, as the "tax matters partner," will be responsible for
representing the Certificateholders in any dispute with the IRS with respect to
partnership items. The Code provides for administrative examination of a
partnership as if the partnership were a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not expire
before three years after the date on which the partnership information return is
filed. Any adverse determination following an audit of the return of the Issuer
by the appropriate taxing authorities could result in an adjustment of the
returns of the Certificateholders, and, under certain circumstances, a
Certificateholder may be precluded from separately litigating a proposed
adjustment to the items of the Issuer. An adjustment could also result in an
audit of a Certificateholder's returns and adjustments of items not related to
the income and losses of the Issuer.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates may be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
Tax Consequences to Foreign Certificateowners. As discussed below, an
investment in a Certificate is not suitable for any non-U.S. person which is not
eligible for a complete exemption from U.S. withholding tax on interest under a
tax treaty with the United States. Accordingly, no interest in a Certificate
should be acquired by or on behalf of any such non-U.S. person.
No regulations, published rulings or judicial decisions exist that
would discuss the characterization for Federal withholding tax purposes with
respect to non-U.S. persons of a partnership with activities substantially the
same as the Issuer. However, it is not expected that the trust would be
considered to be engaged in a trade or business in the United States for
purposes of Federal withholding taxes with respect to non-U.S. persons. If the
Issuer were considered to be engaged in a trade or business in the United States
for such purposes, the income of the Issuer, distributable to a non-U.S. person
would be subject to Federal withholding tax at a rate of 35% for persons taxable
as a corporation and 39.6% for all other non-U.S. persons. Also, in such cases,
a non-U.S. Certificateowner that is a corporation may be subject to the branch
profits tax. If the Issuer is notified that a Certificateowner is a foreign
person, the Issuer may withhold as if it were engaged in a trade or business in
the United States in order to protect the Issuer from possible adverse
consequences of a failure to withhold. Subsequent
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adoption of Treasury regulations or the issuance of other administrative
pronouncements may require the Issuer to change its withholding procedures.
Each foreign Certificateowner might be required to file a U.S.
individual or corporate income tax return (including in the case of a
corporation, the branch profit tax) on its share of the Issuer's income. Each
foreign holder must obtain a taxpayer identification number from the IRS and
submit that number to the withholding agent on Form W-8 in order to assure
appropriate crediting of any taxes withheld. A foreign holder generally would be
entitled to file with the IRS a claim for a refund with respect to withheld
taxes, taking the position that no taxes were due because the Issuer was not
engaged in a U.S. trade or business. However, interest payments made to (or
accrued by) a Certificateholder who is a foreign person may be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Issuer and for that reason or because of the nature of the
Contracts, the interest will likely not be considered "portfolio interest." As a
result, even if the Issuer is not considered to be engaged in a U.S. trade or
business, Certificateholders will likely be subject to United States Federal
income tax which must be withheld at a rate of 30 percent on their share of the
Issuer's income (without reduction for interest expense), unless reduced or
eliminated pursuant to an applicable income tax treaty. If the Issuer is
notified that a Certificateholder or Certificateowner is a foreign person, the
Issuer may be required to withhold and pay over such tax, which can exceed the
amounts otherwise available for distribution to such Certificateholder. A
foreign holder would generally be entitled to file with the IRS a refund claim
for such withheld taxes, taking the position that the interest was portfolio
interest and therefore not subject to U.S. tax. However, the IRS may disagree
and no assurance can be given as to the appropriate amount of tax liability. As
a result, each potential foreign Certificateowner should consult its tax advisor
as to whether the tax consequences of holding an interest in a Certificate make
it an unsuitable investment.
OTHER TAX CONSEQUENCES
No advice has been received as to local income, franchise, personal
property, or other taxation in any state or locality, or as to the tax effect of
ownership of the Securities in any state or locality. Securityholders are
advised to consult their own tax advisors with respect to any state or local
income, franchise, personal property, or other tax consequences arising out of
their ownership of the Securities.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code"), impose restrictions on (a) employee benefit plans (as defined in
Section 3(3) of ERISA), (b) plans described in section 4975(e)(1) of the Code,
including individual retirement accounts or Keogh plans, (c) any entities whose
underlying assets include plan assets by reason of a plan's investment in such
entities (each a "Plan") and (d) persons who have specified relationships to
such Plans ("Parties in Interest" under ERISA and "Disqualified Persons" under
the Code). Moreover, based on the reasoning of the United States Supreme Court
in John Hancock Life Co. v. Harris Trust and Savings Bank, 114 S. Ct. 517
(1993), an insurance company's general account may be deemed to include assets
of the Plans investing in the general account (E.G., through the purchase of an
annuity contract accounted for in the insurance company's general account), and
the insurance company might be treated as a Party in Interest and a Disqualified
Person with respect to a Plan by virtue of such investment. ERISA also imposes
duties on persons who are fiduciaries of Plans subject to ERISA and prohibits
transactions between a Plan and Parties in Interest or Disqualified Persons with
respect to such Plans.
The 1996 Notes may be purchased by a Plan subject to ERISA or Section
4975 of the Code. A fiduciary of a Plan must determine that the purchase of a
Note is consistent with its fiduciary duties under ERISA and does not result in
a nonexempt prohibited transaction as defined in Section 406 of ERISA or Section
4975 of the Code. Employee benefit plans which are governmental plans (as
defined in Section 3(32) of ERISA) and certain church plans (as defined in
Section 3(33) of ERISA) are not subject to the fiduciary responsibility or
prohibited transaction
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provisions of ERISA or the Code, however, such Plans may be subject to the
provisions of other applicable Federal and state laws.
Generally, the 1996 Certificates and any beneficial interest in such
Certificates may not be acquired by a Plan. Certain employee benefit plans, such
as governmental plans (as defined in Section 3(32) of ERISA) and certain church
plans (as defined in Section 3(33) of ERISA) are not subject to the prohibited
transaction provisions of ERISA and Section 4975 of the Code. Accordingly,
assets of such plans may, subject to the provisions of any other applicable
Federal and state law, be invested in the 1996 Securities without regard to the
ERISA considerations described herein. It should be noted, however, that any
such plan that is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code is subject to the prohibited transaction rules set forth in
Section 503 of the Code.
By accepting and holding a Certificate or an interest therein, the
Certificateholder thereof shall be deemed to have represented and warranted that
it is not subject to the prohibited transaction provisions of ERISA.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreements relating to the Notes and the Certificates (the "Underwriting
Agreements"), the Seller has agreed to cause the Issuer to sell to Smith Barney
Inc. (the "Underwriter"), and the Underwriter has agreed to purchase,
$67,000,000 in principal amount of A-1 Notes, $48,800,000 in principal amount of
A-2 Notes and $7,700,000 in principal amount of Certificates.
In the Underwriting Agreements, the Underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase (i) all such 1996 Notes
if any of the 1996 Notes are purchased and (ii) all such 1996 Certificates if
any of the 1996 Certificates are purchased. The Seller has been advised by the
Underwriter that the Underwriter proposes initially to offer the 1996 Securities
to the public at the respective public offering prices set forth on the cover
page of this Prospectus. After the initial public offering, such public offering
prices may be changed.
The Underwriting Agreements provide that Nellie Mae, Inc. will
indemnify the Underwriter against certain liabilities, including liabilities
under applicable securities laws, or contribute to payments the Underwriter may
be required to make in respect thereof.
The closing of the sale of the 1996 Certificates is conditioned on the
closing of the sale of the 1996 Notes, and the closing of the sale of the 1996
Notes is conditioned on the closing of the sale of the 1996 Certificates.
FINANCIAL INFORMATION
The Seller and Nellie Mae, Inc. have determined that their financial
statements are not material to the offering made hereby. The Issuer will engage
in no activities other than as described herein. Accordingly, no financial
statements with respect to the Issuer are included in this Prospectus.
LEGAL MATTERS
Legal matters relating to the Issuer, the Seller, NMELC and Nellie Mae,
Inc. will be passed upon by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
Boston, Massachusetts and for the Underwriter by Palmer & Dodge LLP, Boston,
Massachusetts. Palmer & Dodge LLP has performed legal services for Nellie Mae,
Inc. and it is expected that it will continue to perform legal services for
Nellie Mae, Inc. in the future. Federal and state income tax and other matters
for the Issuer will be passed on by Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C.
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REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the 1996 Securities and the
Issuer will be provided to the Securityholders. See "INFORMATION REGARDING THE
1996 SECURITIES--Reports to Securityholders." Each Class of 1996 Notes and the
1996 Certificates will be issued in book-entry form and registered in the name
of Cede & Co., the nominee of The Depository Trust Company. All reports will be
provided to Cede & Co., which in turn will provide such reports to its
Participants and Indirect Participants. Such Participants and Indirect
Participants will then forward such reports to the beneficial owners of 1996
Securities.
AVAILABLE INFORMATION
The Seller has filed, on behalf of the Issuer, a Registration Statement
on Form S-3 (together with all amendments and exhibits thereto, the
"Registration Statement"), of which this Prospectus is a part, under the
Securities Act of 1933, as amended (the "Securities Act"), with the Securities
and Exchange Commission (the "Commission") with respect to the 1996 Securities.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. Statements made in this
Prospectus as to the contents of any contract, agreement or other document filed
as an exhibit to the Registration Statement or incorporated by reference
therein, do not necessarily describe all terms or provisions of such contract,
agreement or other document. With respect to each such contract, agreement, or
other document filed or incorporated by as an exhibit to the Registration
Statement, reference is made to such exhibit for a more complete description of
the matter involved, and each statement is qualified in its entirety by such
reference.
The Registration Statement and amendments thereof and exhibits thereto,
are available for inspection without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
Seven World Trade Center, 13th Floor, New York, New York 10048; and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of the Registration Statement and amendments thereof and
exhibits thereto may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Any documents filed by or on behalf of the Issuer with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), subsequent to the date of this Prospectus
and prior to the termination of the offering of the 1996 Securities shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute part of this Prospectus. The Seller will provide without charge to
each person to whom a copy of the Prospectus is delivered, on the written or
oral request of any such person, a copy of any or all of the documents
incorporated herein by reference, except the exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to Nellie Mae Education Funding,
LLC, 50 Braintree Hill Park, Suite 300, Braintree, Massachusetts 02184,
Attention: John F. Remondi, Telephone: (617) 849-1325.
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GLOSSARY OF MAJOR DEFINED TERMS
"ACCOUNT" shall mean any of the accounts established by the Indenture.
"ACQUISITION ACCOUNT" shall mean the Account so designated and
established in the Student Loan Acquisition Fund by the Indenture.
"ADMINISTRATION ACCOUNT" shall mean the Account so designated and
established in the Services Fund by the Indenture.
"ADMINISTRATION AGREEMENT" shall mean the Administration Agreement
dated as of June 1, 1996, among the Issuer, the Owner Trustee, the Indenture
Trustee and the Administrator, as amended from time to time.
"ADMINISTRATION FEE" shall mean, as of any date of calculation, the sum
owed to the Administrator pursuant to the terms of the Administration Agreement.
"ADMINISTRATION REQUIREMENT" shall mean, as of any date of calculation
and with respect to a particular Series, the Administrative Expenses due as of
such date with respect to such Series.
"ADMINISTRATIVE EXPENSES" shall mean the fees and expenses of the
Indenture Trustee, the Owner Trustee, the Authenticating Agent, the
Administrator and the Servicer, provided, however, that the fees and expenses
described shall not exceed any amount specified in the related Terms Supplement.
"ADMINISTRATOR" shall mean Nellie Mae, Inc., a Massachusetts non-profit
corporation, or any successors or assigns.
"AFFILIATE" shall mean, with respect to any specified person, any other
person controlling or controlled by or under common control with such specified
person. For the purposes of this definition, "control," when used with respect
to any specified person, shall mean the power to direct the management and
policies of such person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise, and the terms "controlling" and
"controlled" shall have meanings correlative to the foregoing.
"AUTHORIZED DENOMINATIONS" shall mean, with respect to the initial
offering of the Securities, $20,000 or any integral multiple thereof, and in all
other respects shall mean $1,000 or any integral multiple thereof; provided,
however, that Certificates issued to the Depositor and NMI Education Loan
Corporation may be issued in such denominations as to include any residual
amount of Certificates to be issued.
"AUTHORIZED OFFICER," when used with reference to the Issuer, shall
mean any officer of the Owner Trustee or the Administrator, as applicable, in
matters relating to the Issuer and who is identified on the list of Authorized
Officers delivered by the Owner Trustee to the Indenture Trustee on the Closing
Date relating to the initial issuance of a Series of Notes.
"BALANCES" when used with reference to any Account or Fund shall mean
the sum of the following assets in or deposited to the credit of such Account or
Fund: (i) Investment Securities computed at the Value of Investment Securities;
(ii) Financed Loans computed at the Outstanding balance of their principal
amounts plus accrued but unpaid interest; and (iii) lawful money of the United
States.
"BASIC DOCUMENTS" shall mean the Trust Agreement, the Indenture, each
Terms Supplement, each Trust Supplement, the Sales Agreement, the Purchase
Agreement, the Administration Agreement, the Servicing Agreement and other
documents and certificates to be delivered in connection therewith and all
amendments and supplements thereto.
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"BENEFIT PLAN" shall mean any (i) employee benefit plan (as defined in
Section 3(3) of ERISA) which is subject to the provisions of Title I of ERISA,
(ii) plans described in Section 4975 (e)(1) of the Code, including individual
retirement accounts described in Section 408(a) of the Code or Keogh plans or
(iii) or any entity (including an insurance company general account) whose
underlying assets include plan assets by reason of a plan's investment in such
entity.
"BOOK-ENTRY CERTIFICATE" shall mean a beneficial interest in the
Certificates, ownership and transfer of which shall be made through book entries
by a Securities Depository.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or
other day on which banks in the City of Boston, Massachusetts, or New York, New
York are required or authorized by law or executive order to close.
"CAPITALIZED INTEREST" shall mean all interest which has been accrued
but not paid on Financed Loans for which the borrower is entitled to elect, and
has elected, to defer payments of principal of and interest on such Loan.
"CERTIFICATE" shall mean a certificate evidencing the beneficial
interest of a Certificateholder in the Trust.
"CERTIFICATE BALANCE" shall equal, initially, the Initial Certificate
Balance and, thereafter, shall equal the Initial Certificate Balance increased
by the principal balance of each subsequent Class of Certificates issued
pursuant to a Trust Supplement and reduced by all amounts allocable to principal
previously distributed to Certificateholders. Notwithstanding the foregoing,
where any provision of the Trust Agreement or a Trust Supplement permits or
authorizes Certificateholders holding a specified percentage or amount of the
Certificate Balance to take any action or grant any approval, the holders of the
Certificates shall be deemed to have a Certificate Balance equal to 99%.
"CERTIFICATE FUND" shall mean the fund so designated and established by
the Trust Agreement.
"CERTIFICATE INTEREST ACCOUNT" shall mean the Account so designated and
established in the Certificate Fund by the Trust Agreement.
"CERTIFICATE OWNER" shall mean, with respect to a Book-Entry
Certificate, the person who is the beneficial owner of such Book-Entry
Certificate, as reflected on the books of the Securities Depository, or on the
books of a person maintaining an account with such Securities Depository
(directly as a Securities Depository Participant or as an indirect participant,
in each case in accordance with the rules of such Securities Depository).
"CERTIFICATE INTEREST RATE" shall mean, with respect to any Class of
Certificates, the per annum rate determined as set forth in the related Trust
Supplement.
"CERTIFICATE PAYMENT ACCOUNT" shall mean the Account so designated and
established in the Certificate Fund by the Trust Agreement.
"CERTIFICATEHOLDER" shall mean a person in whose name a Certificate is
registered in the Certificate Register.
"CLASS" shall mean, (i) with respect to any Series of Notes, all Notes
of such Series whose final installment of principal has the same Maturity Date
and (ii) with respect to the Certificates, all Certificates whose final
installment of principal has the same Maturity Date.
"CLOSING DATE" shall mean, with respect to Certificates, the date
identified as such in the related Trust Supplement and, with respect to Notes,
the date identified as such in the related Terms Supplement.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and Treasury Regulations promulgated thereunder.
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"COLLECTOR" shall mean the Administrator or collection agency retained
by the Administrator to collect amounts outstanding on Financed Loans upon
acceleration after default.
"COMMONWEALTH" shall mean The Commonwealth of Massachusetts.
"COST OF ISSUANCE ACCOUNT" shall mean the Account so designated and
established in the Services Fund by the Indenture.
"COSTS OF ISSUANCE" for each Series of Notes or Certificates shall mean
all items of expense allocable to the authorization, issuance, sale and delivery
of such Series of Notes or Certificates, including without limitation costs of
planning and feasibility studies, costs of financial advisory, legal, accounting
and management services and services of other consultants and professionals and
related charges, fees and disbursements, costs of preparation and reproduction
of documents, costs of preparation and printing of any offering document
relating to the Notes or Certificates, advertising and printing costs, filing
and recording fees, any initial fees and charges of the Indenture Trustee,
Authenticating Agent or Owner Trustee, rating agency fees, costs of preparation,
execution, transportation and safekeeping of Notes or Certificates, and any
other costs, charges or fees incurred in connection with the issuance of the
Notes or Certificates.
"CUSTODIAN," shall mean USA Loan Services, Inc., a Delaware
corporation, its corporate successors and assigns, and any other organization
with which the Indenture Trustee and the Issuer have entered into or will enter
into in the future a Custody Agreement.
"CUSTODY AGREEMENT" shall mean the agreement to be entered into among
the Indenture Trustee, the Custodian and the Issuer regarding the custody of the
promissory notes signed by the obligors of the Financed Loans.
"DEBT SERVICE RESERVE FUND" shall mean the fund so designated and
established by the Indenture.
"DEBT SERVICE RESERVE REQUIREMENT" shall mean an amount equal to the
greater of (i) two percent (2%) of the aggregate principal amount Outstanding of
the Series 1996-A Notes and the Class 1996-A Certificates or (ii) $500,000.
"DEFAULTED LOAN" shall mean a Financed Loan which is more than 180 days
delinquent in payment of principal or interest.
"DEFERRED INTEREST" with respect to each Series and Class of Notes
shall have the meaning set forth in the related Terms Supplement and with
respect to each Class of Certificates shall have the meaning set forth in the
related Trust Supplement.
"DEPOSITOR" shall mean the Seller in its capacity as depositor under
the Trust Agreement.
"DISTRIBUTION DATE" shall mean as to each Series and Class of Notes and
to each Class of Certificates, the fifteenth (15th) day of each month.
"DOLLAR" and "$" shall mean the lawful currency of the United States of
America.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"FINANCED LOAN" shall mean any Loan which, from time to time, is
assigned by the Issuer to the Indenture Trustee to serve as security for the
payment of all amounts due to Noteholders under the Notes and included in the
Student Loan Portfolio Fund. The initial Financed Loans subject to the lien of
the Indenture shall be listed on the
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Schedule of Financed Loans set forth in SCHEDULE A to the Sales Agreement. The
Financed Loans to be pledged by the Issuer to the Indenture Trustee in
connection with the issuance of each additional Series of Notes shall be listed
on the Schedule of Financed Loans appearing on SCHEDULE A to the related
Supplemental Sales Agreement. A master Schedule of Financed Loans listing all
Financed Loans shall be maintained by the Issuer. Each Schedule of Financed
Loans shall be amended from time to time by the Issuer to reflect accurately the
Financed Loans then subject to the lien of the Indenture.
"FITCH" shall mean Fitch Investors Service, Inc. (whose address is One
State Street Plaza, New York, New York 10004) and its corporate successors.
"FUND" shall mean any of the Funds so designated and established by the
Indenture or the Trust Agreement.
"GUARANTOR" shall mean TERI or Penn, as applicable or any other
guarantor as specified in the related Terms Supplement.
"GUARANTY AGREEMENT" shall mean the TERI Guaranty Agreement or the Penn
Guaranty Agreement, as applicable, including, in either case, any supplement or
amendment thereto entered into in accordance with the provisions thereof, or any
other guaranty agreement as specified in the related Terms Supplement.
"HOLDER" or "HOLDERS" shall mean a registered owner of the Notes or the
Certificates, as the context requires.
"INDENTURE" shall mean the Master Indenture and any Terms Supplement,
each as from time to time amended or supplemented with respect to which the
Notes issued thereunder are still Outstanding.
"INDENTURE TRUST ESTATE" shall mean (i) all Revenues; (ii) the Balances
on deposit in all subaccounts, Accounts and Funds (whether derived from proceeds
of sale of the Notes, from Revenues or from any other source, excluding the
Certificate Fund); (iii) all rights, title, interest and privileges of the
Issuer as owner of the Financed Loans in and to (a) the Financed Loans,
including all promissory notes evidencing the indebtedness for Financed Loans
and all related documentation, and all rights of the Issuer to receive any and
all payments of any nature and from any source with respect to the Financed
Loans, (b) each Guaranty Agreement insofar as it relates to Financed Loans, (c)
the Administration Agreement, (d) the Servicing Agreement and (e) any Sales
Agreements with the Seller with respect to the Financed Loans; (iv) all products
and proceeds of any of the foregoing; and (v) all other property of every kind
and nature which is now or from time to time hereafter pledged, assigned or
transferred as and for security hereunder to the Indenture Trustee by the Issuer
or by anyone on its behalf.
"INDENTURE TRUSTEE" shall mean State Street Bank and Trust Company, a
Massachusetts trust company, not in its individual capacity but solely as
Indenture Trustee under the Indenture.
"INITIAL PERIOD" shall mean, as to any Class of Notes and Class of
Certificates, the period commencing on the Closing Date and continuing with
respect to each Class of Notes, through the day immediately preceding the
Initial Rate Adjustment Date for such Class of Notes, and with respect to each
Class of Certificates, through the day immediately preceding the Initial Rate
Adjustment Date for such Class of Certificates.
"INITIAL POOL BALANCE" shall mean, with respect to any Series, the sum
of the related Pool Balance as of the Closing Date, plus the principal balance
of each Additional Financed Loan purchased by the Issuer on each Transfer Date
during the related Funding Period.
"INSOLVENCY EVENT" means, with respect to a specified person, (a) the
filing or entry of a decree or order for relief by a court having jurisdiction
in the premises in respect of such person or any substantial part of its
property in an involuntary case under any applicable Federal or state
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official for such person or any substantial part of its property, or
ordering the winding-up or liquidation of such
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person's affairs, and such decree or order shall remain unstayed and in effect
for a period of 60 consecutive days; or (b) the commencement by such person of a
voluntary case under any applicable Federal or state bankruptcy, insolvency or
other similar law now or hereafter in effect, or the consent by such person to
the entry of an order for relief in an involuntary case under such law, or the
consent by such person to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official for
such person or any substantial part of its property, or the making by such
person any general assignment for the benefit of creditors, or the failure by
such person generally to pay its debts as such debts become due, or the taking
of action by such person in furtherance of any of the foregoing.
"INTEREST PERIOD" shall mean, as to each Series and Class of Notes and
each Class of Certificates, the Initial Period and thereafter each period
commencing on a Rate Adjustment Date and ending on the day before the next Rate
Adjustment Date.
"INTEREST RATE" shall mean, with respect to each Class of Notes, the
rate of interest per annum borne by such Class of Notes as set forth in the
related Terms Supplement, and with respect to each Class of Certificates, the
rate of interest per annum borne by such Class of Certificates as set forth in
the related Trust Supplement.
"ISSUER" shall mean the Nellie Mae Education Loan Trust established
under the Trust Agreement until a successor replaces it and, thereafter, shall
mean the successor and, for purposes of any provision contained in the Indenture
and required by the TIA, each other obligor of the Notes.
"LIBOR RATE" shall mean, with respect to any Class of Notes or Class of
Certificates, the rate per annum equal to (a) the annual rate of interest
published or reported by the Telerate Service (by reference to the screen page
currently designated as "Page 3750" on that service or such other service as may
be nominated by the British Bankers' Association as the information vendor for
the purpose of displaying British Bankers' Association Interest Settlement Rates
for U.S. dollar deposits) as of 11:00 a.m., London time, on the Rate
Determination Date for a one month period, or (b) if such a rate does not appear
on Telerate Page 3750, the "LIBOR Rate" for the given day shall be the
arithmetic mean of the offered rates for dollar deposits for a one month period
commencing on the Rate Determination Date, which rate appears on Reuters LIBO
Page as of 11:00 a.m., London time, on the Rate Determination Date. If the rate
described above does not appear on Telerate Page 3750 and fewer than two rates
appear on Reuters LIBO Page, the "LIBOR Rate" for the applicable Rate
Determination Date shall be determined in good faith by the Indenture Trustee
and the Owner Trustee from such source as it shall determine to be comparable to
Telerate Page 3750 and Reuters LIBO Page.
"LIEN" shall mean a security interest, lien, charge, pledge, equity or
encumbrance of any kind, other than tax liens and other liens, if any, which
attach to the respective Financed Loan by operation of law as a result of any
act or omission.
"LOAN" or "LOANS" shall mean any loan acquired by the Issuer from the
Seller.
"MASTER INDENTURE" shall mean the Master Trust Indenture dated as of
June 1, 1996 between the Issuer and the Indenture Trustee, as amended or
supplemented from time to time.
"MINIMUM AUTHORIZED DENOMINATION" shall mean, with respect to the
initial offering of the Securities, $20,000, and in all other respects shall
mean $1,000.
"MOODY'S" shall mean Moody's Investors Service, Inc. (whose address is
99 Church Street, New York, New York 10007-2796, Attention: ABS Monitoring
Department, and its corporate successors.
"NET LOAN RATE" shall mean the rate which is equal to the weighted
average interest rate on the Financed Loans minus one and eight-tenths percent
(1.8%).
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"NOTEHOLDER" shall mean any person who shall be the registered owner of
any Note or the duly authorized attorney-in-fact or representative of such
person.
"NOTES" shall mean the Asset-Backed Notes issued pursuant to the Master
Indenture and a related Terms Supplement.
"NOTE FUND" shall mean the Fund so designated and established by the
Indenture.
"NOTE INTEREST ACCOUNT" shall mean the Account so designated and
established in the Note Fund by the Indenture.
"NOTE PAYMENT ACCOUNT" shall mean the Account so designated and
established in the Note Fund by the Indenture.
"OUTSTANDING," (A) when used with respect to Notes, shall refer to any
Notes executed, authenticated, issued and delivered under this Indenture other
than Notes (i) for the transfer or exchange of or in lieu of which other Notes
shall have been authenticated and delivered by the Indenture Trustee pursuant to
the Indenture or (ii) which have been canceled, (B) when used with respect to
Certificates, shall refer to any Certificates executed, authenticated, issued
and delivered under the Trust Agreement other than Certificates (i) for the
transfer or exchange of or in lieu of which other Certificates shall have been
authenticated and delivered by the Owner Trustee pursuant to the Trust Agreement
or (ii) which have been canceled, and (C) when used with respect to Financed
Loans, shall mean the principal balance unpaid as of the applicable date.
"OUTSTANDING AMOUNT" shall mean the aggregate principal amount of all
Notes, or Series or Class of Notes, or all Certificates, or Class of
Certificates, as applicable, Outstanding as of the date of determination.
"OWNER TRUSTEE" shall mean Fleet National Bank, a national banking
association, not in its individual capacity but solely as Owner Trustee under
the Trust Agreement.
"POOL BALANCE" shall mean, at any time, the aggregate principal balance
of the Financed Loans at the end of the preceding Interest Period (including
accrued interest thereon for such Interest Period to the extent such interest
will be capitalized), after giving effect to the following, without duplication:
(i) all payments in respect of principal received by the Trust during such
Interest Period from or on behalf of borrowers and Guarantors, (ii) the
principal portion of the purchase price of all Financed Loans purchased from the
Trust for such Interest Period from the Seller, the Administration or the
Servicer, and (iii) the principal portion of all Additional Financed Loans made
from the Pre-Funding Account with respect to such Interest Period.
"PRE-FUNDING ACCOUNT" means the account designated as such, established
and maintained pursuant to the Indenture.
"PRIMARY PARITY TRIGGER" shall mean, as of any date of determination,
an amount (expressed as a percentage) equal to the sum of (i) the Balances then
on deposit in all Funds and Accounts under the Indenture (excluding Balances
attributable to principal of or accrued interest on Defaulted Loans) and (ii)
amounts on deposit in the lockbox account held by the Servicer and allocable to
the 1996 Financed Loans, divided by an amount equal to the principal amount of
all Notes then Outstanding plus all accrued and unpaid interest thereon plus any
unpaid portion of the Administration Requirement. The Primary Parity Trigger
shall be calculated by the Administrator as of the date of the information
contained in the then most recent report of the Servicer provided by the Issuer
to the Indenture Trustee.
"PRINCIPAL CORPORATE TRUST OPERATIONS OFFICE" shall mean the principal
corporate trust operations office of the Indenture Trustee in Boston,
Massachusetts, or such other office as may be designated by written notice of
the Indenture Trustee to the Issuer and each Noteholder at the address of such
Noteholder as it appears on the books of registry maintained in accordance with
the Indenture.
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"PRINCIPAL FACTOR" shall have the meaning set forth in the Indenture.
"PURCHASE AGREEMENT" shall mean the Master Terms Purchase Agreement
dated June 1, 1996 between Nellie Mae, Inc. and Nellie Mae Funding, LLC, as
amended from time to time.
"RATE ADJUSTMENT DATE" shall mean, with respect to each Class of Notes
and each Class of Certificates, the date on which the applicable Interest Rate
for such Class of Notes or Certificates, as appropriate, is effective and shall
mean, with respect to each such Class of Notes and Certificates, the date of
commencement of each related Interest Period.
"RATE DETERMINATION DATE" shall mean the second Business Day
immediately preceding the Rate Adjustment Date for such Interest Period.
"RATING AGENCY" shall mean (i) Moody's and (ii) Fitch, if the Notes are
then rated by Fitch, or, if either of them no longer exists and has no
successors, then any other rating agency, if any, of nationally recognized
status then rating the Notes.
"RECORD DATE" shall mean the last day of the month.
"RESPONSIBLE OFFICER" shall mean, with respect to the Indenture
Trustee, any officer within the Corporate Trust Office of the Indenture Trustee
with direct responsibility for the administration of the Indenture and the other
Basic Documents on behalf of the Indenture Trustee, including any Vice
President, Assistant Vice President, Assistant Treasurer, Assistant Secretary,
or any other officer of the Indenture Trustee customarily performing functions
similar to those performed by any of the above designated officers.
"REUTERS LIBO PAGE" shall mean the display designated as page "LIBO" on
the Reuter Monitor Money Rates Service (or such other page as may replace the
Reuters LIBO Page on that service for the purpose of displaying London interbank
offered rates of major banks for Dollar deposits).
"REVENUE FUND" shall mean the Fund established by the Indenture.
"REVENUES" shall mean all revenues, receipts and moneys payable into or
to the credit of the Revenue Fund pursuant to the Indenture and any interest
earnings on Investment Securities credited to any other Fund or Account as
provided in the Indenture.
"SALES AGREEMENT" shall mean the Master Terms Sales Agreement dated
June 1, 1996, among the Issuer, the Seller and the Owner Trustee, as amended
from time to time.
"SECONDARY PARITY TRIGGER" shall mean, as of any date of determination,
an amount (expressed as a percentage) equal to the sum of (i) the Balances then
on deposit in all Funds and Accounts under the Indenture (excluding Balances
attributable to principal of or accrued interest on Defaulted Loans) and (ii)
amounts on deposit in the lockbox account held by the Servicer and allocable to
the 1996 Financed Loans, divided by an amount equal to the principal amount of
all Notes and Certificates then Outstanding plus all accrued and unpaid interest
thereon plus any unpaid portion of the Administration Requirement. The Secondary
Parity Trigger shall be calculated by the Administrator as of the date of the
information contained in the then most recent report of the Servicer provided by
the Issuer to the Indenture Trustee.
"SECURITIES" shall mean the Notes and the Certificates together.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SECURITIES DEPOSITORY" shall mean an organization registered as a
"clearing agency" pursuant to Section 17A of the Exchange Act and shall
initially be The Depository Trust Company.
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"SECURITIES DEPOSITORY PARTICIPANT" shall mean a broker, dealer, bank,
other financial institution or other person for whom from time to time a
Securities Depository effects book-entry transfers and pledges of securities
deposited with the Securities Depository.
"SELLER" shall mean the Nellie Mae Education Funding, LLC, a Delaware
limited liability company.
"SERIES" shall mean a separate Series of Notes issued pursuant to the
Master Indenture, which Series may, as provided in the related Terms Supplement,
be divided into two or more Classes.
"SERVICER DEFAULT" shall mean an "Event of Default" as defined in the
Servicing Agreement.
"SERVICER" shall mean USA Group Loan Services, Inc., a Delaware
corporation, its corporate successors and assigns, and any other organization
with which the Issuer has entered into or shall in the future enter into a
Servicing Agreement providing for the administration, servicing and collection
of, among others, the Financed Loans.
"SERVICES FUND" shall mean the Fund established by the Indenture.
"SERVICING AGREEMENT" shall mean the Servicing Agreement between the
Issuer and USA Group Loan Services, Inc. dated as of June 1, 1996, and any other
similar servicing agreement entered into between the Issuer and a Servicer
providing for the administration, servicing and collection of Financed Loans, in
each case as originally executed and as amended or supplemented from time to
time in accordance with the terms thereof and with the Indenture.
"SERVICING FEES" shall mean, as of any date of calculation, the sum
owed to the Servicer pursuant to the terms of the Servicing Agreement.
"STUDENT LOAN ACQUISITION FUND" shall mean the Fund so designated and
established by the Indenture.
"STUDENT LOAN PORTFOLIO FUND" shall mean the Fund so designated and
established by the Indenture.
"SUBACCOUNT" shall mean any of the subaccounts established by the
Indenture and the related Terms
Supplement.
"SUPPLEMENTAL INDENTURE" shall mean any supplement to or amendment of
the Indenture entered into by the Issuer and the Indenture Trustee pursuant to
and in accordance with the provisions of the Indenture.
"SUPPLEMENTAL PURCHASE AGREEMENT" shall mean any Supplemental Purchase
Agreement between Nellie Mae and the Seller.
"SUPPLEMENTAL SALES AGREEMENT" shall mean any Supplemental Sales
Agreement among the Seller, the Trust and the Owner Trustee.
"TERMS SUPPLEMENT" shall mean each Supplemental Indenture which
authorizes a particular Series of Notes.
"TRANSFER AGREEMENT" shall mean a duly written assignment and bill of
sale delivered by the Seller to the Owner Trustee and the Indenture Trustee
evidencing the sale of Additional Financed Loans to the Issuer.
"TRANSFER DATE" shall mean each date on which the Issuer purchases
Additional Financed Loans pursuant to a Supplemental Sales Agreement during a
related Funding Period.
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"TREASURY REGULATIONS" shall mean regulations, including proposed or
temporary regulations, promulgated under the Code. References in any document or
instrument to specific provisions of proposed or temporary regulations shall
include analogous provisions of final Treasury Regulations or other successor
Treasury Regulations.
"TRUST AGREEMENT" shall mean the Trust Agreement dated as of June 1,
1996 between the Depositor and the Owner Trustee, as amended and supplemented
from time to time.
"TRUST ESTATE" shall mean all property of the Issuer from time to time,
including all funds held by the Owner Trustee under the Trust Agreement and all
rights of the Owner Trustee and the Trust pursuant to the Servicing Agreement,
the Administration Agreement, the Sales Agreement and any Supplemental Sales
Agreement.
"TRUST INDENTURE ACT" or "TIA" shall mean the Trust Indenture Act of
1939 as in force on the date hereof, unless otherwise specifically provided.
"TRUST SUPPLEMENT" shall mean each supplement to the Trust Agreement
that authorizes an issuance of a Class of Certificates.
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NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, IN CONNECTION WITH THE OFFER HEREIN CONTAINED AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES OFFERED
BY THIS PROSPECTUS OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SINCE THE
DATE HEREOF.
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TABLE OF CONTENTS
PAGE
----
Summary of Terms ..................................................... 1
Risk Factors ......................................................... 14
Formation of the Trust ............................................... 18
The Trust Estate ..................................................... 20
Trading Information .................................................. 33
Consumer Protection Laws ............................................. 33
Treatment of Nellie Mae Loans in Bankruptcy .......................... 34
Use of Proceeds ...................................................... 34
Fund Balances at Closing ............................................. 35
Nellie Mae Education Funding, LLC .................................... 35
Nellie Mae, Inc. ..................................................... 36
Servicer ............................................................. 37
The 1996 Notes ....................................................... 37
The 1996 Certificates ................................................ 41
Information Regarding the 1996 Securities ............................ 44
Description of the Indenture ......................................... 47
Description of the Sales and Purchase Agreements ..................... 64
Description of Administration Agreement .............................. 65
Transfer of Student Loans ............................................ 69
Certain Federal Income Tax Consequences .............................. 69
ERISA Considerations ................................................. 75
Underwriting ......................................................... 76
Financial Information ................................................ 76
Legal Matters ........................................................ 76
Reports to Securityholders ........................................... 77
Available Information ................................................ 77
Incorporation of Certain Documents by Reference ...................... 77
Glossary of Major Defined Terms ...................................... G-1
------------------
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS EFFECTING TRANSACTIONS IN
THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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================================================================================
================================================================================
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Nellie Mae
Education
Loan Trust
$67,000,000 LIBOR
Rate Asset Backed
Class A-1 Notes
$48,800,000
Rate Asset Backed
Class A-2 Notes
$7,700,000 LIBOR
Rate Asset Backed
Certificates
----------------
PROSPECTUS
----------------
Smith Barney Inc.
- --------------------------------------------------------------------------------
================================================================================
