<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 1998
REGISTRATION STATEMENT NO. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
ADVANTA AUTO FINANCE CORPORATION
(As sponsor of the trusts described herein)
Nevada 500 Office Center Drive, Suite 400 23-2826077
(Jurisdiction) Fort Washington, Pennsylvania 19034 (I.R.S. Employee
(Address of principal offices) Identification No.)
----------------------
Kevin Shipe, Esq.
Advanta Auto Finance Corporation
500 Office Center Drive, Suite 400
Fort Washington, Pennsylvania 19034
(215) 283-4200
(Name, address and telephone number, including area code, of agent for service)
----------------------
Copy To:
Chris DiAngelo, Esq.
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
---------------------
Approximate date of commencement of proposed
sale to the public: From time to time after the
effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is filed as a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, please check the following box and list
the Securities Act registration number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Title of Securities Amount Proposed Maximum Proposed Maximum Amount
Being Registered To Be Aggregate Price Per Aggregate Offering Of Registration Fee
Registered(2) Unit(1) Price(1) (2)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Auto Receivables Asset Backed Notes and $300,000,000 100% $300,000,000 $90,909.09
Auto Receivables Asset Backed Certificates
(together, the "Securities)
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) In accordance with Rule 429 under the Securities Act of 1933, the
Prospectus included herein is a combined prospectus which also relates
to the Registrant's Registration Statement on Form S-3, File No.
333-19733 (the "Prior Registration Statement"). The amount of
securities eligible to be sold under the Prior Registration Statement
($118,308,000, as of March 30, 1998) shall be carried forward to this
Registration Statement. A filing fee of $55,058.18 is paid pursuant to
this Registration Statement. The remaining $35,850.91 of the
registration fee, attributable to the amount being carried forward, was
paid with the Prior Registration Statement.
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATIONSTATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE PROSPECTUS
FILED AS PART OF THIS REGISTRATION STATEMENT MAY BE USED IN CONNECTION WITH THE
SECURITIES COVERED BY REGISTRATION STATEMENT NO. 333-19733.
===============================================================================
<PAGE>
PROSPECTUS
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Auto Receivables Backed Securities Issuable in Series
ADVANTA AUTO FINANCE CORPORATION
This Prospectus describes certain Auto Receivables Backed Notes (the
"Notes") and Auto Receivables Backed Certificates (the "Certificates" and,
together with the Notes, the "Securities") that may be sold from time to time in
one or more series, in amounts, at prices and on terms to be determined at the
time of sale and to be set forth in a supplement to this Prospectus (each, a
"Prospectus Supplement"). Each series of Securities may include one or more
classes of Notes and one or more classes of Certificates, which will be issued
either by the Company, a Transferor, or by a trust to be formed by either the
Company or a Transferor for the purpose of issuing one or more series of such
Securities (each, a "Trust"). The Company, a Transferor or a Trust, as
appropriate, issuing Securities as described in this Prospectus and the related
Prospectus Supplement is referred to herein as the "Issuer."
Capitalized terms used herein are defined terms having specific
meanings. An "Index of Defined Terms" is set forth at page 56 hereto, which
indicates the page on which such defined terms are defined.
Each class of Securities of any series will evidence beneficial
ownership in a segregated pool of assets (the "Trust Property") (such
Securities, "Certificates") or will represent indebtedness of the Issuer secured
by the Trust Property (such Securities, "Notes"), as described under
"Description of the Securities" herein and in the related Prospectus Supplement.
The Trust Property may consist of any combination of retail installment sales
contracts between manufacturers, dealers or certain other originators and retail
purchasers secured by new and used automobiles and light duty trucks financed
thereby, together with all monies received relating thereto (the "Contracts").
The Trust Property may also include a security interest in the underlying new
and used automobiles and light duty trucks and property relating thereto,
together with the proceeds thereof (the "Vehicles" together with the Contracts,
the "Receivables"). If and to the extent specified in the related Prospectus
Supplement, credit enhancement with respect to the Trust Property or any class
of Securities may include any one or more of the following: a financial guaranty
insurance policy (a "Policy") issued by an insurer specified in the related
Prospectus Supplement, a reserve account, letters of credit, credit or liquidity
facilities, third party payments or other support, cash deposits or other
arrangements. In addition to or in lieu of the foregoing, credit enhancement may
be provided by means of subordination, cross-support among the Receivables or
over-collateralization. See "Description of the Trust Agreements--Credit and
Cash Flow Enhancement." The Receivables in the Trust Property for a series will
have been originated or purchased by the Company. The Receivables included in a
Trust Fund will be serviced by a servicer (the "Servicer") described in the
related Prospectus Supplement.
Each series of Securities may include one or more classes (each, a
"Class"). A series may include one or more Classes of Securities entitled to
principal distributions, with disproportionate, nominal or no interest
distributions, or to interest distributions, with disproportionate, nominal or
no principal distributions. The rights of one or more Classes of Securities of
any series may be senior or subordinate to the rights of one or more of the
other Classes of Securities. A series may include two or more Classes of
Securities which differ as to the timing, order or priority of payment, interest
rate or amount of distributions of principal or interest or both. Information
regarding each Class of Securities of a series, together with certain
characteristics of the related Receivables, will be set forth in the related
Prospectus Supplement. The rate of payment in respect of principal of the
Securities of any Class will depend on the priority of payment of such a Class
and the rate and timing of payments (including prepayments, defaults,
liquidations or repurchases of Receivables) on the related Receivables. A rate
of payment lower or higher than that anticipated may affect the weighted average
life of each Class of Securities in the manner described under "Description of
the Securities" herein and in the related Prospectus Supplement.
It is not expected that any Securities described herein will be listed
on any securities exchange. Such lack of exchange listing is likely to result in
a relatively illiquid market for the Securities. It is, however, further
expected that the underwriter(s) of each series of Securities will make a market
for such Securities for so long as they remain outstanding, although such
underwriter(s) will have no obligation to the Company or the related
Securityholders so to make a market.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK
FACTORS" ON PAGE 15 HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT.
THE NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF THE ISSUER ONLY AND DO NOT
REPRESENT OBLIGATIONS OF THE COMPANY, ANY SERVICER OR ANY OF THEIR RESPECTIVE
AFFILIATES. THE CERTIFICATES OF A GIVEN SERIES REPRESENT BENEFICIAL INTERESTS IN
THE RELATED TRUST ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE
COMPANY, ANY TRANSFEROR, ANY SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE SECURITIES NOR THE UNDERLYING RECEIVABLES WILL BE GUARANTEED OR
INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, ANY
SERVICER, ANY TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT AS SET FORTH
IN THE RELATED PROSPECTUS SUPPLEMENT. SEE ALSO "RISK FACTORS" ON PAGE 15 HEREIN.
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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 UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
Offers of the Securities may be made through one or more different
methods, including offerings through underwriters as more fully described under
"Method of Distribution" herein and in the related Prospectus Supplement. Prior
to issuance, there will have been no market for the Securities of any series,
and there can be no assurance that a secondary market for the Securities will
develop, or if it does develop, it will continue.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Securities unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is March 30, 1998.
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a series of Securities
to be offered hereunder, among other things, will set forth with respect to such
series of Securities: (i) a description of the Class or Classes of such
Securities, (ii) the rate of interest, the "Pass-Through Rate" or "Interest
Rate" or other applicable rate (or the manner of determining such rate) and
authorized denominations of such Class of such Securities; (iii) certain
information concerning the Receivables and insurance polices, cash accounts,
letters of credit, financial guaranty insurance policies, third party guarantees
or other forms of credit enhancement, if any, relating to one or more pools of
Receivables or all or part of the related Securities; (iv) the specified
interest, if any, of each Class of Securities in, and manner and priority of,
the distributions from the Trust Property; (v) information as to the nature and
extent of subordination with respect to such series of Securities, if any; (vi)
the payment date to Securityholders; (vii) information regarding the Servicer(s)
for the related Receivables; (viii) the circumstances, if any, under which the
Trust Property may be subject to early termination; (ix) information regarding
tax considerations; and (x) additional information with respect to the method of
distribution of such Securities.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement (together with all
amendments and exhibits thereto, referred to herein as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Securities offered pursuant to this Prospectus. For further
information, reference is made to the Registration Statement which may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at the
Commission's regional offices at 500 West Madison, 14th Floor, Chicago, Illinois
60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies
of the Registration Statement may be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a Web site that contains reports,
proxy and information statements, and other information regarding registrants
that file electronically with the Commission. The address for such Web site is:
http://www.sec.gov.
No person has been authorized to give any information or to
make any representation other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and any
Prospectus Supplement with respect hereto do not constitute an offer to sell or
a solicitation of an offer to buy any securities other than the Securities
offered hereby and thereby, nor an offer of the Securities to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by the Company with respect
to the Registration Statement, either on its own behalf or on behalf of an
Issuer, relating to any series of Securities referred to in the accompanying
Prospectus Supplement, 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"), after the date of this Prospectus and prior to the termination of any
offering of the Securities issued by the Issuer, shall be deemed to be
incorporated by reference in this Prospectus and to be a part of this Prospectus
from the date of the filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein (or in the accompanying Prospectus
Supplement) or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein, modifies or replaces such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
2
<PAGE>
REPORTS TO NOTEHOLDERS
So long as the Securities are in book-entry form, monthly and
annual reports concerning the related Securities and the related Issuer will be
sent by the Trustee to Cede & Co., as the nominee of DTC and as registered
holder of the Securities pursuant to the related Trust Agreement. DTC will
supply such reports to Securityholders in accordance with its procedures. If
such Securities are not in book-entry form, the Securityholders will receive
such reports directly from the related Trustee, rather than indirectly from DTC.
In connection with their distribution on each Payment Date, the related
Securityholders will receive a statement containing the following information,
at a minimum: the amount of such distribution relating to interest, the amount
of such distribution relating to principal, the Pool Factor, the interest rate
(for variable rate Securities) and delinquency information with respect to the
related Receivables. To the extent required by the Securities Exchange Act of
1934, as amended, the related Issuer will provide financial information to the
Securityholders which has been examined and reported upon, with an opinion
expressed by, an independent public accountant; to the extent not so required,
such financial information will be unaudited. The Company has determined that
the financial statements of no entity other than the Security Insurer are
material to the offering made hereby. Each Issuer will be formed to own the
Receivables, hold and administer the Pre-Funding Account, to issue the
Securities and to acquire the Subsequent Receivables, if available. Each Issuer
will have no assets or obligations prior to issuance of the Securities and will
engage in no activities other than the holdings of the related Trust Property
and the issuance of the related Securities. Accordingly, no financial statements
with respect to the related Issuer will be included in the related Prospectus
Supplement. The audited financial statements of the Security Insurer will be set
forth in (or incorporated by reference in) the related Prospectus Supplement,
and the unaudited interim financial statements of the Security Insurer will be
set forth in (or incorporated by reference in) the related Prospectus
Supplement. The Company intends to discontinue filing periodic reports at the
beginning of the company's next fiscal year, to the extent permitted by Section
15(d) of the Exchange Act.
3
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by
reference to the detailed information appearing elsewhere in this Prospectus and
by reference to the information with respect to the Securities of any series
contained in the related Prospectus Supplement to be prepared and delivered in
connection with the offering of such Securities. Certain capitalized terms used
in the summary are defined elsewhere in the Prospectus on the pages indicated in
the "Index of Terms," which appears on page 56 hereof.
Issuer.............................. With respect to each series of
Securities, either the Company, a
special-purpose finance subsidiary of
the Company which may be organized and
established by the Company with
respect to the Trust Property (each
such special-purpose finance
subsidiary, a "Transferor") or a trust
(each, a "Trust") to be formed by the
Company. For purposes of this
Prospectus, the term "Company"
includes the term "Transferor". The
Company, a Transferor or a Trust
issuing Securities pursuant to this
Prospectus and the related Prospectus
Supplement shall be referred to herein
as the "Issuer" with respect to the
related Securities. See "The Issuers."
Company............................. Advanta Auto Finance Corporation
("Advanta" or the "Company"), a Nevada
corporation. The Receivables will be
either (i) originated by various
dealers, which may or may not be
affiliated with one or more
manufacturers of vehicles ("Dealers",
and together with such manufacturers,
"Vendors") or (ii) acquired by the
Company from other originators or
owners of Receivables. The Company's
origination business is primarily one
of "indirect" originations (i.e.,
originations through the Company's
network of unaffiliated originators)
rather than "direct" originations (in
which prospective borrowers, having
decided to purchase a specific
Vehicle, approach the Company directly
(or are contacted directly by the
Company, as through a mail
solicitation or telemarketing effort)
rather than through a dealer or a
broker). The Company is not affiliated
with any dealers. The Company's
principal executive offices are
located at 500 Office Center Drive,
Suite 400, Fort Washington,
Pennsylvania 19034, and its telephone
number is (215) 444-4200. See "The
Company and the Servicer."
Servicer............................ Advanta Auto Finance Corporation
("Advanta" or, in its capacity as the
servicer, the "Servicer") or its
designee, as described in the related
Prospectus Supplement. See "Advanta's
Automobile Financing
Program--Servicing and Collections."
Trustee............................. The Trustee for each series of
Securities will be specified in the
related Prospectus Supplement. In
addition, a Trust may separately enter
into an Indenture and may issue Notes
pursuant to such Indenture; in any
such case the Trust and the Indenture
will be administered by separate,
independent trustees as required by
the rules and regulations under the
Trust Indenture Act of 1939 and the
Investment Company Act of 1940.
The Securities...................... Each Class of Securities of any
series will either evidence beneficial
ownership in a segregated pool of
assets (the "Trust Property") (such
Securities, "Certificates") or will
represent indebtedness of the Issuer
secured by the Trust Property (such
Securities, "Notes"), as described
under "Description of the Securities"
herein and in the related Prospectus
Supplement. The Trust Property may
consist of any combination of retail
installment sales contracts between
manufacturers, dealers or certain
other originators and retail
purchasers secured by new and used
automobiles and light duty trucks
financed thereby, together with all
monies received relating thereto (the
"Contracts"). The Trust Property
4
<PAGE>
also may include a security interest
in the underlying new and used
automobiles and light duty trucks and
property relating thereto, together
with the proceeds thereof (the
"Vehicles" and together with the
Contracts, the "Receivables").
The Trust Property will include
Receivables with respect to which the
related Contract or the related
Vehicles is subject to federal or
state registration or titling
requirements.
If and to the extent specified in the
related Prospectus Supplement, credit
enhancement with respect to the Trust
Property or any class of Securities
may include any one or more of the
following: a financial guaranty
insurance policy (a "Policy") issued
by an insurer specified in the related
Prospectus Supplement, a reserve
account, letters of credit, credit or
liquidity facilities, third party
payments or other support, cash
deposits or other arrangements. In
addition to or in lieu of the
foregoing, credit enhancement may be
provided by means of subordination,
cross-support among the Receivables or
over-collateralization. The Company
will originate Receivables or acquire
Receivables from one or more
originators on or prior to the date of
issuance of the related Securities, as
described under "Advanta's Automobile
Financing Program" herein and in the
related Prospectus Supplement.
With respect to Securities issued by a
Trust, each Trust will be established
pursuant to an agreement (each, a
"Pooling Agreement") by and between
the Company and the Trustee named
therein. Each Pooling Agreement will
describe the related pool of
Receivables held by the Trust.
With respect to Securities that
represent debt issued by the Issuer,
the Issuer will enter into an
indenture (each, an "Indenture") by
and between the Issuer and the trustee
named on such Indenture (the
"Indenture Trustee"). Each Indenture
will describe the related pool of
Receivables comprising the Trust
Property and securing the debt issued
by the related Issuer.
The Receivables comprising the Trust
Property will be serviced by the
Servicer pursuant to a servicing
agreement (each, a "Servicing
Agreement") by and between the
Servicer and the related Issuer.
In the case of the Trust Property of
any class of Securities, the
contractual arrangements relating to
the establishment of a Trust, if any,
the servicing of the related
Receivables and the issuance of the
related Securities may be contained in
a single agreement, or in several
agreements which combine certain
aspects of the Pooling Agreement, the
Servicing Agreement and the Indenture
described above (for example, a
pooling and servicing agreement, or a
servicing and collateral management
agreement). For purposes of this
Prospectus, the term "Trust Agreement"
as used with respect to Trust Property
means, collectively, and except as
otherwise described in the related
Prospectus Supplement, any and all
agreements relating to the
establishment of a Trust, if any, the
servicing of the related Receivables
and the issuance of the related
Securities. The term "Trustee" means
any and all persons acting as a
trustee pursuant to a Trust Agreement.
Securities Will Be Non-Recourse.
The Securities will not be
obligations, either recourse or
non-recourse (except for certain
non-recourse debt described under
"Certain Tax Considerations"), of the
Company, the related Servicer or any
person
5
<PAGE>
other than the related Issuer. The
Notes of a given series represent
obligations of the Issuer, and the
Certificates of a given series
represent beneficial interests in the
related Issuer only and do not
represent interests in or obligations
of the Company, the related Servicer
or any of their respective affiliates
other than the related Issuer. In the
case of Securities that represent
beneficial ownership interest in the
related Issuer, such Securities will
represent the beneficial ownership
interests in such Issuer and the sole
source of payment will be the assets
of such Issuer. In the case of
Securities that represent debt issued
by the related Issuer, such Securities
will be secured by assets in the
related Trust Property.
Notwithstanding the foregoing, and as
to be described in the related
Prospectus Supplement, certain types
of credit enhancement, such as a
letter of credit, financial guaranty
insurance policy or reserve fund may
constitute a full recourse obligation
of the issuer of such credit
enhancement.
General Nature of the Securities as Investments.
All of the Securities offered pursuant
to this Prospectus and the related
Prospectus Supplement will be rated in
one of the four highest rating
categories by one or more Rating
Agencies.
Additionally, except to the extent
provided in the related Prospectus
Supplement, all of the Securities
offered pursuant to this Prospectus
and the related Prospectus Supplement
will be of the fixed-income type
("Fixed Income Securities"). Fixed
Income Securities will generally be
styled as debt instruments, having a
principal balance and a specified
interest rate ("Interest Rate"). Fixed
Income Securities may either represent
beneficial ownership interests in the
related Receivables held by the
related Trust or debt secured by
certain assets of the related Issuer.
Each series or Class of Fixed Income
Securities offered pursuant to this
Prospectus may have a different
Interest Rate, which may be a fixed or
adjustable Interest Rate. The related
Prospectus Supplement will specify the
Interest Rate for each series or Class
of Fixed Income Securities described
therein, or the initial Interest Rate
and the method for determining
subsequent changes to the Interest
Rate.
A series may include one or more
Classes of Fixed Income Securities
("Strip Securities") entitled (i) to
principal distributions, with
disproportionate, nominal or no
interest distributions, or (ii) to
interest distributions, with
disproportionate, nominal or no
principal distributions. In addition,
a series of Securities may include two
or more Classes of Fixed Income
Securities that differ as to timing,
sequential order, priority of payment,
Interest Rate or amount of
distribution of principal or interest
or both, or as to which distributions
of principal or interest or both on
any Class may be made upon the
occurrence of specified events, in
accordance with a schedule or formula,
or on the basis of collections from
designated portions of the related
pool of Receivables. Any such series
may include one or more Classes of
Fixed Income Securities ("Accrual
Securities"), as to which certain
accrued interest will not be
distributed but rather will be added
to the principal balance (or nominal
balance, in the case of Accrual
Securities which are also Strip
Securities) thereof on each Payment
Date, as hereinafter defined, or in
the manner described in the related
Prospectus Supplement.
If so provided in the related
Prospectus Supplement, a series may
include one or more other Classes of
Fixed Income Securities (collectively,
the "Senior Securities") that are
senior to one or more other Classes of
Fixed
6
<PAGE>
Income Securities (collectively, the
"Subordinate Securities") in respect
of certain distributions of principal
and interest and allocations of losses
on Receivables.
In addition, certain Classes of Senior
(or Subordinate) Securities may be
senior to other Classes of Senior (or
Subordinate) Securities in respect of
such distributions or losses.
General Payment Terms of Securities.
As provided in the related Trust
Agreement and as described in the
related Prospectus Supplement, the
holders of the Securities
("Securityholders") will be entitled
to receive payments on their
Securities on specified dates (each, a
"Payment Date"). Payment Dates with
respect to Fixed Income Securities
will occur monthly, quarterly or
semi-annually, as described in the
related Prospectus Supplement.
The related Prospectus Supplement will
describe a date (the "Record Date")
preceding such Payment Date, as of
which the Trustee or its paying agent
will fix the identity of the
Securityholders for the purpose of
receiving payments on the next
succeeding Payment Date. As described
in the related Prospectus Supplement,
the Payment Date will be a specified
day of each month, commonly the tenth,
twelfth, fifteenth or twenty-fifth day
of each month (or, in the case of
quarterly-pay Securities, the tenth,
twelfth, fifteenth or twenty-fifth day
of every third month; and in the case
of semi-annual pay Securities, the
tenth, twelfth, fifteenth or
twenty-fifth day of every sixth month)
and the Record Date will be the close
of business as of the last day of the
calendar month that precedes the
calendar month in which such Payment
Date occurs.
Each Trust Agreement will describe a
period (each, a "Remittance Period")
preceding each Payment Date (for
example, in the case of monthly-pay
Securities, the calendar month
preceding the month in which a Payment
Date occurs). As more fully described
in the related Prospectus Supplement,
collections received on or with
respect to the related Receivables
constituting Trust Property during a
Remittance Period will be required to
be remitted by the Servicer to the
related Trustee prior to the related
Payment Date and will be used to fund
payments to Securityholders on such
Payment Date. As may be described in
the related Prospectus Supplement, the
related Trust Agreement may provide
that all or a portion of the payments
collected on or with respect to the
related Receivables may be applied by
the related Trustee to the acquisition
of additional Receivables during a
specified period (rather than be used
to fund payments of principal to
Securityholders during such period),
with the result that the related
Securities will possess an
interest-only period, also commonly
referred to as a revolving period,
which will be followed by an
amortization period. Any such interest
only or revolving period may, upon the
occurrence of certain events to be
described in the related Prospectus
Supplement, terminate prior to the end
of the specified period and result in
the earlier than expected amortization
of the related Securities. Such events
which may result in an early
amortization event will generally
consist of (i) the Company's inability
to deliver sufficient, additional
Receivables to maintain the revolving
period, (ii) an event of default by
the Company or the Servicer (i.e., the
Company's or the Servicer's failure to
perform their respective duties under
the related Trust Agreement) and (iii)
the occurrence of a bankruptcy event
with respect to the Company or the
Servicer.
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In addition, and as may be described
in the related Prospectus Supplement,
the related Trust Agreement may
provide that all or a portion of such
collected payments may be retained by
the Trustee (and held in certain
temporary investments, including
Receivables) for a specified period
prior to being used to fund payments
of principal to Securityholders.
Such retention and temporary
investment by the Trustee of such
collected payments may be required by
the related Trust Agreement for the
purpose of (a) slowing the
amortization rate of the related
Securities relative to the installment
payment schedule of the related
Receivables, or (b) attempting to
match the amortization rate of the
related Securities to an amortization
schedule established at the time such
Securities are issued. Any such
feature applicable to any Securities
may terminate upon the occurrence of
events to be described in the related
Prospectus Supplement, resulting in
distributions to the specified
Securityholders and an acceleration of
the amortization of such Securities.
As more fully specified in the related
Prospectus Supplement, neither the
Securities nor the underlying
Receivables will be guaranteed or
insured by any governmental agency or
instrumentality or the Company, the
related Servicer, any Trustee, or any
of their affiliates.
No Investment Companies............. Neither the Company nor any Trust
will register as an "investment
company" under the Investment Company
Act of 1940, as amended (the
"Investment Company Act").
Risk Factors........................ There are material risks associated
with an investment in the Securities
offered hereby; prospective
Securityholders should read "Risk
Factors" herein, as well as the "Risk
Factors" section of the related
Prospectus Supplement.
Securities will not be
listed on any Exchange.............. It is not expected that any Securities
described herein will be listed on any
securities exchange. Such lack of
exchange listing is likely to result
in a relatively illiquid market for
the Securities. It is, however,
further expected that the
underwriter(s) of each series of
Securities will make a market for such
Securities for so long as they remain
outstanding, although such
underwriter(s) will have no obligation
to the Company or the related
Securityholders so to make a market.
See "Risk Factors--Limited Liquidity"
herein.
The Residual Interest............... With respect to each Trust, the
"Residual Interest" at any time
represents the rights to the related
Trust Property in excess of the
Securityholders' interest of all
series then outstanding that were
issued by such Trust. The Residual
Interest in any Trust Property will
fluctuate as the aggregate Pool
Balance of such Trust Property changes
from time to time. A portion of the
Residual Interest in any Trust may be
sold separately in one or more public
or private transactions.
Master Trusts; Issuance of
Additional Series................... As may be described in the related
Prospectus Supplement, the Company may
cause one or more of the Trusts (such
a Trust, a "Master Trust") to issue
additional series of Securities from
time to time. Under each Trust
Agreement relating to a Master Trust
(each, a "Master Trust Agreement"),
the Company may determine the terms of
any such new series. See "Description
of the Securities--Master Trusts."
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<PAGE>
The Company may cause the related
Trustee to offer any such new series
to the public or other investors, in
transactions either registered under
the Securities Act or exempt from
registration thereunder, directly or
through one or more underwriters or
placement agents, in fixed-price
offerings or in negotiated
transactions or otherwise.
A new series to be issued by a Master
Trust which has a series outstanding
may only be issued upon satisfaction
of the conditions described herein
under "Description of the
Securities--Master Trusts". Securities
secured by Receivables held by a
Master Trust shall be entitled to
monies received relating to such
Receivables on a equal priority basis
with other Securities issued pursuant
to the other Trust Agreements by such
Master Trust.
Cross-Collateralization............. As described in the related Trust
Agreement and the related Prospectus
Supplement, the source of payment for
Securities of each series will be the
assets of the related Trust Property
only.
However, as may be described in the
related Prospectus Supplement, a
series or class of Securities may
include the right to receive monies
from a common pool of credit
enhancement which may be available for
more than one series of Securities,
such as a master reserve account,
master insurance policy or a master
collateral pool consisting of similar
Receivables. Notwithstanding the
foregoing, and as described in the
related Prospectus Supplement, no
payment received on any Receivable
held by any Trust may be applied to
the payment of Securities issued by
any other Trust (except to the limited
extent that certain collections in
excess of the amounts needed to pay
the related Securities may be
deposited in a common master reserve
account or an overcollateralization
account that provides credit
enhancement for more than one series
of Securities issued pursuant to the
related Trust Agreement).
Trust Property...................... As specified in the related
Prospectus Supplement, the Trust
Property will consist of the related
Contracts, and may include a security
interest in the related Vehicles. If
and to the extent specified in the
related Prospectus Supplement, credit
enhancement with respect to the Trust
Property or any class of Securities
may include any one or more of the
following: a Policy issued by an
insurer specified in the related
Prospectus Supplement, a reserve
account, letters of credit, credit or
liquidity facilities, repurchase
obligations, third party payments or
other support, cash deposits or other
arrangements. In addition to or in
lieu of the foregoing, credit
enhancement may be provided by means
of subordination, cross-support among
the Receivables or
over-collateralization. See
"Description of the Trust
Agreement--Credit and Cash Flow
Enhancement." The Contracts are
obligations for the purchase of the
Vehicles, or evidence borrowings used
to acquire the Vehicles. As specified
in the related Prospectus Supplement,
the Contracts may consist of Rule of
78s Contracts, Actuarial Contracts or
Simple Interest Contracts. Generally,
"Rule of 78s Contracts" provide for
fixed level monthly payments which
will amortize the full amount of the
Contract over its term. The Rule of
78s Contracts provide for allocation
of payments according to the "sum of
periodic balances" or "sum of monthly
payments" method (the "Rule of 78s").
Each Rule of 78s Contract provides for
the payment by the Obligor of a
specified total amount of payments,
payable in monthly installments on the
related due date, which total
represents the principal amount
financed and finance charges in an
amount calculated on the basis of a
stated annual percentage rate ("APR")
for the term of such Contract. The
rate at which such amount of finance
9
<PAGE>
charges is earned and,
correspondingly, the amount of each
fixed monthly payment allocated to
reduction of the outstanding principal
balance of the related Contract are
calculated in accordance with the Rule
of 78s. Under the Rule of 78s, the
portion of each payment allocable to
interest is higher during the early
months of the term of a Contract and
lower during later months than that
under a constant yield method for
allocating payments between interest
and principal.
Notwithstanding the foregoing, as
specified in the related Prospectus
Supplement, all payments received by
the related Servicer on or in respect
of the Rule of 78s Contracts may be
allocated on an actuarial or simple
interest basis.
An "Actuarial Contract" provides for
the amortization of the Contract over
a series of fixed level monthly
payments. Each Actuarial Contract
provides for the payment by the
Obligor of a specified total number of
payments, payable in monthly
installments on the related due date,
which total represents the principal
amount financed and finance charges in
an amount calculated on the basis of a
stated APR for the term of such
Contract. The rate at which such
amount of finance charges is earned
and, correspondingly, the amount of
each fixed monthly payment allocated
to reduction of the outstanding
principal balance of the related
Contract are calculated in accordance
with the actuarial method. Each
scheduled monthly payment is deemed to
consist of an amount of interest equal
to one-twelfth of the stated APR of
the Contract multiplied by the
outstanding principal balance of the
Contract and an amount of principal
equal to the remainder of such
scheduled monthly payment.
"Simple Interest Contracts" provide
for the amortization of the amount
financed under the receivable over a
series of fixed level monthly
payments. However, unlike the monthly
payment under Rule of 78s Contracts
and Actuarial Contracts, each monthly
payment consists of an installment of
interest which is calculated on the
basis of the outstanding principal
balance of the receivable multiplied
by the stated APR and further
multiplied by the period elapsed (as a
fraction of a calendar year) since the
preceding payment of interest was
made. As payments are received under a
Simple Interest Contract, the amount
received is applied first to interest
accrued to the date of payment and the
balance is applied to reduce the
unpaid principal balance. Accordingly,
if an Obligor pays a fixed monthly
installment before its scheduled due
date, the portion of the payment
allocable to interest for the period
since the preceding payment was made
will be less than it would have been
had the payment been made as
scheduled, and the portion of the
payment applied to reduce the unpaid
principal balance will be
correspondingly greater. Conversely,
if an Obligor pays a fixed monthly
installment after its scheduled due
date, the portion of the payment
allocable to interest for the period
since the preceding payment was made
will be greater than it would have
been had the payment been made as
scheduled, and the portion of the
payment applied to reduce the unpaid
principal balance will be
correspondingly less. In either case,
the Obligor pays a fixed monthly
installment until the final scheduled
payment date, at which time the amount
of the final installment is increased
or decreased as necessary to repay the
then outstanding principal balance.
If an Obligor elects to prepay a Rule
of 78s Contract in full, it is
entitled to a rebate of the portion of
the outstanding balance then due and
payable attributable to unearned
finance charges. If a Simple Interest
Contract is prepaid, rather than
receive a rebate, the Obligor is
required to pay
10
<PAGE>
interest only to the date of
prepayment. The amount of a rebate
under a Rule of 78s Contract
calculated in accordance with the Rule
of 78s will always be less than had
such rebate been calculated on an
actuarial basis and generally will be
less than the remaining scheduled
payments of interest that would be due
under a Simple Interest Contract for
which all payments were made on
schedule. Distributions to
Securityholders may not be affected by
Rule of 78s rebates under the Rule of
78s Contracts because pursuant to the
related Prospectus Supplement such
distributions may be determined using
the actuarial or simple interest
method.
The related Prospectus Supplement will
further describe the type and
characteristics of the Contracts
included in the Trust Property
relating to the Securities offered
pursuant to this Prospectus and the
related Prospectus Supplement.
The Company will either transfer
Receivables to a Trust pursuant to a
Pooling Agreement or pledge the
Company's right, title and interest in
and to such Receivables to a Trustee
on behalf of Securityholders pursuant
to an Indenture. The obligations of
the Company, the Servicer, the related
Trustee and the related Indenture
Trustee, if any, under the related
Trust Agreement include those
specified below and in the related
Prospectus Supplement.
In addition, if so specified in the
related Prospectus Supplement, the
Trust Property will include monies on
deposit in a Pre-Funding Account (the
"Pre-Funding Account") to be
established with the Trustee, which
will be used to acquire Additional
Receivables from time to time during
the "Pre-Funding Period" specified in
the related Prospectus Supplement. The
Pre-Funding Account, if any, will be
reduced during the related Pre-Funding
Period by the amount thereof used to
purchase Additional Receivables. Any
amount remaining in the Pre-Funding
Account at the end of the related
Pre-Funding Period will be distributed
to the related Securityholders, pro
rata, on the Payment Date immediately
following the end of the Pre-Funding
Period.
If and to the extent provided in the
related Prospectus Supplement, the
Company will be obligated (subject
only to the availability thereof) to
either transfer to a Trust or pledge
to a Trustee on behalf of
Securityholders, additional
Receivables (the "Additional
Receivables") from time to time during
any Pre-Funding Period specified in
the related Prospectus Supplement.
Special Payment
Features............................ The Receivables may contain the
following special payment features:
"Balloon" Payments: In a "balloon"
payment Receivable, the final
scheduled payment may be substantially
higher than the preceding scheduled
payments. Such balloon payment
Receivables may have a higher risk of
loss than Receivables that do not
contain such a feature, as borrowers
may have difficulty in paying (or
refinancing) the large final payment.
Adjustable Rate Receivables: Certain
of the Receivables may calculate
interest on an adjustable rate basis
(an index such as Prime or LIBOR)
rather than on a fixed rate basis.
Such Receivables may be subject to
minimum ("floors") and maximum
("caps") rates of interest. Such
adjustable rate Receivables may have
higher risk of loss than do
Receivables with a fixed rate of
interest, as borrowers may have
difficulty
11
<PAGE>
paying the higher monthly payments
which result from an increase in
rates.
"Pay for Performance" Program: The
Company may offer loans in which the
interest rate may decrease if the
borrower maintains a steady history of
timely payment over a specified period
of time. Any such decrease in rate,
although generally indicative of good
performance, may result in decreased
cash received by the related Issuer.
Registration of Securities.......... Securities may be represented by global
securities registered in the name of
Cede & Co. ("Cede"), as nominee of The
Depository Trust Company ("DTC"), or
another nominee. In such case,
Securityholders will not be entitled
to receive definitive securities
representing such Securityholders'
interests, except in certain
circumstances described in the related
Prospectus Supplement. See
"Description of the Securities--Book
Entry Registration" herein.
Credit and Cash Flow
Enhancement......................... If and to the extent specified in
the related Prospectus Supplement,
credit enhancement with respect to
Trust Property or any class of
Securities may include any one or more
of the following: a Policy issued by
an insurer specified in the related
Prospectus Supplement (a "Security
Insurer"), a reserve account, letters
of credit, credit or liquidity
facilities, third party payments or
other support, cash deposits or other
arrangements. Any form of credit
enhancement will have certain
limitations and exclusions from
coverage thereunder, which will be
described in the related Prospectus
Supplement. See "Description of the
Trust Agreement--Credit and Cash Flow
Enhancement."
Repurchase Obligations and
the Receivables Acquisition
Agreement........................... As more fully described in the related
Prospectus Supplement, the Company
will be obligated to acquire from the
related Trust Property any Receivable
which was transferred pursuant to a
Pooling Agreement or pledged pursuant
to an Indenture if the interest of the
Securityholders therein is materially
adversely affected by a breach of any
representation or warranty made by the
Company with respect to such
Receivable, which breach has not been
cured. In addition, if so specified in
the related Prospectus Supplement, the
Company may from time to time
reacquire certain Receivables of the
Trust Property, subject to specified
conditions set forth in the related
Trust Agreement.
Servicer's Compensation............. The Servicer shall be entitled to
receive a fee for servicing the Trust
Property equal to a specified
percentage of the value of such Trust
Property, as set forth in the related
Prospectus Supplement. See
"Description of the Trust
Agreements--Servicing Compensation"
herein and in the related Prospectus
Supplement.
Certain Legal Aspects
of the Contracts.................... With respect to the transfer of the
Contracts to the related Trust
pursuant to a Pooling Agreement or the
pledge of the related Issuer's right,
title and interest in and to such
Contracts on behalf of Securityholders
pursuant to an Indenture, the Company
will warrant, in each case, that such
transfer is either a valid transfer
and assignment of the Contracts to the
Trust or the grant of a security
interest in the Contracts. Each
Prospectus Supplement will specify
what actions will be taken by which
parties to perfect either the Issuer's
or the Securityholders' security
interest in the Contracts. The Company
may also warrant that, if the transfer
or pledge by it to the Trust or to the
Securityholders is deemed to be a
grant to the Trust or to the
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<PAGE>
Securityholders of a security interest
in the Contracts, then the related
Issuer or the Securityholders will
have a first priority perfected
security interest therein, except for
certain liens which have priority over
previously perfected security
interests by operation of law, and,
with certain exceptions, in the
proceeds thereof. Similar security
interest and priority representations
and warranties, as described in the
related Prospectus Supplement, may
also be made by the Company with
respect to the Vehicles.
Perfection of security interests in
automobiles and light duty trucks is
generally governed by the vehicle
registration or titling laws of the
state in which each vehicle is
registered or titled. In most states,
a security interest in a vehicle is
perfected by notation of the secured
party's lien on the vehicle's
certificate of title. Each Prospectus
Supplement will specify whether the
Company, the Servicer or the Trustee,
in light of the administrative burden
and expense, will amend any
certificate of title to identify the
Company or the Trustee as the new
secured party on the certificates of
title relating to the Vehicles. See
"Certain Legal Aspects of the
Receivables."
Each Prospectus Supplement will
specify if the Company has filed or
will be required to file UCC financing
statements identifying the Vehicles as
collateral pledged in favor of the
related Trust or Trustee on behalf of
the Securityholders. In the absence of
such filings any security interest in
the Vehicles will not be perfected in
favor of the related Trust or Trustee.
See "Certain Legal Aspects of the
Receivables."
Optional Termination................ The Servicer, the Company, or, if
specified in the related Prospectus
Supplement, certain other entities
may, at their respective options,
effect early retirement of a series of
Securities under the circumstances and
in the manner set forth herein under
"Description of The Trust
Agreement--Termination" and in the
related Prospectus Supplement. Such
termination may occur either at a date
certain (e.g., thirty months following
the issuance date) or at such time as
the Pool Factor has declined to a
specified level, which will generally
not exceed 10%. The specific date
and/or Pool Factor level at which such
termination may occur with respect to
a series of Securities shall be set
forth in the related Prospectus
Supplement.
Mandatory Termination............... The Trustee, the Servicer or certain
other entities specified in the
related Prospectus Supplement may be
required to effect early retirement of
all or any portion of a series of
Securities by soliciting competitive
bids for the purchase of the Trust
Property or otherwise, under other
circumstances and in the manner
specified in "Description of The Trust
Agreement--Termination" and in the
related Prospectus Supplement. Such
termination may occur either at a date
certain (e.g., thirty months following
the issuance date) or at such time as
the Pool Factor has declined to a
specified level, which will generally
not exceed 10%. The specific date
and/or Pool Factor level at which such
termination may occur with respect to
a series of Securities shall be set
forth in the related Prospectus
Supplement.
Tax Considerations.................. Securities of each series offered
hereby will, for federal income tax
purposes, constitute either (i)
interests in a Trust treated as a
grantor trust under applicable
provisions of the Code ("Grantor Trust
Securities"), (ii) debt issued by an
Issuer or by the Company ("Debt
Securities"), (iii) interests in a
Trust which is treated as a
partnership ("Partnership Interests")
or (iv) interests in a Trust which
elects to be treated as a
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<PAGE>
"financial asset securitization
investment trust" (a "FASIT"). The tax
characterization of any series of
Securities will be described in the
related Prospectus Supplement, and the
related Opinion of tax counsel will be
filed as part of a Current Report 8-K
filing in connection with each
issuance.
Investors are advised to consult their
tax advisors and to review "Federal
Income Tax Consequences" in the
related Prospectus Supplement.
ERISA Considerations................ The Prospectus Supplement for each
series of Securities will summarize,
subject to the limitations discussed
therein, considerations under the
Employee Retirement Income Security
Act of 1974, as amended ("ERISA"),
relevant to the purchase of such
Securities by employee benefit plans
and individual retirement accounts.
See "ERISA Considerations" in the
related Prospectus Supplement.
Ratings............................. Each Class of Securities offered
pursuant to this Prospectus and the
related Prospectus Supplement will be
rated in one of the four highest
rating categories by one or more
"national statistical rating
organizations", as defined in the
Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and
commonly referred to as "Rating
Agencies". Such ratings will address,
in the opinion of such Rating
Agencies, the likelihood that the
Issuer will be able to make timely
payment of all amounts due on the
related Securities in accordance with
the terms thereof. Such ratings will
neither address any prepayment or
yield considerations applicable to any
Securities nor constitute a
recommendation to buy, sell or hold
any Securities.
The ratings expected to be received
with respect to any Securities will be
set forth in the related Prospectus
Supplement.
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<PAGE>
RISK FACTORS
Prospective Securityholders should consider, among other
things, the following factors in connection with the purchase of the Securities:
Subprime Lending May Pose Special Risks to Investors in the
Securities. The Company's program is geared primarily to originating and
acquiring Contracts in the so-called "subprime" automobile lending industry. The
subprime market for credit consists of making loans which may not be made by
traditional sources of credit, which in the automobile finance business is
comprised of insured-deposit taking institutions such as banks, thrifts and
credit unions, and finance companies which are "captives" (i.e., finance
subsidiaries) of automobile manufacturers.
A loan may be considered "subprime" primarily for one, or
both, of two reasons: borrower credit considerations and collateral
considerations. It is also possible that the subprime automobile finance
business is more susceptible to loss than other segments of the subprime lending
business generally, such as subprime mortgage lending, due to the mobility and
depreciation of the collateral.
"Subprime" borrowers are likely to be relatively weak credits
who may be unable (or unwilling) to repay their loans. A borrower may be
considered a "subprime" credit due to limited income, tarnished credit history
(e.g., prior bankruptcy, history of delinquent payments on other types of
installment credit) or a lack of credit history (i.e., a relatively young
individual who has not yet developed a "credit history profile").
"Subprime" loans may also have less valuable collateral.
Collateral considerations in the subprime automobile market primarily result
from the financing, in many cases, of used vehicles. Although depreciation also
affects new automobiles, the market value of an automobile which is several
years old may be more difficult to ascertain than for a new vehicle since such
value will depend on mileage and general condition, which may vary substantially
for different vehicles of a similar model year.
As a result of all of the foregoing factors, the performance
of a subprime portfolio may be more susceptible to performance deterioration
than a prime portfolio, since the borrowers, being more marginal credits, are
likely to be disproportionately affected by economic downturns, and since the
collateral, often consisting of older, used vehicles, may be more difficult to
value correctly.
"Subprime" asset-backed offerings are frequently guaranteed by
a small number of Credit Enhancers, whose own credit may be adversely affected
by a downturn in the subprime lending business. Another consideration with
respect to the subprime automobile lending business relates to the degree to
which the industry's asset-backed securities (such as the Securities offered
hereby) are guaranteed, in whole or in part, by Credit Enhancers which
themselves have assumed substantial exposure to this industry. See "Security
Rating may be highly dependent on the ratings of an external Credit Enhancer"
below. Although such Credit Enhancers typically have a "AAA" rating, if
portfolios of subprime automobile receivables generally suffer lower than
expected levels of performance, the ratings of such Credit Enhancers as have
concentrated on this industry may be adversely affected, even if a specific
receivables pool (such as one of the Company's pools) has not suffered such a
lower than expected level of performance.
The Company's program has limited historical data available
regarding loan performance. The Company's automobile finance business is
relatively new, with the initial Contracts having been originated or acquired
only in May of 1996. Consequently, the Company has not been able to develop
meaningful statistics relating to the historical performance of its portfolio.
As a result, it is unknown how the Company's portfolio performs relative to the
portfolios of other subprime lenders.
Limited Liquidity May Result in a Securityholder Being Unable
to Liquidate its Investment. It is not expected that any Securities offered
hereby will be listed on any securities exchange. Such lack of exchange listing
is likely to result in a relatively illiquid market for the Securities.
There can be no assurance that a secondary market for the
Securities of any series or Class will develop or, if it does develop, that it
will provide Securityholders with liquidity of investment or that it will
continue for the life of such Securities. The Prospectus Supplement for any
series of Securities may indicate that an underwriter specified therein intends
to establish and maintain a secondary market in such Securities; however, no
underwriter will be obligated to do so.
15
<PAGE>
Ownership of Contracts Will Not Necessarily Be Vested in the
Related Trustee, with the result that delays and disruptions in payments may
occur. The Company will warrant in a Trust Agreement (i) if the Company retains
title to the Contracts, that the Trustee for the benefit of Securityholders has
a valid security interest in such Contracts, or (ii) if the Company transfers
such Contracts to an Issuer, that the transfer of the Contracts to such Issuer
is either a valid assignment, transfer and conveyance of the Contracts to the
Issuer or the Trustee on behalf of the Securityholders has a valid security
interest in such Contracts. As set forth in the related Prospectus Supplement,
the related Trust Agreement will provide either that the Trustee will be
required to maintain possession of the original copies of all Contracts that
constitute chattel paper or that the Company or the Servicer will retain
possession of such Contracts; provided that in case the Company retains
possession of the related Contracts, the Servicer may take possession of such
original copies as necessary for the enforcement of any Contract. If any
Contracts remain in the possession of the Company, the related Prospectus
Supplement may describe specific trigger events that will require delivery to
the Trustee. If the Company, the Servicer, the Trustee or other third party,
while in possession of the Contracts, sells or pledges and delivers such
Contracts to another party in violation of the Receivables Acquisition Agreement
or the Trust Agreement, there is a risk that such other party could acquire an
interest in such Contracts having a priority over the Issuer's interest.
Furthermore, if the Company, the Servicer or a third party, while in possession
of the Contracts, is rendered insolvent, such event of insolvency may result in
competing claims to ownership or security interests in the Contracts. Such an
attempt, even if unsuccessful, could result in delays in payments on the
Securities. If successful, such attempt could result in losses to the
Securityholders or an acceleration of the repayment of the Securities. The
Company will be obligated to repurchase any Contract originated by the Company
and currently in the related Trust Property if there is a breach of the
Company's representations and warranties that materially and adversely affects
the interests of the Trust in such Contract and such breach has not been cured.
Security Interests in Both the Receivables and the Underlying
Vehicles May Not Be Valid Under Certain Circumstances. The transfer of the
Receivables by the Company to the Trustee pursuant to the related Trust
Agreement, the perfection of the security interests in the Receivables and the
enforcement of rights to realize on the Vehicles as collateral for the
Receivables are subject to a number of federal and state laws, including the UCC
as in effect in various states. As specified in each Prospectus Supplement, the
Servicer will take such action as is required to perfect the rights of the
Trustee in the Receivables. If, through inadvertence or otherwise, a third party
were to purchase (including the taking of a security interest in) a Receivable
for new value in the ordinary course of its business, without actual knowledge
of the Trustee's interest, and take possession of a Receivable, the purchaser
would acquire an interest in such Receivable superior to the interest of the
Trustee, with the result that such Receivable would no longer be available as
part of the Trust Property for the related series of Securities. As further
specified in each Prospectus Supplement, no action will be taken to perfect the
rights of the Trustee in proceeds of any insurance policies covering individual
Vehicles or Obligors. Therefore, the rights of a third party with an interest in
such proceeds could prevail against the rights of the Trustee prior to the time
such proceeds are deposited by the Servicer into a Trust Account. See "Certain
Legal Aspects of the Receivables".
Except to the extent specified in the related Prospectus
Supplement, each Contract will include a perfected security interest in the
related Vehicle in favor of the Trustee, the Company (and, if perfected in the
name of the Company, assigned pursuant to the related Trust Agreement to the
Trustee for the benefit of the Securityholders) or the unaffiliated originator
from whom the related Contract was purchased by the Company (and if perfected in
the name of an unaffiliated originator, assigned to the Company pursuant to the
related purchase agreement and assigned to the Trustee for the benefit of the
Securityholders pursuant to the related Trust Agreement). However, to the extent
provided in the related Prospectus Supplement, due to the administrative burden
and expense, the certificates of title of the Vehicles securing certain
Contracts which reflect the security interest of the Company or an unaffiliated
originator in such Vehicles may not be endorsed to reflect the Trustee's
interest therein or delivered to the Trustee. In the absence of such endorsement
and delivery, the Trustee may not have a perfected security interest in such
Vehicles. As a result, a third party buyer of a Vehicle for value from an
Obligor may extinguish the interest of the Trust in the Vehicle, a subsequent
perfected lienholder may obtain a security interest senior in right to that of
the Trust, and a trustee in bankruptcy of the Company may be able to assert
successfully that the Trust did not have a security interest in the Vehicle. In
addition, statutory liens for repairs or unpaid taxes and other liens arising by
operation of law may have priority even over prior perfected security interests
in the name of the Trustee in the Vehicles.
Restrictions on Recoveries May Result in the Related Issuer
Receiving Substantially Less Than the Face Amount of the Related Contract.
Unless specific limitations are described on the related Prospectus
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Supplement with respect to specific Contracts, all Contracts will provide that
the obligations of the Obligors thereunder are absolute and unconditional,
regardless of any defense, set-off or abatement which the Obligor may have
against the Company or any other person or entity whatsoever. The Company will
warrant that no claims or defenses have been asserted or threatened with respect
to the Contracts and that all requirements of applicable law with respect to the
Contracts have been satisfied.
In the event that the Company or the Trustee must rely on
repossession and disposition of Vehicles to recover scheduled payments due on
defaulted contracts, i.e., Contracts which are seriously delinquent such as 90
or 120 days, or as to which the related Obligor has affirmatively indicated an
inability or unwillingness to make payment ("Defaulted Contracts"), the Issuer
may not realize the full amount due on a Contract (or may not realize the full
amount on a timely basis). Other factors that may affect the ability of the
Issuer to realize the full amount due on a Contract include whether amendments
to certificates of title relating to the Vehicles had been filed, whether
financing statements to perfect the security interest in the Vehicles had been
filed, depreciation, obsolescence, damage or loss of any Vehicle, and the
application of Federal and state bankruptcy and insolvency laws. As a result,
the Securityholders may be subject to delays in receiving payments and suffer
loss of their investment in the Securities.
Although the Transactions Will Be Structured So As to Minimize
the Risks Associated with the Company's Bankruptcy, Such Safeguards May Not
Eliminate All Such Risks. The Company will take steps in structuring the
transactions contemplated hereby that are intended to ensure that the voluntary
or involuntary application for relief by the Company under the United States
Bankruptcy Code or similar applicable state laws ("Insolvency Laws") will not
result in the Trust Property becoming property of the estate of the Company
within the meaning of such Insolvency Laws. Such steps will generally involve
the creation by the Company of one or more separate, limited-purpose
subsidiaries (each, a "Finance Subsidiary") pursuant to articles of
incorporation containing certain limitations (including restrictions on the
nature of such Finance Subsidiary's business and a restriction on such Finance
Subsidiary's ability to commence a voluntary case or proceeding under any
Insolvency Law without the prior unanimous affirmative vote of all its
directors). However, there can be no assurance that the activities of any
Finance Subsidiary would not result in a court's concluding that the assets and
liabilities of such Finance Subsidiary should be consolidated with those of the
Company in a proceeding under any Insolvency Law.
While an originator is the Servicer, cash collections held by
such originator may, subject to certain conditions, be commingled and used for
the benefit of such originator prior to each Payment Date and, in the event of
the bankruptcy of such originator, the Company, a Trust or Trustee may not have
a perfected interest in such collections.
The Company believes that the transfer of the Receivables by
the Company to a Finance Subsidiary should be treated as a valid assignment,
transfer and conveyance of such Receivables. However, in the event of an
insolvency of the Company, a court, among other remedies, could attempt to
recharacterize the transfer of the Receivables by the Company to the Finance
Subsidiary as a borrowing by the Company from the Finance Subsidiary or the
related Securityholders, secured by a pledge of such Receivables. Such an
attempt, even if unsuccessful, could result in delays in payments on the
Securities. If such an attempt were successful, a court, among other remedies,
could elect to accelerate payment of the Securities and liquidate the
Receivables, with the Securityholders entitled to the then outstanding principal
amount thereof and interest thereon at the applicable Security Interest Rate to
the date of payment. Thus, the Securityholders could lose the right to future
payments of interest and might incur reinvestment losses. As more fully
described in the related Prospectus Supplement, in the event the related Issuer
is rendered insolvent, the related Trustee for a Trust, in accordance with the
Trust Agreement, may promptly sell, dispose of or otherwise liquidate the
related Receivables in a commercially reasonable manner on commercially
reasonable terms. The proceeds from any such sale, disposition or liquidation of
such Receivables will be treated as collections on such Receivables. If the
proceeds from the liquidation of the Receivables and any amount available from
any credit enhancement, if any, are not sufficient to pay Securities of the
related series in full, the amount of principal returned to such Securityholders
will be reduced and such Securityholders will incur a loss.
Obligors of the Vehicles may be entitled to assert against the
Company, the Issuer, or the Trust, if any, claims and defenses which they have
against the Company with respect to the Receivables. The Company will warrant
that no such claims or defenses have been asserted or threatened with respect to
the Receivables and that all requirements of applicable law with respect to the
Receivables have been satisfied.
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Financial Condition of the Company May Be Relevant Even if the
Intended Bankruptcy Characterization is Sustained. The Company is generally not
obligated to make any payments in respect of the Securities or the Receivables
of a specific Trust. If the Company were to cease acting as Servicer, delays in
processing payments on the Receivables and information in respect thereof could
occur and result in delays in payments to the Securityholders.
In certain circumstances, the Company will be required to
acquire Receivables from the related Trust Property with respect to which such
representations and warranties have been breached. In the event that the Company
is incapable of complying with its reacquire obligations and no other party is
obligated to perform or satisfy such obligations, Securityholders may be subject
to delays in receiving payments and suffer loss of their investment in the
Securities.
Insurance on Vehicles Will Generally Be Required at the Time
of Origination, Although No Assurance Can Be Given That Such Insurance Will Be
Maintained. The Company generally requires that the Obligor insure the related
Vehicle with a physical damage policy naming the Company or the related
originator as loss payee. Although such insurance on the Vehicle is generally
required at the time of the Contract origination, there can be no assurance that
the Obligor will maintain the appropriate coverage on the Vehicle. Prior to the
month of the policy expiration date, the Servicer will send a notice to the
Obligor requesting that the Obligor notify the Servicer as to the status of the
renewed policy. If the Servicer does not receive a response from the Obligor,
the Servicer will send a second notification and await response from the Obligor
regarding the policy status. The Company does not anticipate force placing
insurance (i.e., obtaining such insurance coverage without the consent of the
related Obligor) on the related Vehicles. The Company will represent and warrant
to the related Trustee that each Vehicle was covered by a physical damage policy
the time the related Contract was originated. However, the Company will not
represent and warrant to the related Trustee that each Vehicle is in fact
covered by a physical damage policy at the time the related Contract is
transferred to the Trustee, although the Company will represent and warrant that
the procedures described above will be followed with respect to each Vehicle. As
a consequence of the foregoing, the Vehicles may not be covered by physical
damage insurance and losses to Securityholders may result from such lack of
coverage.
Delinquencies May Vary Over Time, and Any Increase in
Delinquencies May Result in an Unanticipated Level of Loss. There can be no
assurance that the historical levels of delinquencies and losses experienced by
the Company on its respective loan and vehicle portfolio will be indicative of
the performance of the Contracts included in the related Trust Property or that
such levels will continue in the future. Delinquencies and losses could increase
significantly for various reasons, including changes in the federal income tax
laws, changes in the local, regional or national economies, the failure to
service the Receivables Pool adequately, or the transfer or relocation of the
Servicing from the Company or any Sub-Servicer to a third party.
Provisions Applicable to a Series Will Have Adverse
Consequences for the Subordinate Classes. To the extent specified in the related
Prospectus Supplement, distributions of interest and principal on one Class of
Securities of a series may be subordinated in priority of payment to interest
and principal due on other Classes of Securities of the related series.
Consequently, the risk of loss on the related Receivables pool may be
disproportionately allocated to the holders of the more subordinate Classes,
making the return on investment on such Classes highly sensitive to the loss and
delinquency levels of the related pool.
The Company is Not Corporately Liable on the Securities, and
the Only Source of Repayment Will Be the Related Trust Property. The Trust
Property will not have, nor is it permitted or expected to have, any significant
assets or sources of funds other than the related Receivables and, to the extent
provided in the related Prospectus Supplement, the related reserve account and
any other credit enhancement. The Securities represent obligations solely of the
related Issuer or debt secured by the related Trust Property, and will not
represent a recourse obligation to other assets of the Company. No Securities of
any series will be insured or guaranteed by the Company, the Servicer, or the
applicable Trustee. Consequently, holders of the Securities of any series must
rely for repayment primarily upon payments on the Receivables and, if and to the
extent available, the reserve account, if any, and any other credit enhancement,
all as specified in the related Prospectus Supplement.
Master Trusts May Pose Spread Risks, Since Additional Series
May Be Issued Without the Consent of the Holders of Prior Series. As may be
described in the related Prospectus Supplement, a Master Trust may issue from
time to time more than one series. While the terms of any additional series will
be specified in a supplement to the related Master Trust Agreement, the
provisions of such supplement and, therefore, the terms of any additional
series, will not be subject to prior review by, or consent of, holders of the
Securities of any series
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previously issued by such Master Trust. Such terms may include methods for
determining applicable investor percentages and allocating collections,
provisions creating different or additional security or credit enhancements and
any other provisions which are made applicable only to such series. The
obligation of the related Trustee to issue any new series is subject to the
condition, among others, that such issuance will not result in any Rating Agency
reducing or withdrawing its rating of the Securities of any outstanding series
(any such reduction or withdrawal is referred to herein as a "Ratings Effect").
There can be no assurance, however, that the terms of any series might not have
an impact on the timing or amount of payments received by a Securityholder of
another series issued by the same Master Trust. See "Description of the
Securities--Master Trusts."
Book-Entry Registration May Further Reduce Liquidity and May
Lead to Payment Delays. Issuance of the Securities in book-entry form may reduce
the liquidity of such Securities in the secondary trading market since investors
may be unwilling to purchase Securities for which they cannot obtain definitive
physical securities representing such Securityholders' interests, except in
certain circumstances described in the related Prospectus Supplement.
Since transactions in Securities will, in most cases, be able
to be effected only through DTC, direct or indirect participants in DTC's
book-entry system ("Direct Participants" or "Indirect Participants") or certain
banks, the ability of a Securityholder to pledge a Security to persons or
entities that do not participate in the DTC system, or otherwise to take actions
in respect to such Securities, may be limited due to lack of a physical security
representing the Securities.
Securityholders may experience some delay in their receipt of
distributions of interest on and principal of the Securities since distributions
may be required to be forwarded by the Trustee to DTC and, in such case, DTC
will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable class of Securityholders either directly or indirectly through
Indirect Participants. See "Description of the Securities--Book Entry
Registration."
Security Rating May Be Highly Dependent on the Ratings of an
External Credit Enhancer. The rating of Securities credit enhanced by a letter
of credit, financial guaranty insurance policy, reserve fund, credit or
liquidity facilities, cash deposits or other forms of credit enhancement
(collectively "Credit Enhancement") will depend primarily on the
creditworthiness of the issuer of such external Credit Enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer to honor its obligations pursuant to any
such Credit Enhancement below the rating initially given to the Securities would
likely result in a reduction in the rating of the Securities.
The Rate of Payment on the Securities is Unpredictable, and
May Be Highly Volatile; if the Actual Payment Rate Deviates from an Investor's
Expectations, Such Investor's Yield May Be Reduced Substantially. Because the
rate of payment of principal on the Securities will depend, among other things,
on the rate of payment on the related Contracts, the rate of payment of
principal on the Securities cannot be predicted. Payments on the Contracts will
include scheduled payments as well as partial and full prepayments (to the
extent not replaced with substitute Contracts), payments upon the liquidation of
Defaulted Contracts, payments upon acquisitions by the Servicer or the Company
of Contracts from the related Trust Property on account of a breach of certain
representations and warranties in the related Trust Agreement, payments upon an
optional acquisition by the Servicer or the Company of Contracts from the
related Trust Property (any such voluntary or involuntary prepayment or other
early payment of a Contract, a "Prepayment"), and residual payments. The rate of
early terminations of Contracts due to Prepayments and defaults may be
influenced by a variety of economic and other factors, including, among others,
obsolescence, then current economic conditions and tax considerations. The risk
of reinvesting distributions of the principal of the Securities will be borne by
the Securityholders. The yield to maturity on Strip Securities or Securities
purchased at premiums or discounts to par will be extremely sensitive to the
rate of Prepayments on the related Receivables. In addition, the yield to
maturity on certain other types of classes of Securities, including Strip
Securities, Accrual Securities or certain other Classes in a series including
more than one Class of Securities, may be relatively more sensitive to the rate
of prepayment of the related Contracts than other Classes of Securities.
The rate of Prepayments of Contracts cannot be predicted and
is influenced by a wide variety of economic, social, and other factors,
including prevailing interest rates, the availability of alternate financing and
local and regional economic conditions. Therefore, no assurance can be given as
to the level of Prepayments that a Trust will experience.
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Securityholders should consider, in the case of Securities
purchased at a discount, the risk that a slower than anticipated rate of
Prepayments on the Receivables could result in an actual yield that is less than
the anticipated yield and, in the case of any Securities purchased at a premium,
the risk that a faster than anticipated rate of Prepayments on the Receivables
could result in an actual yield that is less than the anticipated yield.
Limitations on Interest Payments and Repossessions May Result
in Reduced and/or Delayed Payments. Generally, under the terms of the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"), or similar
state legislation, an Obligor who enters military service after the origination
of the related Receivable (including an Obligor who is a member of the National
Guard or is in reserve status at the time of the origination of the Receivable
and is later called to active duty) may not be charged interest (including fees
and charges) above an annual rate of 6% during the period of such Obligor's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such action could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Receivables. In addition, the Relief Act
imposes limitations that would impair the ability of the Servicer to foreclose
(repossess and sell at auction) on an affected Receivable during the Obligor's
period of active duty status. Thus, in the event that such a Receivable goes
into default, there may be delays and losses occasioned by the inability of the
Servicer to realize upon the Financed Vehicle in a timely fashion.
THE TRUST PROPERTY
The Trust Property will include, as specified in the related
Prospectus Supplement, (i) a pool of Receivables, (ii) all monies (including
accrued interest) due thereunder on or after the applicable Cut-off Date, (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 related Trust
Agreement, as described below and in the related Prospectus Supplement, (iv) the
security interests, if any, in the Vehicles relating to such pool of
Receivables, (v) the right to proceeds from claims on physical damage policies,
if any, covering such Vehicles or the related Obligors, as the case may be, (vi)
the proceeds of any repossessed Vehicles related to such pool of Receivables,
(vii) the rights of the Company under the related agreements pursuant to which
the Company acquired the Receivables, directly or indirectly, from unaffiliated
originators or dealers ("Receivables Acquisition Agreement") and (viii) interest
earned on certain short-term investments held in such Trust Property, unless the
related Prospectus Supplement specifies that such earnings may be paid to the
Servicer or the Company. The Trust Property will also include, if so specified
in the related Prospectus Supplement, monies on deposit in a Pre-Funding
Account, which will be used by the Trustee to acquire or receive a security
interest in Additional Receivables from time to time during the Pre-Funding
Period specified in the related Prospectus Supplement. See "Description of the
Securities--Forward Commitments; Pre-Funding." In addition, to the extent
specified in the related Prospectus Supplement, some combination of Credit
Enhancements may be issued to or held by the Trustee on behalf of the related
Trust for the benefit of the holders of one or more classes of Securities.
The Receivables comprising the Trust Property will, as
specifically described in the related Prospectus Supplement, be either (i)
originated by the Company, (ii) originated by various manufacturers and acquired
by the Company, (iii) originated by various Dealers and acquired by the Company
or (iv) acquired by the Company, directly or indirectly, from unaffiliated
originators or owners of Receivables.
The Trust Property will include Receivables with respect to
which the related Contract or the related Vehicles is subject to federal or
state registration or titling requirements.
The Receivables included in the Trust Property will be
selected from those Receivables held by the Company based on the criteria
specified in the applicable Trust Agreement and described herein under "The
Receivables" and "Advanta's Automobile Financing Program" and in the related
Prospectus Supplement.
With respect to each series of Securities, on or prior to the
Closing Date on which the Securities are delivered to Securityholders, the
Company or a Finance Subsidiary will form a Trust by either (i) transferring the
related Receivables into a Trust pursuant to a Trust Agreement between the
Company or a Finance Subsidiary and the Trustee or (ii) entering into an
Indenture with an Indenture Trustee, relating to the issuance of such
Securities, secured by the related Receivables.
The Receivables comprising the Trust Property will generally
have been originated by the Company or acquired by the Company, directly or
indirectly, from unaffiliated originators in accordance with the
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Company's specified underwriting criteria. The underwriting criteria applicable
to the Receivables included in any Trust Property will be described in all
material respects in the related Prospectus Supplement.
THE ISSUERS
With respect to each series of Securities, the Company will
either establish a separate Trust that will issue such Securities, or the
Company will form a Finance Subsidiary that will issue such Securities, in each
case pursuant to the related Trust Agreement. For purposes of this Prospectus
and the related Prospectus Supplement, the Finance Subsidiary, if the Finance
Subsidiary issues the related Securities, or the related Trust, if a Trust
issues the related Securities, shall be referred to as the "Issuer" with respect
to such Securities.
Upon the issuance of the Securities of a given series, the
proceeds from such issuance will be generally used by the Company to purchase
Receivables. The Servicer will service the related Receivables pursuant to the
applicable Servicing Agreement, and will be compensated for acting as the
Servicer. To facilitate servicing and to minimize administrative burden and
expense, the Servicer may be appointed custodian for the related Receivables by
each Trustee and the Company, as may be set forth in the related Prospectus
Supplement.
If the protection provided to the Securityholders of a given
class by the subordination of another Class of Securities of such series and by
the availability of the funds in the reserve account, if any, or any other
Credit Enhancement for such series is insufficient, the Issuer must rely solely
on the payments from the Obligors on the related Contracts, and the proceeds
from the sale of Vehicles which secure the Defaulted Contracts. In such event,
the factors described above under "Risk Factors--Ownership of Contracts will not
necessarily be vested in the related Trustee, with the result that delays and
disruptions in payments may occur", "Risk Factors--Security Interests in both
the Receivables and the underlying Vehicles may not be valid under certain
circumstances" and "Risk Factors--Restrictions on Recoveries may result in the
related Issuer receiving substantially less than the face amount of the related
Contract" and described below under "Certain Legal Aspects of the Receivables"
may affect such Issuer's ability to realize on the collateral securing such
Contracts, and thus may reduce the proceeds to be distributed to the
Securityholders of such series.
THE RECEIVABLES
Receivables Pools
Information with respect to the Receivables in the related
Trust Property will be set forth in the related Prospectus Supplement,
including, to the extent appropriate, the composition of such Receivables and
the distribution of such Receivables by geographic concentration, payment
frequency and current principal balance as of the applicable Cut-off Date.
The Contracts
As specified in the related Prospectus Supplement, the
Contracts may consist of Rule of 78s Contracts, Actuarial Contracts or Simple
Interest Contracts. Generally, "Rule of 78s Contracts" provide for fixed level
monthly payments which will amortize the full amount of the Contract over its
term. The Rule of 78s Contracts provide for allocation of payments according to
the "sum of periodic balances" or "sum of monthly payments" method (the "Rule of
78s"). Each Rule of 78s Contract provides for the payment by the Obligor of a
specified total amount of payments, payable in monthly installments on the
related due date, which total represents the principal amount financed and
finance charges in an amount calculated on the basis of a stated annual
percentage rate ("APR") for the term of such Contract. The rate at which such
amount of finance charges is earned and, correspondingly, the amount of each
fixed monthly payment allocated to reduction of the outstanding principal
balance of the related Contract are calculated in accordance with the Rule of
78s. Under the Rule of 78s, the portion of each payment allocable to interest is
higher during the early months of the term of a Contract and lower during later
months than that under a constant yield method for allocating payments between
interest and principal. Notwithstanding the foregoing, as specified in the
related Prospectus Supplement, all payments received by the Servicer on or in
respect of the Rule of 78s Contracts may be allocated on an actuarial or simple
interest basis so that
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such payments may be accounted for, and presented on a basis consistent with,
the payments on the Securities, which will in no case be based on the Rule 78s'
method.
An "Actuarial Contract" provides for the amortization of the
Contract over a series of fixed level monthly payments. Each Actuarial Contract
provides for the payment by the Obligor of a specified total number of payments,
payable in monthly installments on the related due date, which total represents
the principal amount financed and finance charges in an amount calculated on the
basis of a stated APR for the term of such Contract. The rate at which such
amount of finance charges is earned and, correspondingly, the amount of each
fixed monthly payment allocated to reduction of the outstanding principal
balance of the related Contract are calculated in accordance with the actuarial
method. Each scheduled monthly payment is deemed to consist of an amount of
interest equal to one-twelfth of the stated APR of the Contract multiplied by
the outstanding principal balance of the Contract and an amount of principal
equal to the remainder of such scheduled monthly payment.
"Simple Interest Contracts" provide for the amortization of
the amount financed under the receivable over a series of fixed level monthly
payments. However, unlike the monthly payment under Rule of 78s Contracts or the
Actuarial Contracts, each monthly payment consists of an installment of interest
which is calculated on the basis of the outstanding principal balance of the
receivable multiplied by the stated APR and further multiplied by the period
elapsed (as a fraction of a calendar year) since the preceding payment of
interest was made. As payments are received under a Simple Interest Contract,
the amount received is applied first to interest accrued to the date of payment
and the balance is applied to reduce the unpaid principal balance. Accordingly,
if an Obligor pays a fixed monthly installment before its scheduled due date,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. Conversely, if an
Obligor pays a fixed monthly installment after its scheduled due date, the
portion of the payment allocable to interest for the period since the preceding
payment was made will be greater than it would have been had the payment been
made as scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly less. In either case, the Obligor pays
a fixed monthly installment until the final scheduled payment date, at which
time the amount of the final installment is increased or decreased as necessary
to repay the then outstanding principal balance.
If an Obligor elects to prepay a Rule of 78s Contract in full,
it is entitled to a rebate of the portion of the outstanding balance then due
and payable attributable to unearned finance charges. If a Simple Interest
Contract is prepaid, rather than receive a rebate, the Obligor is required to
pay interest only to the date of prepayment. The amount of a rebate under a Rule
of 78s Contract calculated in accordance with the Rule of 78s will always be
less than had such rebate been calculated on an actuarial basis and generally
will be less than the remaining scheduled payments of interest that would be due
under a Simple Interest Contract for which all payments were made on schedule.
Distributions to Security holders may not be affected by Rule of 78s rebates
under the Rule of 78s Contract because pursuant to the related Prospectus
Supplement such distributions may be determined using the actuarial or simple
interest method.
Delinquencies, Repossessions, and Losses
Certain information relating to the Company's delinquency,
repossession and loss experience with respect to Contracts it has originated or
acquired will be set forth in each Prospectus Supplement. This information may
include, among other things, the experience with respect to all Contracts in the
Company's portfolio during certain specified periods. As of the Cut-Off Date
with respect to any issuance of Securities, the related Trust Property will not
contain more than 5% (by aggregate unpaid principal balance) of Contracts which
are 30-59 days delinquent. This information may include, among other things, the
experience with respect to all Contracts in the Company's portfolio during
certain specified periods. There can be no assurance that the delinquency,
repossession and loss experience on any Trust Property will be comparable to the
Company's prior experience.
Maturity and Prepayment Considerations
As more fully described in the related Prospectus Supplement,
if a Contract permits a Prepayment, such payment, together with accelerated
payments resulting from defaults, will shorten the weighted average life of the
related pool of Receivables and the weighted average life of the related
Securities. The rate of Prepayments on the Receivables may be influenced by a
variety of factors, such as increasing or declining rates of interest, the rate
of
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inflation, an improvement in the related Obligors' credit standing, and
availability of alternative sources of financing. In addition, under certain
circumstances, the Company will be obligated to acquire Receivables from the
related Trust Property pursuant to the applicable Trust Agreement as a result of
breaches of representations and warranties. Any reinvestment risks resulting
from a faster or slower amortization of the related Securities which results
from Prepayments will be borne entirely by the related Securityholders.
The related Prospectus Supplement will set forth certain
additional information with respect to the maturity and prepayment
considerations applicable to a particular pool of Receivables and the related
series of Securities, together with a description of any applicable prepayment
penalties.
ADVANTA'S AUTOMOBILE FINANCING PROGRAM
Overview
Advanta Auto Finance Corporation ("Advanta" or the "Company"),
a wholly-owned subsidiary of Advanta Mortgage Holding Company, was established
as an automotive finance company specializing in subprime automobile financing.
Advanta is primarily engaged in the indirect financing of automotive purchases
by consumers who have experienced credit problems, who are attempting to
re-establish credit, who may not yet have sufficient credit history or who do
not wish to deal with the traditional sources of financing (i.e., banks).
Typical consumer characteristics include: customer has
multiple delinquencies reported on his credit record, consumer's credit history
includes judgments, charge-offs, bankruptcy or repossession, consumer
delinquency due to health or other reasons, divorce or unemployment, consumer
either a renter or homeowner or living with relatives, consumer's request for
financing turned down by banks and captives and underlying collateral either a
new or used vehicle.
Advanta offers an array of products to existing originators in
order to establish long-term relationships. Advanta's products are marketed to
existing originators through regional business development managers. Advanta
purchases the closed, subprime automobile finance Contracts, which are
originated by the existing originators and subsequently assigned, directly or
indirectly, to Advanta, on a flow and pool basis.
Product determination criteria typically includes: the type of
collateral (i.e., year, age and mileage), time at residence, time at employer,
amount of gross monthly income, amount of selling price, trade-in value and
advance rate via the National Automobile Dealers Association Book ("NADA"), or
the Dealer's Invoice, debt-to-income ratio, car payment-to-income ratio, credit
bureau risk score and prior or current automobile credit.
Underwriting
Advanta has policies and procedures in place to address the
controls needed to analyze prospective credit applicants. Such procedures
include verifying and evaluating the credit bureau report as well as other
credit information obtained by the existing originator and the applicant.
Automobile finance Contracts which are delivered on a flow
basis are generally underwritten in accordance with Advanta's established
underwriting guidelines. These guidelines are reviewed and revised continuously
based upon opportunities and prevailing conditions in the subprime automobile
market, as well as the expected market for the resulting securities.
For Contracts purchased on a flow basis, the existing
originators are trained to underwrite to Advanta's underwriting criteria. As a
result, the Contracts purchased generally comply with established guidelines.
Any exceptions must have compensating factors and must be approved by the
appropriate level of authority at Advanta prior to funding. During the
underwriting process for flow Contracts, the underwriter assesses both the
borrower's ability and willingness to repay the obligation as well as the
underlying vehicle collateral.
All Contracts are secured by either a new or used vehicle.
Vehicles financed must have general market acceptance. Advanta Auto Finance uses
the Dealer's Invoice, NADA, Kelley Blue Book and Vintek appraisals to establish
vehicles values. Valuations must be on an "as-is" basis.
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Eligible Contract collateral includes new and used cars, vans
and light trucks from automobile manufacturers actively engaged in new car sales
in the United States. Typical Contract characteristics may include: vehicle age
ranging from current year to five years of age, minimum loan amount of $5,000,
maximum loan amount of $30,000, mileage at the end of the contract term cannot
exceed 110,000 miles, maximum term of 60 months, minimum downpayment of 10% of
vehicle selling price, maximum advance rate of 110% of NADA trade, Kelley
wholesale or the Dealer's Invoice plus extras, debt to income ratio not to
exceed 45% and minimum credit bureau risk scores. A credit report is required
for all flow applicants. The credit report can be generated by either Equifax
(BEACON score), TransUnion (EMPIRICA score) or TRW (FICO score).
The Company's Contract flow underwriting process includes the
evaluation of residence stability, employment history, credit history, ability
to pay, amount of income, debt ratio, credit bureau score and the value of the
collateral. As a result, the existing originator's applications, which are
written on the existing originator's documents, are underwritten to Advanta's
established underwriting guidelines which are generally consistent for the auto
finance contracts delivered on a flow basis. For the flow originations, the
Company generally funds the existing originator's closed contracts within three
months of origination.
Contracts which are delivered on a pool basis may be
originated by a variety of originators under differing underwriting guidelines.
When reviewing potential pool acquisitions, the existing originator's
underwriting guidelines are reviewed and either deemed acceptable or
unacceptable to the Company. If deemed acceptable, Advanta will generally cause
the Contracts acquired on a pool basis to be reviewed on a sample basis. Such
review may be performed by Advanta or by a third party acting at the direction
of Advanta. In addition to reviewing the underwriting guidelines, the Company
will generally request the following contract-specific information: the vehicle
identification number, the type of Contract (i.e., Rule of 78s, pre-computed,
actuarial, Simple Interest, Balloon, fixed or adjustable rate), the vehicle
make, model and year, the vehicle mileage, the debt-to-income ratio, the credit
bureau risk score, the monthly income, the time at current/prior residence, the
time at current/prior employer and the downpayment percentage. Pool originators
are typically reviewed to verify that all applicable state laws including
required licensing are adhered to. A quality control compliance review as well
as an operational review may also be performed.
Generally, each loan package must contain the original note
agreement or retail installment sales contract, the title application or
Division of Motor Vehicles lien receipt and proof of comprehensive/collision
insurance.
Originators
Advanta purchases automobile finance contracts nationwide
through originators. Originators may include, but are not limited to, brokers,
small/large regional/national banks, finance companies and credit unions as well
as other sources of subprime automobile financing.
Each originator must be approved by the appropriate level of
authority at Advanta prior to Advanta purchasing Contracts from them. Documents
generally required to be submitted to Advanta include: an executed standard
purchase agreement, year-end financials, a list of major trade and finance
references and a list of owners, partners, shareholders and officers. Moreover,
the minimum net worth requirement for each originator is approximately $250,000.
Prospective originators are subject to extensive reviews by
Advanta. The reviews allow Advanta to ascertain whether or not the prospective
originator meets Advanta's requirements. Specifically, Advanta will analyze the
potential originator's financial statements, determine whether they possess
adequate net worth and determine whether they conduct business in accordance
with Advanta's established standards. Before purchasing Contracts from a
potential originator, Advanta will require detailed information concerning the
originator's contracts and agreements. Generally this documentation includes
retail installment sales contracts for each state in which the originator
conducts business, dealer agreements and marketing materials for pertinent
programs. Additionally, the originator's outside counsel will normally assist in
the process of drafting purchase agreements, providing sale opinions, obtaining
lien perfection and filing UCC's. Advanta can terminate an originator
relationship at any time.
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POOL FACTORS
The "Pool Factor" for each Class of Securities will be a
seven-digit decimal, which the Servicer will compute prior to each distribution
with respect to such Class of Securities, indicating the remaining outstanding
principal balance of such Class of Securities as of the applicable Payment Date,
as a fraction of the initial outstanding principal balance of such Class of
Securities. Each Pool Factor will be initially 1.0000000, and thereafter will
decline to reflect reductions in the outstanding principal balance of the
applicable Class of Securities. A Securityholder's portion of the aggregate
outstanding principal balance of the related Class of Securities is the product
of (i) the original aggregate purchase price of such Securityholder's Securities
and (ii) the applicable Pool Factor.
As more specifically described in the related Prospectus
Supplement with respect to each series of Securities, the related
Securityholders of record will receive reports on or about each Payment Date
concerning the payments received on the Receivables, the Pool Balance (as such
term is defined in the related Prospectus Supplement, the "Pool Balance"), each
Pool Factor and various other items of information. In addition, Securityholders
of record during any calendar year will be furnished information for tax
reporting purposes not later than the latest date permitted by law.
USE OF PROCEEDS
Except as provided in the related Prospectus Supplement, the
proceeds from the sale of the Securities of a given series will be used by the
Company for the acquisition of the related Receivables, for general corporate
purposes, including, but not limited to, the purchase of additional Receivables
from Dealers, repayment of indebtedness and general working capital purposes.
The Company expects that it will make additional transfers of Receivables to the
Trust from time to time, but the timing and amount of any such additional
transfers will be dependent upon a number of factors, including the volume of
Contracts originated by the Company, prevailing interest rates, availability of
funds and general market conditions.
THE COMPANY AND THE SERVICER
Advanta is a wholly-owned subsidiary of Advanta Mortgage
Holding Company. Advanta was incorporated in Nevada on October 20, 1995. Advanta
purchases and causes to be serviced automobile loans which are originated and
assigned to Advanta by automobile dealers. Advanta's executive offices are
located at 500 Office Center Drive, Suite 400, Fort Washington, Pennsylvania
19034; telephone (215) 444-4200.
THE TRUSTEE
The Trustee for each series of Securities will be specified in
the related Prospectus Supplement. The Trustee's liability in connection with
the issuance and sale of the related Securities is limited solely to the express
obligations of such Trustee set forth in the related Trust Agreement.
With respect to each series of Securities, the procedures for
the resignation or removal of the Trustee and the appointment of a successor
Trustee will be specified in the related Prospectus Supplement.
DESCRIPTION OF THE SECURITIES
General
The Securities will be issued in series. Each series of
Securities (or, in certain instances, two or more series of Securities) will be
issued pursuant to a Trust Agreement. The following summaries (together with
additional summaries under "The Trust Agreement" below) describe all material
terms and provisions relating to the Securities common to each Trust Agreement.
The summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the Trust
Agreement for the related Securities and the related Prospectus Supplement.
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All of the Securities offered pursuant to this Prospectus and
the related Prospectus Supplement will be rated in one of the four highest
rating categories by one or more Rating Agencies.
The Securities will generally be issued in the form of debt
instruments, having a principal balance and a specified Interest Rate. The
Securities may either represent beneficial ownership interests in the related
Receivables held by the related Trust or debt secured by certain assets of the
related Issuer.
Each series or Class of Securities offered pursuant to this
Prospectus may have a different Interest Rate, which may be a fixed or
adjustable interest rate. The related Prospectus Supplement will specify the
Interest Rate for each series or Class of Securities described therein, or the
initial interest rate and the method for determining subsequent changes to the
Interest Rate, if applicable.
A series may include one or more Classes of Strip Securities
entitled (i) to principal distributions, with disproportionate, nominal or no
interest distributions, or (ii) to interest distributions, with
disproportionate, nominal or no principal distributions. In addition, a series
of Securities may include two or more Classes of Securities that differ as to
timing, sequential order, priority of payment, Interest Rate or amount of
distribution of principal or interest or both, or as to which distributions of
principal or interest or both on any Class may be made upon the occurrence of
specified events, in accordance with a schedule or formula, or on the basis of
collections from designated portions of the related pool of Receivables. Any
such series may include one or more Classes of Accrual Securities, as to which
certain accrued interest will not be distributed but rather will be added to the
principal balance (or nominal balance, in the case of Accrual Securities which
are also Strip Securities) thereof on each Payment Date, as hereinafter defined,
or in the manner described in the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series
may include one or more other Classes of Senior Securities that are senior to
one or more other Classes of Subordinate Securities in respect of certain
distributions of principal and interest and allocations of losses on
Receivables.
In addition, certain Classes of Senior (or Subordinate)
Securities may be senior to other Classes of Senior (or Subordinate) Securities
in respect of such distributions or losses.
General Payment Terms of Securities
As provided in the related Trust Agreement and as described in
the related Prospectus Supplement, Securityholders will be entitled to receive
payments on their Securities on the specified Payment Dates. Payment Dates with
respect to the Securities will occur monthly, quarterly or semi-annually, as
described in the related Prospectus Supplement.
The related Prospectus Supplement will describe the Record
Date preceding such Payment Date, as of which the Trustee or its paying agent
will fix the identity of the Securityholders for the purpose of receiving
payments on the next succeeding Payment Date. As more fully described in the
related Prospectus Supplement, the Payment Date will be a specified date in each
month, e.g., the fifteenth or twenty-fifth day of each month (or, in the case of
quarterly-pay Securities, a specified date in every third month; and in the case
of semi-annual pay Securities, a specified date in every sixth month) and the
Record Date will either be the close of business as of the last day of the
calendar month that precedes the calendar month in which such Payment Date
occurs, or the close of business on the business day preceding such Payment
Date.
Each Trust Agreement will describe a Remittance Period
preceding each Payment Date (for example, in the case of monthly-pay Securities,
the calendar month preceding the month in which a Payment Date occurs). As more
fully provided in the related Prospectus Supplement, collections received on or
with respect to the related Receivables held by a Trust during a Remittance
Period will be required to be remitted by the Servicer to the related Trustee
prior to the related Payment Date and will be used to fund payments to
Securityholders on such Payment Date. As may be described in the related
Prospectus Supplement, the related Trust Agreement may provide that all or a
portion of the payments collected on or with respect to the related Receivables
may be applied by the related Trustee to the acquisition of additional
Receivables during a specified period (rather than be used to fund payments of
principal to Securityholders during such period) with the result that the
related Securities will possess an interest-only period, also commonly referred
to as a revolving period, which will be followed by an amortization period. Any
such interest only or revolving period may, upon the occurrence of certain
events to be described in the related Prospectus Supplement, terminate prior to
the end of the specified period and result in the earlier than expected
amortization of the related Securities.
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In addition, and as may be described in the related Prospectus
Supplement, the related Trust Agreement may provide that all or a portion of
such collected payments may be retained by the Trustee (and held in certain
temporary investments, including Receivables) for a specified period prior to
being used to fund payments of principal to Securityholders.
Such retention and temporary investment by the Trustee of such
collected payments may be required by the related Trust Agreement for the
purposes of (a) slowing the amortization rate of the related Securities relative
to the installment payment schedule of the related Receivables, or (b)
attempting to match the amortization rate of the related Securities to an
amortization schedule established at the time such Securities are issued. Any
such feature applicable to any Securities may terminate upon the occurrence of
events to be described in the related Prospectus Supplement, resulting in
distributions to the specified Securityholders and an acceleration of the
amortization of such Securities. Such events which may result in an early
amortization event will generally consist of (i) the Company's inability to
deliver sufficient, additional Receivables to maintain the revolving period,
(ii) an event of default by the Company or the Servicer (i.e., the Company's or
the Servicer's failure to perform their respective duties under the related
Trust Agreement) and (iii) the occurrence of a bankruptcy event with respect to
the Company or the Servicer.
Neither the Securities nor the underlying Receivables will be
guaranteed or insured by any governmental agency or instrumentality or the
Company, the Servicer, any Trustee or any of their respective affiliates unless
specifically set forth in the related Prospectus Supplement.
As may be described in the related Prospectus Supplement,
Securities of each series covered by a particular Trust Agreement will either
evidence specified beneficial ownership interests in the Trust Property or
represent debt secured by the related Trust Property.
Master Trusts
As may be described in the related Prospectus Supplement, each
Trust Agreement may provide that, pursuant to any one or more supplements
thereto, the Company may direct the related Trustee to issue from time to time
new series subject to the conditions described below (each such issuance a
"Master Trust New Issuance"). Each Master Trust New Issuance will have the
effect of decreasing the Residual Interest in the related Master Trust. Under
each such Master Trust Agreement, the Company may designate, with respect to any
newly issued series: (i) its name or designation; (ii) its initial principal
amount (or method for calculating such amount); (iii) its Interest Rate (or
formula for the determination thereof); (iv) the Payment Dates and the date or
dates from which interest shall accrue; (v) the method for allocating
collections to Securityholders of such series; (vi) any bank accounts to be used
by such series and the terms governing the operation of any such bank accounts;
(vii) the percentage used to calculate monthly servicing fees; (viii) the
provider and terms of any form of Credit Enhancement with respect thereto; (ix)
the terms on which the Securities of such series may be repurchased or
remarketed to other investors; (x) the number of Classes of Securities of such
series, and if such series consists of more than one Class, the rights and
priorities of each such Class; (xi) the extent to which the Securities of such
series will be issuable in book-entry form; (xii) the priority of such series
with respect to any other series; and (xiii) any other relevant terms. None of
the Company, the Servicer, the related Trustee or any Master Trust is required
or intends to obtain the consent of any Securityholder of any outstanding series
to issue any additional series.
Each Master Trust Agreement provides that the Company may
designate terms such that each Master Trust New Issuance has an amortization
period which may have a different length and begin on a different date than such
periods for any series previously issued by the related Master Trust and then
outstanding. Moreover, each Master Trust New Issuance may have the benefits of
Credit Enhancements issued by enhancement providers different from the providers
of the Credit Enhancement, if any, with respect to any series previously issued
by the related Master Trust and then outstanding. Under each Master Trust
Agreement, the related Trustee shall hold any such Credit Enhancement only on
behalf of the Securityholders to which such Credit Enhancement relates. The
Company will have the option under each Master Trust Agreement to vary among
series the terms upon which a series may be repurchased by the Issuer or
remarketed to other investors. As more fully described in a related Prospectus
Supplement, there is no limit to the number of Master Trust New Issuances that
the Company may cause under a Master Trust Agreement. Each Master Trust will
terminate only as provided in the related Master Trust Agreement. There can be
no assurance that the terms of any Master Trust New Issuance might not have an
impact on the timing and amount of payments received by Securityholders of
another series issued by the same Master Trust.
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Under each Master Trust Agreement and pursuant to a related
supplement, a Master Trust New Issuance may only occur upon the satisfaction of
certain conditions provided in each such Master Trust Agreement. The obligation
of the related Trustee to authenticate the Securities of any such Master Trust
New Issuance and to execute and deliver the supplement to the related Master
Trust Agreement is subject to the satisfaction of the following conditions: (a)
on or before the date upon which the Master Trust New Issuance is to occur, the
Company shall have given the related Trustee, the Servicer, the Rating Agency
and certain related providers of Credit Enhancement, if any, written notice of
such Master Trust New Issuance and the date upon which the Master Trust New
Issuance is to occur; (b) the Company shall have delivered to the related
Trustee a supplement to the related Master Trust Agreement, in form satisfactory
to such Trustee, executed by each party to the related Master Trust Agreement
other than such Trustee; (c) the Company shall have delivered to the related
Trustee any related Credit Enhancement agreement; (d) the related Trustee shall
have received confirmation from the Rating Agency that such Master Trust New
Issuance will not result in any Rating Agency reducing or withdrawing its rating
with respect to any other series or Class of such Trust (any such reduction or
withdrawal is referred to herein as a "Ratings Effect"); (e) the Company shall
have delivered to the related Trustee, the Rating Agency and certain providers
of Credit Enhancement, if any, an opinion of counsel acceptable to the related
Trustee that for federal income tax purposes (i) following such Master Trust New
Issuance the related Master Trust will not be deemed to be an association (or
publicly traded partnership) taxable as a corporation, (ii) such Master Trust
New Issuance will not affect the tax characterization as debt of Securities of
any outstanding series or Class issued by such Master Trust that were
characterized as debt at the time of their issuance and (iii) such Master Trust
New Issuance will not cause or constitute an event in which gain or loss would
be recognized by any Securityholders or the related Master Trust; and (f) the
delivery of officers' certificates by the Company confirming the satisfaction of
such conditions to such Master Trust New Issuance. Upon satisfaction of the
above conditions, the related Trustee shall execute the supplement to the
related Master Trust Agreement and issue the Securities of such new series.
Indexed Securities
To the extent so specified in any Prospectus Supplement, any
class of Securities of a given series may consist of Securities ("Indexed
Securities") in which the principal amount payable at the final scheduled
Payment Date (the "Indexed Principal Amount") is determined by reference to a
measure (the "Index") which will be related to (i) the difference in the rate of
exchange between United States dollars and a currency or composite currency (the
"Indexed Currency") specified in the applicable Prospectus Supplement (such
Indexed Securities, "Currency Indexed Securities"); (ii) the difference in the
price of a specified commodity (the "Indexed Commodity") on specified dates
(such Indexed Securities, "Commodity Indexed Securities"); (iii) the difference
in the level of a specified stock index (the "Stock Index"), which may be based
on U.S. or foreign stocks, on specified dates (such Indexed Securities, "Stock
Indexed Securities"); or (iv) such other objective price or economic measures as
are described in the applicable Prospectus Supplement. The manner of determining
the Indexed Principal Amount of an Indexed Security and historical and other
information concerning the Indexed Currency, the Indexed Commodity, the Stock
Index (each, an "Index") or other price or economic measures used in such
determination will be set forth in the applicable Prospectus Supplement,
together with information concerning tax consequences to the holders of such
Indexed Securities.
Depending upon the Index used, the yield to maturity of an
Indexed Security may be highly volatile. Such yield will be a function of the
performance of the Index, and not necessarily of the level of interest rates
generally, as will be the case with Securities offered hereby which are not
Indexed Securities. Indexed Securities, to the extent offered, are likely to be
appropriate investments only for sophisticated investors which would purchase
such Securities as part of an overall hedging strategy, even though such
Securities would be secured, as a credit matter, by the related pool of
automobile loan receivables.
If the determination of the Indexed Principal Amount of an
Indexed Security is based on an Index calculated or announced by a third party
and such third party either suspends the calculation or announcement of such
Index or changes the basis upon which such Index is calculated (other than
changes consistent with policies in effect at the time such Indexed Security was
issued and permitted changes described in the applicable Prospectus Supplement),
then such Index shall be calculated for purposes of such Indexed Security by an
independent calculation agent named in the applicable Prospectus Supplement on
the same basis, and subject to the same conditions and controls, as applied to
the original third party. If for any reason such index cannot be calculated on
the same basis and subject to the same conditions and controls as applied to the
original third party, then the Indexed Principal Amount of such Indexed Security
shall be calculated in the manner set forth in the applicable Prospectus
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Supplement. Any determination of such independent calculation agent shall in the
absence of manifest error be binding on all parties.
Interest on an Indexed Security will be payable based on the
amount designated in the applicable Prospectus Supplement (the "Face Amount").
The applicable Prospectus Supplement will describe whether the principal amount
of the related Indexed Security, if any, that would be payable upon redemption
or repayment prior to the applicable final scheduled Distribution Date will be
the Face Amount of such Indexed Security, the Indexed Principal Amount of such
Indexed Security at the time of redemption or repayment or another amount
described in such Prospectus Supplement.
Book-Entry Registration
As may be described in the related Prospectus Supplement,
Securityholders of a given series may hold their Securities through DTC (in the
United States) or CEDEL or Euroclear (in Europe) if they are participants of
such systems, or indirectly through organizations that are participants in such
systems.
Cede, as nominee for DTC, will hold the global Securities in
respect of a given series. CEDEL and Euroclear will hold omnibus positions on
behalf of the CEDEL Participants (as defined below) and the Euroclear
Participants (as defined below) (collectively, the "Participants"),
respectively, through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective depositaries (collectively, the
"Depositaries") which in turn will hold such positions in customers' securities
accounts in the Depositaries' names on the books of DTC.
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 notes or
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations. 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").
Transfers between DTC Participants will occur in accordance
with DTC rules. Transfers between CEDEL Participants and Euroclear Participants
will occur in the ordinary way in accordance with their applicable rules and
operating procedures.
Cross-market transfers between persons holding directly or
indirectly through DTC, on the one hand, and directly or indirectly through
CEDEL Participants or Euroclear Participants, on the other, will be effected in
DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by its Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same-day funds settlement applicable to DTC. CEDEL
Participants and Euroclear Participants may not deliver instructions directly to
the Depositaries.
Because of time-zone differences, credits of securities in
CEDEL or Euroclear as a result of a transaction with a DTC Participant will be
made during the subsequent securities settlement processing, dated the business
day following the DTC settlement date, and such credits or any transactions in
such securities settled during such processing will be reported to the relevant
CEDEL Participant or Euroclear Participant on such business day. Cash received
in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
CEDEL or Euroclear cash account only as of the business day following settlement
in DTC.
The Securityholders of a given series that are not
Participants or Indirect Participants but desire to purchase, sell or otherwise
transfer ownership of, or other interests in, Securities of such series may do
so only through Participants and Indirect Participants. In addition,
Securityholders of a given series will receive all distributions of principal
and interest through the Participants who in turn will receive them from DTC.
Under a
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book-entry format, Securityholders of a given series may experience some
delay in their receipt of payments, since such payments will be forwarded by the
applicable Trustee to Cede, as nominee for DTC. DTC will forward such payments
to its Participants, which thereafter will forward them to Indirect Participants
or such Securityholders. It is anticipated that the only "Securityholder" in
respect of any series will be Cede, as nominee of DTC. Securityholders of a
given series will not be recognized as Securityholders of such series, and such
Securityholders will be permitted to exercise the rights of Securityholders of
such series 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 of a given series among Participants on whose
behalf it acts with respect to such Securities and to receive and transmit
distributions of principal of, and interest on, such Securities. Participants
and Indirect Participants with which the Securityholders of a given series have
accounts with respect to such Securities similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Securityholders of such series. Accordingly, although such
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 Participants, who in
turn act on behalf of Indirect Participants and certain banks, the ability of a
Securityholder of a given series to pledge Securities of such series 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 the lack of a physical
certificate for such Securities.
DTC will advise the Trustee in respect of each series that it
will take any action permitted to be taken by a Securityholder of the related
series only at the direction of one or more Participants to whose accounts with
DTC the Securities of such series 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.
CEDEL is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participating
organizations ("CEDEL Participants") and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. CEDEL interfaces with domestic
markets in several countries. As a professional depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to CEDEL is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a CEDEL Participant, either directly
or indirectly.
Euroclear was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 28
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by Morgan Guaranty Trust Company of New York, Brussels, Belgium office,
under contract with Euroclear Clearance System, S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the "Euroclear
Operator" (as defined below), and all Euroclear securities clearance accounts
and Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for the Euroclear System on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries and may include the Underwriters. Indirect access to
the Euroclear System is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear Participant, either directly
or indirectly.
The "Euroclear Operator" is the Belgian branch of a New York
banking corporation which is a member bank of the Federal Reserve System. As
such, it is regulated and examined by the Board of Governors of
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the Federal Reserve System and the New York State Banking Department, as well as
the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the
Euroclear Operator are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System and
applicable Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within the Euroclear System,
withdrawal of securities and cash from the Euroclear System, and receipts of
payments with respect to securities in the Euroclear System. All securities in
the Euroclear System are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants and has no record of relationship with persons holding through
Euroclear Participants.
Except as required by law, the Trustee in respect of a series
will not have any liability for any aspect of the records relating to or
payments made or account of beneficial ownership interests of the related
Securities held by Cede, as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Definitive Notes
As may be described in the related Prospectus Supplement, the
Securities will be issued in fully registered, certificated form ("Definitive
Securities") to the Securityholders of a given series or their nominees, rather
than to DTC or its nominee, only if (i) the Trustee in respect of the related
series advises in writing that DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to such Securities and
such Trustee is unable to locate a qualified successor, (ii) such Trustee, at
its option, elects to terminate the book-entry-system through DTC or (iii) after
the occurrence of an "Event of Default" under the related Indenture or a default
by the Servicer under the related Trust Agreements, Securityholders representing
at least a majority of the outstanding principal amount of such Securities
advise the applicable Trustee through DTC in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in such
Securityholders' best interest.
Upon the occurrence of any event described in the immediately
preceding paragraph, the applicable Trustee will be required to notify all such
Securityholders through Participants of the availability of Definitive
Securities. Upon surrender by DTC of the definitive certificates representing
such 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
Securities will thereafter be made by the applicable Trustee in accordance with
the procedures set forth in the related Indenture or Trust Agreement directly to
holders of Definitive Securities in whose names the Definitive Securities were
registered at the close of business on the applicable Record Date specified for
such Securities in the related Prospectus Supplement. 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 Security,
however, will be made only upon presentation and surrender of such Security at
the office or agency specified in the notice of final distribution to the
applicable Securityholders.
Definitive Securities in respect of a given series of
Securities will be transferable and exchangeable at the offices of the
applicable Trustee or of a certificate registrar named in a notice delivered to
holders of such 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 therewith.
Reports to Securityholders
With respect to each series of Securities, on or prior to each
Payment Date for such series, the Servicer or the related Trustee will forward
or cause to be forwarded to each holder of record of such class of Securities a
statement or statements with respect to the related Trust Property setting forth
the information specifically described in the related Trust Agreement which
generally will include the following information:
(i) the amount of the distribution with respect to each
class of Securities;
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(ii) the amount of such distribution allocable to
principal;
(iii) the amount of such distribution allocable to
interest;
(iv) the Pool Balance, if applicable, as of the close of
business on the last day of the related Remittance Period;
(v) the aggregate outstanding principal balance and the
Pool Factor for each Class of Securities after giving effect
to all payments reported under (ii) above on such Payment
Date;
(vi) the amount paid to the Servicer, if any, with
respect to the related Remittance Period;
(vii) the amount of the aggregate purchase amounts for
Receivables that have been reacquired, if any, for such
Remittance Period; and
(viii) the amount of coverage under any letter of credit,
financial guaranty insurance policy, reserve account or other
form of credit enhancement covering default risk as of the
close of business on the applicable Payment Date and a
description of any Credit Enhancement substituted therefor.
Each amount set forth pursuant to subclauses (i), (ii), (iii)
and (v) with respect to the Securities of any series will be expressed as a
dollar amount per $1,000 of the initial principal balance of such Securities, as
applicable. The actual information to be set forth in statements to
Securityholders of a series will be described in the related Prospectus
Supplement.
Within the prescribed period of time for tax reporting
purposes after the end of each calendar year, the applicable Trustee will
provide to the Securityholders a statement containing the amounts described in
(ii) and (iii) above for that calendar year and any other information required
by applicable tax laws, for the purpose of the Securityholders' preparation of
federal income tax returns.
Forward Commitments; Pre-Funding
An Issuer may enter into an agreement (each, a "Forward
Purchase Agreement") with the Company whereby the Company will agree to transfer
additional Receivables to such Issuer following the date on which such Issuer is
established and the related Certificates are issued. The Issuer may enter into
Forward Purchase Agreements to permit the acquisition of additional Receivables
that could not be delivered by the Company or have not formally completed the
origination process, in each case prior to the date on which the Securities are
delivered to the Securityholders (the "Closing Date"). Any Forward Purchase
Agreement will require that any Receivables so transferred to the Issuer conform
to the requirements specified in such Forward Purchase Agreement.
If a Forward Purchase Agreement is to be utilized, and unless
otherwise specified in the related Prospectus Supplement, the related Trustee
will be required to deposit in a segregated account (each, a "Pre-Funding
Account") up to 100% of the net proceeds received by the Trustee in connection
with the sale of one or more Classes of Securities of the related Series; the
additional Receivables will be transferred to the related Issuer in exchange for
money released to the Company from the related Pre-Funding Account. Each Forward
Purchase Agreement will set a specified period (the "Funding Period") during
which any such transfers must occur; a Funding Period will generally not exceed
three months, and in no event will exceed nine months. The Forward Purchase
Agreement or the related Trust Agreement will require that, if all monies
originally deposited to such Pre-Funding Account are not so used by the end of
the related Funding Period, then any remaining monies will be applied as a
mandatory prepayment of the related class or classes of Securities as specified
in the related Prospectus Supplement.
During the Funding Period the monies deposited to the
Pre-Funding Account will either (i) be held uninvested or (ii) will be invested
in cash-equivalent investments rated in one of the four highest rating
categories by at least one nationally recognized statistical rating organization
and which will either mature prior to the end of the Funding Period, or will be
drawable on demand and in any event, will not constitute the type of investment
which
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would require registration of the related Issuer as an "investment company"
under the Investment Company Act of 1940, as amended.
The related Forward Purchase Agreement and/or Trust Agreement
will set forth the standards and required characteristics for pre-funded
Receivables; such standards and required characteristics will require that the
principal statistical measurements of the final pool do not vary materially from
the final pool as it is required to appear, as disclosed in the related
Prospectus Supplement. In most cases this will also mean that the final pool
will not vary materially, in terms of its principal statistical characteristics,
from the original pool (i.e., the pool before the addition of the pre-funded
Receivables). For purposes of the foregoing, the "principal statistical
characteristics" will be the weighted average Coupon Rate, weighted average
remaining term to maturity and geographic distribution of Obligors.
The related Prospectus Supplement will present the disclosure
concerning the effect on the related Trust of the pre-funded Receivables on an
aggregate basis; i.e., the related Prospectus Supplement will describe the
characteristics of the entire pool of Receivables (on an aggregate basis)
following the addition of the pre-funded Receivables.
In the event that the Company is unable to deliver sufficient
additional, qualifying Receivables to utilize fully the Pre-Funding Account
monies, the remaining monies will be applied as a mandatory prepayment of the
related class or classes of Securities as specified in the related Prospectus
Supplement. It is expected that such monies will be so applied at par, i.e.,
with the payment of any prepayment or other "make-whole" type premium. Depending
upon the movement of interest rates from the pricing date of the related
Securities to the date of such prepayment, holders of the prepaid class(es) may
be unable to reinvest such prepaid amounts at a yield equal to (or in excess of)
the yield that they were expecting to receive on their Securities. Furthermore,
if an investor purchased such Securities at a premium prior to such prepayment,
such investor could suffer a loss due to the prepayment being made at par,
rather than at a premium.
The Company expects to disclose, in its periodic reports to be
filed with respect to each issuance of Securities, as required by the Exchange
Act, the status of any Pre-Funding Account as of each Payment Date occurring
during the related Funding Period. Following the end of any Funding Period the
Company will file, in a Current Report on Form 8-K, statistical information
regarding the additional Receivables added to the related Trust Property during
such Funding Period. Such information will be presented in a similar fashion as
the information on the original pool in the related Prospectus Supplement, and
will be presented for the pool of additional Receivables in isolation, as well
as for the entire pool of Receivables (on an aggregate basis) following the
addition of the pre-funded Receivables.
DESCRIPTION OF THE TRUST AGREEMENTS
The following summary describes certain terms of each Trust
Agreement pursuant to which a Trust Property will be created and the related
Securities in respect of such Trust Property will be issued. For purposes of
this Prospectus, the term "Trust Agreement" as used with respect to a Trust
means, collectively, and except as otherwise specified, any and all agreements
relating to the establishment of the related Trust, the servicing of the related
Receivables and the issuance of the related Securities, including without
limitation the Indenture, (i.e. pursuant to which any Notes shall be issued).
Forms of the Trust Agreement have been filed as exhibits to the Registration
Statement of which the Prospectus forms a part. The summary does not purport to
be complete. It is qualified in its entirety by reference to the provisions of
the Trust Agreements.
Origination of the Receivables by the Company
On the closing date specified with respect to any given series
of Securities (the "Closing Date"), the Company or a Finance Subsidiary will
transfer Receivables originated by the Company either to a Trust pursuant to a
Pooling Agreement, or will pledge the Company's or the Finance Subsidiary's
right, title and interests in and to such Receivables to a Trustee on behalf of
the Securityholders pursuant to an Indenture. The Company or a Finance
Subsidiary will either transfer the Receivables to a Trust pursuant to a Pooling
Agreement, or will pledge the Company's right, title and interests in and to
such Receivables to a Trustee on behalf of Securityholders pursuant to an
Indenture. The obligations of the Company or a Finance Subsidiary and the
Servicer under the related Trust Agreement include those specified below and in
the related Prospectus Supplement.
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As more fully described in the related Prospectus Supplement,
the Company will be obligated to acquire from the related Trust Property its
interest in any Receivable transferred to a Trust or pledged to a Trustee on
behalf of Securityholders if the interest of the Securityholders therein is
materially adversely affected by a breach of any representation or warranty made
by the Company with respect to such Receivable, which breach has not been cured
following the discovery by or notice to the Company of the breach. In addition,
if so specified in the related Prospectus Supplement, the Company may from time
to time reacquire certain Receivables or substitute other Receivables for such
Receivable subject to specified conditions set forth in the related Trust
Agreement.
Accounts
With respect to each series of Securities issued by a Trust,
the Servicer will establish and maintain with the applicable Trustee one or more
accounts, in the name of such Trustee on behalf of the related Securityholders,
into which all payments made on or with respect to the related Receivables will
be deposited (the "Collection Account"). The Servicer will also establish and
maintain with such Trustee separate accounts, in the name of such Trustee on
behalf of such Securityholders, in which amounts released from the Collection
Account and the reserve account or other Credit Enhancement, if any, for
distribution to such Securityholders will be deposited and from which
distributions to such Securityholders will be made (the "Distribution Account").
Any other accounts to be established with respect to a Trust,
including any reserve account, will be described in the related Prospectus
Supplement.
For any series of Securities, funds in the Collection Account,
the Distribution Account, any reserve account and other accounts identified as
such in the related Prospectus Supplement (collectively, the "Trust Accounts")
shall be invested as provided in the related Trust Agreement in Eligible
Investments. "Eligible Investments" are generally limited to investments
acceptable to the Rating Agencies as being consistent with the rating of such
Securities. Subject to the approval of the Rating Agencies and the related
Credit Enhancer, if any, Eligible Investments may include securities issued by
the Company, the Servicer or their respective affiliates or other trusts created
by the Company or its affiliates (any such Eligible Investments described in
this sentence, "Company Investment Contracts"). A Company Investment Contract
will be a funding agreement designed to allow the Company or the related
Servicer access to the money held in the related Trust Account prior to the date
on which such money is required to make distributions to the Securityholders. In
effect, the money in the Trust Accounts will be invested in a note issued by the
Company or the related Servicer. Any such Company Investment Contract would be
employed to lessen the effects of "negative carry" or "negative arbitrage" on
the structure of the Securities, i.e., to permit the reinvestment of the Trust
Account monies at a higher rate than would be obtainable through investment of
other types of Eligible Investments. The terms of any Company Investment
Contract will be described in the related Prospectus Supplement, and a copy
thereof will be filed with the Commission on a Current Report in connection with
the issuance of the related Securities.
Except as described below or in the related Prospectus
Supplement, Eligible Investments are limited to obligations or securities that
mature not later than the business day immediately preceding the related Payment
Date. However, subject to certain conditions, funds in the reserve account may
be invested in securities that will not mature prior to the date of the next
distribution and will not be sold to meet any shortfalls. Thus, the amount of
cash in any reserve account at any time may be less than the balance of such
reserve account. If the amount required to be withdrawn from any reserve account
to cover shortfalls in collections on the related Receivables exceeds the amount
of cash in such reserve account a temporary shortfall in the amounts distributed
to the related Securityholders could result, which could, in turn, increase the
average life of the Securities of such series. Except as otherwise specified in
the related Prospectus Supplement, investment earnings on funds deposited in the
applicable Trust Accounts, net of losses and investment expenses (collectively,
"Investment Earnings"), shall be deposited in the applicable Collection Account
on each Payment Date and shall be treated as collections of interest on the
related Receivables.
The Trust Accounts will be maintained as Eligible Deposit
Accounts. "Eligible Deposit Account" means either (a) a segregated account with
an Eligible Institution or (b) a segregated trust account with the corporate
trust department of a depository institution organized under the laws of the
United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank), having corporate trust
powers and acting as trustee for funds deposited in such account, so long as any
of the securities of such depository institution has a credit rating from each
Rating Agency in one of its generic rating categories which signifies investment
grade. "Eligible Institution" means, with respect to a Trust, (a) the corporate
trust department of the
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related Indenture Trustee or the related Trustee, as applicable, or (b) a
depository institution organized under the laws of the United States of America
or any one of the states thereof or the District of Columbia (or any domestic
branch of a foreign bank), which (i) (A) has either (w) a long-term unsecured
debt rating acceptable to the Rating Agencies or (x) a short-term unsecured debt
rating or certificate of deposit rating acceptable to the Rating Agencies or (B)
the parent corporation of which has either (y) a long-term unsecured debt rating
acceptable to the Rating Agencies or (z) a short-term unsecured debt rating or
certificate of deposit rating acceptable to the Rating Agencies and (ii) whose
deposits are insured by the FDIC.
The Servicer
The Servicer under each Trust Agreement will be named in the
related Prospectus Supplement. The entity serving as Servicer may be the
Company, its designee, or an affiliate of the Company and may have other
business relationships with the Company or the Company's affiliates. The
Servicer with respect to each series will service the Receivables contained in
the Trust Fund for such series. Any Servicer may delegate its servicing
responsibilities to one or more sub-servicers, but will not be relieved of its
liabilities with respect thereto.
The Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Trust Agreement. An uncured breach of such a
representation or warranty that in any respect materially and adversely affects
the interests of the Securityholders will constitute a Servicer Default by the
Servicer under the related Trust Agreement.
Servicing Procedures
Each Trust Agreement will provide that the Servicer will make
reasonable efforts to collect all payments due with respect to the Receivables
which are part of the Trust Fund and, in a manner consistent with the related
Trust Agreement, will continue such collection procedures as the Servicer
follows with respect to the particular type of Receivable in the particular pool
it services for itself and others. Consistent with its normal procedures, the
Servicer may, in its discretion and on a case-by-case basis, arrange with the
Obligor on a Receivable to extend or modify the payment schedule. Some of such
arrangements (including, without limitation any extension of the payment
schedule beyond the final scheduled Payment Date for the related Securities) may
result in the Servicer acquiring such Receivable if such Contract becomes a
Defaulted Contract. The Servicer may sell the Vehicle securing the respective
Defaulted Contract, if any, at a public or private sale, or take any other
action permitted by applicable law. See "Certain Legal Aspects of the
Receivables".
Payments on Receivables
With respect to each series of Securities, unless otherwise
specified in the related Prospectus Supplement, the Servicer will deposit into
the Collection Account all payments on the related Receivables (from whatever
source) and all proceeds of such Receivables collected within three (3) business
days of receipt thereof in the related collection facility, such as a lock-box
account or collection account. Monies deposited in such collection facility for
Trust Property may be commingled with funds from other sources.
Servicing Compensation
As may be described in the related Prospectus Supplement with
respect to any series of securities issued by a Trust, the Servicer will be
entitled to receive a servicing fee for each Collection Period (the "Servicing
Fee") in an amount equal to a specified percentage per annum (as set forth in
the related Prospectus Supplement, the "Servicing Fee Rate") of the value of the
assets of the Trust Property, generally as of the first day of such Collection
Period. Each Prospectus Supplement and Servicing Agreement will specify the
priority of distributions with respect to the Servicing Fee (together with any
portion of the Servicing Fee that remains unpaid from prior Payment Dates).
Generally, the Servicing Fee will be paid prior to any distribution to the
related Securityholders.
The Servicer will also collect and retain any late fees, late
charges with respect to interest paid on past due amounts and other
administrative fees or similar charges allowed by applicable law with respect to
the Receivables, and will be entitled to reimbursement from each Trust for
certain liabilities. Payments by or on behalf
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of Obligors will be allocated to scheduled payments and late fees and other
charges in accordance with the Servicer's normal practices and procedures.
The Servicing Fee will compensate the Servicer for performing
the functions of a third party servicer of similar types of receivables as an
agent for their beneficial owner, including collecting and posting all payments,
responding to inquiries of Obligors on the related Receivables, investigating
delinquencies, sending billing statements to Obligors, reporting tax information
to Obligors, paying costs of collection and disposition of defaults, and
policing the collateral. The Servicing Fee also will compensate the Servicer for
administering the related Receivables, accounting for collections and furnishing
statements to the applicable Trustee and the applicable Indenture Trustee, if
any, with respect to distributions. The Servicing Fee also will reimburse the
Servicer for certain taxes, accounting fees, outside auditor fees, data
processing costs and other costs incurred in connection with administering the
Receivables.
Distributions
With respect to each series of Securities, beginning on the
Payment Date specified in the related Prospectus Supplement, distributions of
principal and interest (or, where applicable, of principal or interest only) on
each Class of such Securities entitled thereto will be made by the applicable
Indenture Trustee to the holders of Notes (the "Noteholders") and by the
applicable Trustee to the holders of Certificates (the "Certificateholders") of
such series. The timing, calculation, allocation, order, source, priorities of
and requirements for each class of Noteholders and all distributions to each
class of Certificateholders of such series will be set forth in the related
Prospectus Supplement.
With respect to each series of Securities, on each Payment
Date collections on the related Receivables will be transferred from the
Collection Account to the Distribution Account for distribution to
Securityholders, respectively, to the extent provided in the related Prospectus
Supplement. Credit Enhancement, such as a reserve account, may be available to
cover any shortfalls in the amount available for distribution on such date, to
the extent specified in the related Prospectus Supplement. As more fully
described in the related Prospectus Supplement, distributions in respect of
principal of a Class of Securities of a given series will be subordinate to
distributions in respect of interest on such Class, and distributions in respect
of the Certificates of such series may be subordinate to payments in respect of
the Notes of such series.
Credit and Cash Flow Enhancements
The amounts and types of Credit Enhancement arrangements, if
any, and the provider thereof, if applicable, with respect to each class of
Securities of a given series will be set forth in the related Prospectus
Supplement. If and to the extent provided in the related Prospectus Supplement,
credit enhancement may be in the form of a Policy, subordination of one or more
Classes of Securities, reserve accounts, overcollateralization, letters of
credit, credit or liquidity facilities, third party payments or other support,
surety bonds, guaranteed cash deposits or such other arrangements as may be
described in the related Prospectus Supplement or any combination of two or more
of the foregoing. If specified in the applicable Prospectus Supplement, Credit
Enhancement for a Class of Securities may cover one or more other Classes of
Securities of the same series, and Credit Enhancement for a series of Securities
may cover one or more other series of Securities.
The presence of Credit Enhancement for the benefit of any
Class or series of Securities is intended to enhance the likelihood of receipt
by the Securityholders or such Class or series of the full amount of principal
and interest due thereon and to decrease the likelihood that such
Securityholders will experience losses. As more specifically provided in the
related Prospectus Supplement, the credit enhancement for a Class or series of
Securities will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance and interest thereon. If
losses occur which exceed the amount covered by any Credit Enhancement or which
are not covered by any Credit Enhancement, Securityholders of any Class or
series will bear their allocable share of deficiencies, as described in the
related Prospectus Supplement. In addition, if a form of Credit Enhancement
covers more than one series of Securities, Securityholders of any such series
will be subject to the risk that such Credit Enhancement will be exhausted by
the claims of Securityholders of other series.
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Statements to Indenture Trustees and Trustees
Prior to each Payment Date with respect to each series of
Securities, the Servicer will provide to the applicable Indenture Trustee and/or
the applicable Trustee and Credit Enhancer as of the close of business on the
last day of the preceding related Collection Period a statement setting forth
substantially the same information as is required to be provided in the periodic
reports provided to Securityholders of such series described under "Description
of the Securities--Reports to Securityholders".
Evidence as to Compliance
Each Trust Agreement will provide that a firm of independent
public accountants will furnish to the related Trust and/or the applicable
Indenture Trustee and Credit Enhancer, annually, a statement as to compliance by
the Servicer during the preceding twelve months (or, in the case of the first
such certificate, the period from the applicable Closing Date) with certain
standards relating to the servicing of the Receivables.
Each Trust Agreement will also provide for delivery to the
related Trust and/or the applicable Indenture Trustee of a certificate signed by
an officer of the Servicer stating that the Servicer either has fulfilled its
obligations under such Trust Agreement in all material respects throughout the
preceding 12 months (or, in the case of the first such certificate, the period
from the applicable Closing Date) or, if there has been a default in the
fulfillment of any such obligation in any material respect, describing each such
default. The Servicer also will agree to give each Indenture Trustee and each
Trustee notice of certain Servicer Defaults under the related Trust Agreement.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the applicable Indenture
Trustee or the applicable Trustee.
Certain Matters Regarding the Servicers
Each Trust Agreement will provide that the Servicer may not
resign from its obligations and duties as Servicer thereunder, except upon
determination that the performance by the Servicer of such duties is no longer
permissible under applicable law. No such resignation will become effective
until the related Trustee or a successor servicer has assumed the Servicer's
servicing obligations and duties under the Trust Agreement.
Except as otherwise provided in the related Prospectus
Supplement, each Trust Agreement will further provide that neither the Servicer
nor any of its respective directors, officers, employees, or agents shall be
under any liability to the related Issuer or the related Securityholders for
taking any action or for refraining from taking any action pursuant to such
Trust Agreement, or for errors in judgment; provided, however, that neither the
Servicer nor any such person will be protected against any liability that would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of reckless disregard of
obligations and duties thereunder. In addition, such Trust Agreement will
provide that the Servicer is under no obligation to appear in, prosecute, or
defend any legal action that is not incidental to its servicing responsibilities
under such Trust Agreement and that, in its opinion, may cause it to incur any
expense or liability.
Under the circumstances specified in any such Trust Agreement,
any entity into which the Servicer may be merged or consolidated, or any entity
resulting from any merger or consolidation to which the Servicer is a party, or
any entity succeeding to the business of the Servicer or, with respect to its
obligations as Servicer, which corporation or other entity in each of the
foregoing cases assumes the obligations of the Servicer, will be the successor
to the Servicer under such Trust Agreement.
Servicer Default
Except as otherwise provided in the related Prospectus
Supplement, "Servicer Default" under a Trust Agreement will include (i) any
failure by the Servicer to deliver to the applicable Trustee for deposit in any
of the related Trust Accounts any required payment or to direct such Trustee to
make any required distributions therefrom, which failure continues unremedied
for more than three (3) Business Days after written notice from such Trustee is
received by the Servicer or after discovery by the Servicer; (ii) any failure by
the Servicer duly to observe or perform in any material respect any other
covenant or agreement in such Trust Agreement, which failure
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materially and adversely affects the rights of the related Securityholders and
which continues unremedied for more than thirty (30) days after the giving of
written notice of such failure (1) to the Servicer by the applicable Trustee or
(2) to the Servicer, and to the applicable Trustee by holders of the related
Securities, as applicable, evidencing not less than 50% of the voting rights of
such outstanding Securities; (iii) any Insolvency Event; and (iv) any claim
being made on a Policy issued as Credit Enhancement. An "Insolvency Event" shall
mean financial insolvency, readjustment of debt, marshalling of assets and
liabilities, or similar proceedings with respect to the Servicer and certain
actions by the Servicer indicating its insolvency, reorganization pursuant to
bankruptcy proceedings, or inability to pay its obligations.
Rights upon Servicer Default
As more fully described in the related Prospectus Supplement,
as long as a Servicer Default under a Trust Agreement remains unremedied, the
applicable Trustee, Credit Enhancer or holders of Securities of the related
series evidencing not less than 50% of the voting rights of such then
outstanding Securities may terminate all the rights and obligations of the
Servicer, if any, under such Trust Agreement, whereupon a successor servicer
appointed by such Trustee or such Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under such Trust
Agreement and will be entitled to similar compensation arrangements. If,
however, a bankruptcy trustee or similar official has been appointed for the
Servicer, and no Servicer Default other than such appointment has occurred, such
bankruptcy trustee or official may have the power to prevent the applicable
Trustee or such Securityholders from effecting a transfer of servicing. In the
event that the Trustee is unwilling or unable to so act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a successor
with a net worth of at least $25,000,000 and whose regular business includes the
servicing of a similar type of receivables. Such Trustee may make such
arrangements for compensation to be paid, which in no event may be greater than
the servicing compensation payable to the Servicer under the related Trust
Agreement.
Waiver of Past Defaults
With respect to each Trust, unless otherwise provided in the
related Prospectus Supplement and subject to the approval of any Credit
Enhancer, the holders of Notes evidencing at least a majority of the voting
rights of such then outstanding Securities may, on behalf of all Securityholders
of the related Securities, waive any default by the Servicer in the performance
of its obligations under the related Trust Agreement and its consequences,
except a default in making any required deposits to or payments from any of the
Trust Accounts in accordance with such Trust Agreement. No such waiver shall
impair the Securityholders' rights with respect to subsequent defaults.
Amendment
As more fully described in the related Prospectus Supplement,
each of the Trust Agreements may be amended by the parties thereto, without the
consent of the related Securityholders, for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of such Trust
Agreements or of modifying in any manner the rights of such Securityholders;
provided that such action will not, in the opinion of counsel satisfactory to
the applicable Trustee, materially and adversely affect the interests of any
such Securityholder and subject to the approval of any Credit Enhancer. As may
be described in the related Prospectus Supplement, the Trust Agreements may also
be amended by the Company, the Servicer, and the applicable Trustee with the
consent of the holders of Securities evidencing at least a majority of the
voting rights of such then outstanding Securities for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Trust Agreements or of modifying in any manner the rights of such
Securityholders; provided, however, that no such amendment may (i) increase or
reduce in any manner the amount or priority of, or accelerate or delay the
timing of, collections of payments on the related Receivables or distributions
that are required to be made for the benefit of such Securityholders or (ii)
reduce the aforesaid percentage of the Securities of such series which are
required to consent to any such amendment, without the consent of the
Securityholders of such series.
Insolvency Event
As described in the related Prospectus Supplement, if an
Insolvency Event occurs with respect to a Debtor relating to the applicable
Trust Property, the related Trust will terminate, and the Receivables of the
related
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Trust Property will be liquidated and each such Trust will be terminated
90 days after the date of such Insolvency Event, unless, before the end of such
90-day period, the Trustee of such Trust shall have received written
instructions from each of the related Securityholders (other than the Company)
and/or Credit Enhancer to the effect that such party disapproves of the
liquidation of such Receivables. Promptly after the occurrence of any Insolvency
Event with respect to an Obligor, notice thereof is required to be given to such
Securityholders and/or Credit Enhancer; provided, however, that any failure to
give such required notice will not prevent or delay termination of any Trust.
Upon termination of any Trust, the applicable Trustee shall direct that the
assets of such Trust be promptly sold (other than the related Trust Accounts) in
a commercially reasonable manner and on commercially reasonable terms. The
proceeds from any such sale, disposition or liquidation of such Receivables will
be treated as collections on such Receivables and deposited in the related
Collection Account. If the proceeds from the liquidation of such Receivables and
any amounts on deposit in the Reserve Account, if any, and the related
Distribution Account are not sufficient to pay the Securities of the related
series in full, and no additional Credit Enhancement is available, the amount of
principal returned to Securityholders will be reduced and some or all of such
Securityholders will incur a loss.
Each Trust Agreement will provide that the applicable Trustee
does not have the power to commence a voluntary proceeding in bankruptcy with
respect to any related Trust without the unanimous prior approval of all
Certificateholders (including the Company, if applicable) of such Trust and the
delivery to such Trustee by each such Certificateholder of a certificate
certifying that such Certificateholder reasonably believes that such Trust is
insolvent.
Termination
With respect to each Trust, the obligations of the Servicer,
the Company and the applicable Trustee pursuant to the related Trust Agreement
will terminate upon the earlier to occur of (i) the maturity or other
liquidation of the last related Receivable and the disposition of any amounts
received upon liquidation of any such remaining Receivables and (ii) the payment
to Securityholders of the related series of all amounts required to be paid to
them pursuant to such Trust Agreement. As more fully described in the related
Prospectus Supplement, in order to avoid excessive administrative expense, the
Servicer will be permitted in respect of the applicable Trust Property, unless
otherwise specified in the related Prospectus Supplement, at its option to
purchase from such Trust Property, as of the end of any Collection Period
immediately preceding a Payment Date, if the Pool Balance of the related
Contracts is less than a specified percentage (set forth in the related
Prospectus Supplement) of the initial Pool Balance in respect of such Trust
Property, all such remaining Receivables at a price equal to the aggregate of
the loan balances thereof as of the end of such Collection Period. The related
Securities will be redeemed following such purchase.
If and to the extent provided in the related Prospectus
Supplement with respect to the Trust Property, the applicable Trustee will,
within ten days following a Payment Date as of which the Pool Balance is equal
to or less than the percentage of the initial Pool Balance specified in the
related Prospectus Supplement, solicit bids for the purchase of the Receivables
remaining in such Trust, in the manner and subject to the terms and conditions
set forth in such Prospectus Supplement. If such Trustee receives satisfactory
bids as described in such Prospectus Supplement, then the Receivables remaining
in such Trust Property will be sold to the highest bidder.
As more fully described in the related Prospectus Supplement,
any outstanding Notes of the related series will be redeemed concurrently with
either of the events specified above and the subsequent distribution to the
related Certificateholders of all amounts required to be distributed to them
pursuant to the applicable Trust Agreement may effect the prepayment of the
Certificates of such series.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
General
The transfer of Receivables by the Company or its Finance
Subsidiary to the Trust pursuant to the related Trust Agreement, the perfection
of the security interests in the Receivables and the enforcement of rights to
realize on the Vehicles as collateral for the Receivables are subject to a
number of federal and state laws, including the UCC as in effect in various
states. As specified in each Prospectus Supplement, the Servicer will take such
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action as is required to perfect the rights of the Trustee in the Receivables.
If, through inadvertence or otherwise, a third party were to purchase (including
the taking of a security interest in) a Receivable for new value in the ordinary
course of its business, without actual knowledge of the Trust's interest, and
take possession of a Receivable, the purchaser would acquire an interest in such
Receivable superior to the interest of the Trust. As further specified in each
Prospectus Supplement, no action will be taken to perfect the rights of the
Trustee in proceeds of any insurance policies covering individual Vehicles or
Obligors. Therefore, the rights of a third party with an interest in such
proceeds could prevail against the rights of the Trust prior to the time such
proceeds are deposited by the Servicer into a Trust Account.
Security Interests in the Financed Vehicles
General
Retail installment sale contracts such as the Receivables
evidence the credit sale of automobiles and light duty trucks by dealers to
consumers. The contracts also constitute personal property security agreements
and include grants of security interests in the related automobiles and light
duty trucks under the UCC. Perfection of security interests in automobiles and
light duty trucks is generally governed by the vehicle registration or titling
laws of the state in which each vehicle is registered or titled. In most states
a security interest in a vehicle is perfected by notation of the secured party's
lien on the vehicle's certificate of title.
Perfection
Pursuant to the Trust Agreement, the Company will sell and
assign the Receivables it has originated or acquired and its security interests
in the Vehicles to the Trustee. Alternatively, the Company may sell and assign
the Receivables and its interest in the Vehicles to a Finance Subsidiary which
will, in turn, sell and assign such Receivables and related security interests
to the Trustee. Each of the related Prospectus Supplements will specify whether,
because of the administrative burden and expense, the Company, the Servicer or
the Trustee will amend any certificate of title to identify the Trustee as the
new secured party on the certificates of title relating to the Vehicles. Each of
the related Prospectus Supplements will specify the UCC financing statements to
be filed in order to perfect the transfer to the Finance Subsidiary of
Receivables and the transfer by the Finance Subsidiary to the Trustee of the
Receivables. Further, although the Trustee will not rely on possession of the
Receivables as the legal basis for the perfection of its interest therein or in
the security interests in the Vehicles, the Servicer, as specified in the
related Prospectus Supplement, will continue to hold the Receivables and any
certificates of title relating to the Vehicles in its possession as custodian
for the Trustee pursuant to the related Trust Agreement which, as a practical
matter, should preclude any other party from claiming a competing security
interest in the Receivables on the basis that the security interest is perfected
by possession.
A security interest in a motor vehicle registered in most
states may be perfected against creditors and subsequent purchasers without
notice for valuable consideration only by one or more of the following:
depositing with the related Department of Motor Vehicles or analogous state
office a properly endorsed certificate of title for the vehicle showing the
secured party as legal owner or lienholder thereon, or filing a sworn notice of
lien with the related Department of Motor Vehicles or analogous state office and
noting such lien on the certificate of title, or, if the vehicle has not been
previously registered, filing an application in usual form for an original
registration together with an application for registration of the secured party
as legal owner or lienholder, as the case may be. However, under the laws of
most states, a transferee of a security interest in a motor vehicle is not
required to reapply to the related Department of Motor Vehicles or analogous
state office for a transfer of registration when the security interest is sold
or when the interest of the transferee arises from the transfer of a security
interest by the lienholder to secure payment or performance of an obligation.
Accordingly, under the laws of such states, the assignment by the Company of its
interest in the Receivables to the Trustee under the related Trust Agreement is
an effective conveyance of the security interest of the Company in the
Receivables, and specifically, the Vehicles, without such re-registration and
without amendment of any lien noted on the related certificate of title, and
(subject to the immediately succeeding paragraphs) the Trustee will succeed to
the Company's rights as secured party.
Although re-registration of a Vehicle is not necessary to
convey a perfected security interest in the Vehicles to the Trustee, the
Trustee's security interest could be defeated through fraud, negligence, forgery
or administrative error since it may not be listed as legal owner or lienholder
on the certificates of title to the Vehicles. However, in the absence of fraud,
negligence, forgery or administrative error, the notation of the Company's or
the
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unaffiliated originator's lien on the certificates of title will be sufficient
to protect the Trust against the rights of subsequent purchasers of a Vehicle or
subsequent creditors who take a security interest in a Vehicle. In the related
Trust Agreement, the Company or its Finance Subsidiary will represent and
warrant that it has, or has taken all action necessary to obtain, a perfected
security interest in each Vehicle. If there are any Vehicles as to which the
Company failed to obtain a first priority perfected security interest, the
Company's security interest would be subordinate to, among others, subsequent
purchasers of such Vehicles and holders of first priority perfected security
interests therein. Such a failure, however, would constitute a breach of the
Company's or the Finance Subsidiary's representations and warranties under the
related Trust Agreement. Accordingly, pursuant to the related Trust Agreement,
the Company or Finance Subsidiary would be required to repurchase the related
Receivables from the Trustee unless the breach were cured.
Continuity of Perfection
Under the laws of most states, a perfected security interest
in a motor vehicle continues for four months after the vehicle is moved to a new
state from the one in which it is initially registered and thereafter until the
owner re-registers such motor vehicle in the new state. A majority of states
generally require surrender of a certificate of title to re-register a vehicle.
In those states that require a secured party to hold possession of the
certificate of title to maintain perfection of the security interest, the
secured party would learn of the re-registration through the request from the
Obligor under the related installment sale contract to surrender possession of
the certificate of title to assist in such re-registration. In the case of
vehicles registered in states providing for the notation of a lien on the
certificate of title but not requiring possession by the secured party, the
secured party would receive notice of surrender from the state of
re-registration if the security interest is noted on the certificate of title.
Thus, the secured party would have the opportunity to reperfect its security
interest in the vehicle in the state of relocation. However, these procedural
safeguards will not protect the secured party if, through fraud, forgery or
administrative error, the debtor somehow procures a new certificate of title
that does not list the secured party's lien. Additionally, in states that do not
require surrender of a certificate of title for re-registration of a vehicle,
re-registration could defeat perfection. In each of the Trust Agreements, the
Servicer will be required to take steps to effect re-perfection upon receipt of
notice of re-registration or information from the Obligor as to relocation.
Similarly, when an Obligor sells a Vehicle, the Servicer will have an
opportunity to require satisfaction of the related Receivable before release of
the lien, either because the Servicer will be required to surrender possession
of the certificate of title in connection with the sale, or because the Servicer
will receive notice as a result of its lien noted thereon. Pursuant to the
related Trust Agreement, the related Servicer will hold the certificates of
title for the related Vehicles as custodian for the Trustee. Under the related
Trust Agreement, the Servicer will be obligated to take appropriate steps, at
its own expense, to maintain perfected security interests in the Vehicles.
Priority of Certain Liens Arising by Operation of Law
Under the laws of most states, certain statutory liens such as
mechanics', repairmen's and garagemen's liens for repairs performed on a motor
vehicle, motor vehicle accident liens, towing and storage liens, liens arising
under various state and federal criminal statutes and liens for unpaid taxes
take priority over even a first priority perfected security interest in such
vehicle by operation of law. The UCC also grants priority to certain federal tax
liens over the lien of a secured party. The laws of most states and federal law
permit the confiscation of motor vehicles by governmental authorities under
certain circumstances if used in or acquired with the proceeds of unlawful
activities, which may result in the loss of a secured party's perfected security
interest in a confiscated vehicle. The Company will represent and warrant to the
Trustee in the related Trust Agreement that, as of the related Closing Date,
each security interest in a Vehicle shall be a valid, subsisting and enforceable
first priority security interest in such Vehicle. However, liens for repairs or
taxes superior to the security interest of the Trustee in any such Vehicle, or
the confiscation of such Vehicle, could arise at any time during the term of a
Receivable. No notice will be given to the Trustee or any Securityholder in the
event such a lien or confiscation arises and any such lien or confiscation
arising after the related Closing Date would not give rise to the Company's
repurchase obligation under the related Trust Agreement.
Repossession
In the event of default by an Obligor, the holder of the
related retail installment sale contract has all the remedies of a secured party
under the UCC, except where specifically limited by other state laws. The UCC
remedies of a secured party include the right to repossession by self-help
means, unless such means would constitute
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a breach of the peace. Unless a vehicle is voluntarily surrendered, self-help
repossession is accomplished simply by taking possession of the related financed
vehicle. In cases where the Obligor objects or raises a defense to repossession,
or if otherwise required by applicable state law, a court order is obtained from
the appropriate state court, and the vehicle must then be recovered in
accordance with that order. In some jurisdictions, the secured party is required
to notify the debtor of the default and the intent to repossess the collateral
and give the debtor a time period within which to cure the default prior to
repossession. Generally, this right of cure may only be exercised on a limited
number of occasions during the term of the related contract. Other jurisdictions
permit repossession without prior notice if it can be accomplished without a
breach of the peace (although in some states, a course of conduct in which the
creditor has accepted late payments has been held to create a right by the
Obligor to receive prior notice).
Notice of Sale; Redemption Rights
The UCC and other state laws require a secured party to
provide the Obligor with reasonable notice of the date, time and place of any
public sale and/or the date after which any private sale of the collateral may
be held. In addition, some states also impose substantive timing requirements on
the sale of repossessed vehicles in certain circumstances and/or various
substantive timing and content requirements on such notices. In some states,
under certain circumstances after a financed vehicle has been repossessed, the
Obligor may redeem the collateral by paying the delinquent installments and
other amounts due. The Obligor has the right to redeem the collateral prior to
actual sale or entry by the secured party into a contract for sale of the
collateral by paying the secured party the unpaid principal balance of the
obligation, accrued interest thereon, reasonable expenses for repossessing,
holding, and preparing the collateral for disposition and arranging for its
sale, plus, in some jurisdictions, reasonable attorneys' fees and legal expenses
or in some other states, by payment of delinquent installments on the unpaid
principal balance of the related obligation.
Deficiency Judgments and Excess Proceeds
The proceeds of resale of the Vehicles generally will be
applied first to the expenses of resale and repossession and then to the
satisfaction of the indebtedness. In many instances, the remaining principal
amount of such indebtedness will exceed such proceeds. Under the UCC and laws
applicable in some states, a creditor is entitled to bring an action to obtain a
deficiency judgment from a debtor for any deficiency on repossession and resale
of a motor vehicle securing such debtor's loan; however, in some states, a
creditor may not seek a deficiency judgment from a debtor whose financed vehicle
had an initial cash sales price less than a specified amount, usually $3,000.
Some states, impose prohibitions or limitations or notice requirements on
actions for deficiency judgments. In addition to the notice requirement
described above, the UCC requires that every aspect of the sale or other
disposition, including the method, manner, time, place and terms, be
"commercially reasonable". Generally, courts have held that when a sale is not
"commercially reasonable", the secured party loses its right to a deficiency
judgment. In addition, the UCC permits the debtor or other interested party to
recover for any loss caused by noncompliance with the provisions of the UCC.
Also, prior to a sale, the UCC permits the debtor or other interested person to
obtain an order mandating that the secured party refrain from disposing of the
collateral if it is established that the secured party is not proceeding in
accordance with the "default" provisions under the UCC. However, the deficiency
judgment would be a personal judgment against the Obligor for the shortfall, and
a defaulting Obligor can be expected to have very little capital or sources of
income available following repossession. Therefore, in many cases, it may not be
useful to seek a deficiency judgment or, if one is obtained, it may be settled
at a significant discount or be uncollectible.
Occasionally, after resale of a vehicle and payment of all
expenses and indebtedness, there is a surplus of funds. In that case, the UCC
requires the creditor to remit the surplus to any holder of a subordinate lien
with respect to the vehicle or if no such lienholder exists or if there are
remaining funds, the UCC requires the creditor to remit the surplus to the
Obligor under the contract.
Consumer Protection Laws
Numerous federal and state consumer protection laws and
related regulations impose substantial requirements upon creditors and servicers
involved in consumer finance. These laws include the Truth-in-Lending Act, the
Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair
Credit Reporting Act, the Fair
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Debt Collection Practices Act, the Magnuson-Moss Warranty Act, the Federal
Reserve Board's Regulations B and Z, state adaptations of the Uniform Consumer
Credit Code, state motor vehicle retail installment sale acts, state "lemon"
laws and other similar laws. In addition, the laws of certain states 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 liabilities upon creditors who
fail to comply with their provisions. In some cases, this liability could
affect the ability of an assignee such as the Trustee to enforce consumer
finance contracts such as the Receivables.
The so-called "Holder-in-Due-Course Rule" of the Federal Trade
Commission (the "FTC Rule") has the effect of subjecting any assignee of the
seller in a consumer credit transaction (and certain related creditors and their
assignees) to all claims and defenses which the Obligor in the transaction could
assert against the seller. Liability under the FTC Rule is limited to the
amounts paid by the Obligor under the contract, and the holder of the contract
may also be unable to collect any balance remaining due thereunder from the
Obligor. The FTC Rule is generally duplicated by the Uniform Consumer Credit
Code, other state statutes or the common law in certain states. To the extent
that the Receivables will be subject to the requirements of the FTC Rule, the
Trustee, as holder of the Receivables, will be subject to any claims or defenses
that the purchaser of the related Vehicle may assert against the seller of such
Vehicle. Such claims will be limited to a maximum liability equal to the amounts
paid by the Obligor under the related Receivable.
Under most state vehicle dealer licensing laws, sellers of
automobiles and light duty trucks are required to be licensed to sell vehicles
at retail sale. In addition, with respect to used vehicles, the Federal Trade
Commission's Rule on Sale of Used Vehicles requires that all sellers of used
vehicles prepare, complete and display a "Buyer's Guide" which explains the
warranty coverage for such vehicles. Furthermore, Federal Odometer Regulations
promulgated under the Motor Vehicle Information and Cost Savings Act and the
motor vehicle title laws of most states require that all sellers of used
vehicles furnish a written statement signed by the seller certifying the
accuracy of the odometer reading. If a seller is not properly licensed or if
either a Buyer's Guide or Odometer Disclosure Statement was not provided to the
purchaser of a Vehicle, the Obligor may be able to assert a defense against the
seller of the Vehicle. If an Obligor on a Receivable were successful in
asserting any such claim or defense, the Servicer would pursue on behalf of the
Trust any reasonable remedies against the seller or manufacturer of the vehicle,
subject to certain limitations as to the expense of any such action to be
specified in the related Trust Agreement.
Any such loss, to the extent not covered by credit support (as
specified in the Related Prospectus Supplement), could result in losses to the
Securityholders. As specified in the related Prospectus Supplement, if an
Obligor were successful in asserting any such claim or defense as described in
this paragraph or the two immediately preceding paragraphs, such claim or
defense may constitute a breach of a representation and warranty under the
related Trust Agreement and may create an obligation of the Company to
repurchase such Receivable unless the breach were cured.
Courts have applied general equitable principles to secured
parties pursuing repossession or litigation involving deficiency balances. These
equitable principles may have the effect of relieving an Obligor from some or
all of the legal consequences of a default.
In several cases, consumers have asserted that the self-help
remedies of secured parties under the UCC and related laws violate the due
process protections of the 14th Amendment to the Constitution of the United
States. Courts have generally either upheld the notice provisions of the UCC and
related laws as reasonable or have found that the creditor's repossession and
resale do not involve sufficient state action to afford constitutional
protection to consumers.
As specified in the related Prospectus Supplement, the Company
(or its Finance Subsidiary, if any) will represent and warrant under the related
Trust Agreement that each Receivable complies with all requirements of law in
all material respects. Accordingly, if an Obligor has a claim against the
Trustee for violation of any law and such claim materially and adversely affects
the Trustee's interest in a Receivable, such violation would constitute a breach
of representation and warranty under the related Trust Agreement and would
create an obligation of the Company (or its Finance Subsidiary, if any) to
repurchase such Receivable unless the breach were cured.
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Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), an Obligor who enters military service
after the origination of such Obligor's Receivable (including an Obligor who was
in reserve status and is called to active duty after origination of the
Receivable), may not be charged interest (including fees and charges) above an
annual rate of 6% during the period of such Obligor's active duty status, unless
a court orders otherwise upon application of the lender. The Relief Act applies
to Obligors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to Obligors
who enter military service (including reservists who are called to active duty)
after origination of the related Receivable, no information can be provided as
to the number of loans that may be effected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Servicer to collect full amounts of interest on certain of the
Receivables. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related Receivables, would result in a reduction of
the amounts distributable to the holders of the related Securities, and would
not be covered by advances, any form of Credit Enhancement provided in
connection with the related series of Securities. In addition, the Relief Act
imposes limitations that would impair the ability of the Servicer to foreclose
on an affected Receivable during the Mortgagor's period of active duty status,
and, under certain circumstances, during an additional three month period
thereafter. Thus, in the event that the Relief Act or similar legislation or
regulations applies to any Receivable which goes into default, there may be
delays in payment and losses on the related Securities in connection therewith.
Any other interest shortfalls, deferrals or forgiveness of payments on the
Receivables resulting from similar legislation or regulations may result in
delays in payments or losses to Securityholders of the related series.
Other Limitations
In addition to the laws limiting or prohibiting deficiency
judgments, numerous other statutory provisions, including federal bankruptcy
laws and related state laws, may interfere with or affect the ability of a
creditor to realize upon collateral or enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a court
may prevent a creditor from repossessing a motor vehicle, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the market
value of the motor vehicle at the time of bankruptcy (as determined by the
court), leaving the party providing financing as a general unsecured creditor
for the remainder of the indebtedness. A bankruptcy court may also reduce the
monthly payments due under a contract or change the rate of interest and time of
repayment of the indebtedness. Any such shortfall, to the extent not covered by
credit support (as specified in each Prospectus Supplement), could result in
losses to the Securityholders.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax
consequences of the purchase, ownership and disposition of the Notes and the
Certificates. Dewey Ballantine LLP, special federal tax counsel for the Company
("Federal Tax Counsel"), is of the opinion that the discussion hereunder fully
and fairly discloses all material federal tax risks associated with the
purchase, ownership and disposition of the Notes and Certificates. The summary
does not purport to deal with federal income tax consequences or special rules
that are applicable to certain categories of holders. Moreover, there are no
cases or Internal Revenue Service ("IRS") rulings on all of the issues discussed
below. As a result, the IRS may disagree with all or a part of the discussion
below. Prospective investors are urged to consult their own tax advisors in
determining the federal, state, local, foreign and any other tax consequences to
them of the purchase, ownership and disposition of the Notes and the
Certificates.
Federal Tax Counsel will, in addition to delivering its
opinion with respect to the discussion set forth herein, deliver separate
opinions in connection with each issuance of Securities. Such opinions will be
delivered at pricing, and will be filed on a Current Report within two business
days of pricing (and in any event prior to the issuance of the related
Securities).
The following summary is based upon current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which
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are subject to change, which change may be retroactive. The opinion of Federal
Tax Counsel, however, is not binding on the IRS or the courts. No ruling on any
of the issues discussed below will be sought from the IRS. For purposes of the
following summary, references to the Trust, the Notes, the Certificates and
related terms, parties and documents shall be deemed to refer, unless otherwise
specified herein, to each Trust and the Notes, Certificates and related terms,
parties and documents applicable to such Trust.
The federal income tax consequences to Securityholders will
vary depending on whether the Trust will be treated as a partnership under the
Code, whether the Trust will be treated as a grantor trust, whether the Trust
will be treated as a FASIT or whether it is intended that the Trust serve as a
security device for the issuance of Securities that are to be treated as
indebtedness for federal income tax purposes. The Prospectus Supplement for each
series of Securities will specify whether the Trust will be treated as a
partnership, a grantor trust, a FASIT or is intended to serve as a security
device as just described.
TRUSTS TREATED AS PARTNERSHIPS
Tax Characterization of the Trust as a Partnership
Federal Tax Counsel will deliver its opinion that a Trust
which is intended to be a partnership, as specified in the related Prospectus
Supplement, will not be an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes. This opinion will be based on
the assumption that the terms of the Trust Agreement and related documents will
be complied with, and on counsel's conclusions that (1) the Trust will not have
certain characteristics necessary for a business trust to be classified as an
association taxable as a corporation and (2) the nature of the income of the
Trust will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations.
If the Trust were taxable as a corporation for federal income
tax purposes, the Trust would be subject to corporate income tax on its taxable
income. The Trust's taxable income would include all its income on the
Receivables, possibly reduced by its interest expense on the Notes. Any such
corporate income tax could materially reduce cash available to make payments on
the Notes and distributions on the Certificates, and Certificateholders could be
liable for any such tax that is unpaid by the Trust.
Tax Consequences to Holders of the Notes Issued by a Partnership
Treatment of the Notes as Indebtedness. The Transferor will
agree, and the Noteholders will agree by their purchase of Notes, to treat the
Notes as debt for federal income tax purposes. Federal Tax Counsel will, except
as otherwise provided in the related Prospectus Supplement, advise the Trust
that in its opinion the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
Treatment of Original Issue Discount. The discussion below
assumes that all payments on the Notes are denominated in U.S. dollars, and that
the Notes are not Indexed Securities or Strip Notes. Moreover, the discussion
assumes that the interest formula for the Notes meets the requirements for
"qualified stated interest" under Treasury regulations (the "OID regulations")
relating to original issue discount ("OID"), and that any OID on the Notes
(i.e., any excess of the principal amount of the Notes over their issue price)
does not exceed a de minimis amount (i.e., generally 1/4% of their principal
amount multiplied by the number of full years included in their term), all
within the meaning of the OID regulations. If these conditions are not satisfied
with respect to any given series of Notes, additional tax considerations with
respect to such Notes will be disclosed in the applicable Prospectus Supplement.
Treatment of Interest Income. Based on the above assumptions
the Notes generally will not be considered issued with OID. The stated interest
thereon will be taxable to a Noteholder as ordinary interest income when
received or accrued in accordance with such Noteholder's method of tax
accounting. Under the OID regulations, a holder of a Note issued with a de
minimis amount of OID generally must include such OID in income, on a pro rata
basis, as principal payments are made on the Note. However, a holder may elect
to accrue de minimis OID under a constant yield method in connection with an
election to accrue all interest, discount, and premium on the Note using the
constant yield method. See "Trusts Treated as Grantor Trusts--Taxation of
Holders if Stripped Bond Rules Do Not Apply--Election to Treat All Interest as
OID" for a discussion of such election. A purchaser
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who buys a Note for more or less than its principal amount will generally be
subject, respectively, to the premium amortization or market discount rules of
the Code.
A holder of a Note that has a fixed maturity date of not more
than one year from the issue date of such Note (a "Short-Term Note") may be
subject to special rules. An accrual basis holder of a Short-Term Note (and
certain cash method holders, including regulated investment companies, as set
forth in Section 1281 of the Code) generally would be required to report
interest income as interest accrues on a straight-line basis over the term of
each interest period. Other cash basis holders of a Short-Term Note would, in
general, be required to report interest income as interest is paid (or, if
earlier, upon the taxable disposition of the Short-Term Note). However, a cash
basis holder of a Short-Term Note reporting interest income as it is paid may be
required to defer a portion of any interest expense otherwise deductible on
indebtedness incurred to purchase or carry the Short-Term Note until the taxable
disposition of the Short-Term Note. A cash basis taxpayer may elect under
Section 1281 of the Code to accrue interest income on all nongovernment debt
obligations with a term of one year or less, in which case the taxpayer would
include interest on the Short-Term Note in income as it accrues, but would not
be subject to the interest expense deferral rule referred to in the preceding
sentence. Certain special rules apply if a Short-Term Note is purchased for more
or less than its principal amount.
Treatment Upon 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, (i) increased by any market discount,
acquisition discount, OID, if any, and gain previously included by such
Noteholder in income with respect to the Note and (ii) 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. Any
such gain or loss generally will be capital gain or loss if the Note was held as
a capital asset, except for gain representing accrued interest and accrued
market discount not previously included in income. Capital losses generally may
be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a
Noteholder who is a Foreign Investor, as defined below, generally will be
considered "portfolio interest," and generally will not be subject to United
States federal income tax and withholding tax, if the interest is not
effectively connected with the conduct of a trade or business within the United
States by the Foreign Investor and the Foreign Investor (i) is not actually or
constructively a "10 percent shareholder" of the Trust or the Transferor
(including a holder of 10% of the outstanding Certificates) or a "controlled
foreign corporation" with respect to which the Trust or the Transferor is a
"related person" within the meaning of the Code and (ii) provides the Owner
Trustee or other person who is otherwise required to withhold U.S. tax with
respect to the Notes with an appropriate statement (on Form W-8 or a similar
form), signed under penalties of perjury, certifying that the beneficial owner
of the Note is a Foreign Investor and providing the Foreign Investor's name and
address. If a Note is held through a securities clearing organization or certain
other financial institutions, the organization or institution may provide the
relevant signed statement to the withholding agent; in that case, however, the
signed statement must be accompanied by a Form W-8 or substitute form provided
by the Foreign Investor 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 percent, unless reduced or eliminated pursuant
to an applicable tax treaty.
Any 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) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the Foreign Investor, (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year, and (iii) in the case of gain representing accrued
interest or OID, the conditions described in the immediately preceding paragraph
are satisfied.
If the interest income or gain realized on a Note held by a
Foreign Investor is effectively connected with the conduct of a trade or
business in the United States by the Foreign Investor, such interest income or
gain realized will be exempt from the withholding tax previously discussed if
the holder provides an appropriate and timely statement on Form 4224, although
the Foreign Investor generally will be subject to United States federal income
tax on the interest income or gain realized at regular federal income tax rates.
In addition, if the Foreign Investor 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).
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For purposes of this tax discussion, a Foreign Person or
Foreign Investor is any person other than (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political subdivision
thereof, (iii) an estate whose income is includible in gross income for United
States federal income taxation regardless of source, or (iv) a trust other than
a "Foreign Trust," as such term is defined in Section 7701(a)(31) of the Code.
Backup Withholding. Each holder of a Note (other than an
exempt holder such as a corporation, tax-exempt organization, qualified pension
and profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing, among other
things, 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
Trust will be required to withhold 31 percent 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.
Possible Alternative Treatments of the Notes. If, contrary to
the opinion of Federal Tax Counsel, the IRS successfully asserted that one or
more of the Notes would likely be treated as owning an interest in a partnership
and not an interest in an association (or publicly traded partnership) taxable
as a corporation. If the Noteholders were treated as owning an equitable
interest in a partnership, the partnership itself would not be subject to
federal income tax; rather each partner would be taxed individually on their
respective distributive share of the partnership's income, gain, loss,
deductions and credits. The amount, timing and characterization of items of
income and deductions for a Noteholder would differ if the Notes were held to
constitute partnership interests, rather than indebtedness. Since the Issuer
will treat the Notes as indebtedness for federal income tax purposes, the
Servicer will not attempt to satisfy the tax reporting requirements that would
apply under this alternative characterization of the Notes. Investors that are
foreign persons should consult their own tax advisors in determining the
federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of the Notes.
Tax Consequences to Holders of the Certificates Issued by a Partnership
Treatment of the Trust as a Partnership. The Transferor and
the Company will agree, and the Certificateholders will agree by their purchase
of Certificates, to treat the Trust as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Trust, 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 Trust, the Certificates, the Notes, the Transferor and
the Company is not clear because there is no authority on transactions closely
comparable to that contemplated herein.
For example, because the Certificates may have certain
features characteristic of debt, the Certificates might be considered debt of
the Transferor or the Trust. Generally, provided such Certificates are issued at
or close to face value, any characterization would not result in materially
adverse tax consequences to Certificateholders as compared to the consequences
from treatment of the Certificates as equity in a partnership, described below.
If Certificates are issued at a substantial discount, a discussion of the
relevant tax consequences will be set forth in the related Prospectus
Supplement. The following discussion assumes that the Certificates represent
equity interests in a partnership.
Indexed Securities, etc. The following discussion assumes that
all payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust will not be
subject to federal income tax. Rather, each Certificateholder will be required
to separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. In certain instances, however, the
Trust 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 Trust's income will consist primarily
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of interest and finance charges earned on the Receivables (including appropriate
adjustments for market discount, OID and bond premium) and any gain upon
collection or disposition of Receivables. The Trust'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 Receivables.
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, in general, that the Certificateholders will be allocated taxable
income of the Trust for each month equal to the sum of (i) the interest that
accrues on the Certificates in accordance with their terms for such month,
including interest accruing at the Pass Through Rate for such month and interest
on amounts previously due on the Certificates but not yet distributed; (ii) any
Trust income attributable to discount on the Receivables that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
of premium on Receivables that corresponds to any excess of the issue price of
Certificates over their principal amount. Based on the economic arrangement of
the parties, this approach for allocating Trust income should be permissible
under applicable Treasury regulations, although Federal Tax Counsel is unable to
opine that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the Trust might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
income even if they have not received cash from the Trust to pay such taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all Certificateholders 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.
All of some of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) may
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
An individual taxpayer's share of expenses of the Trust
(including fees to the Servicer but not interest expense) would be miscellaneous
itemized deductions. Such deductions might be disallowed to the individual in
whole or in part and might result in such holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to such holder over
the life of the Trust. Such deductions may also be subject to reduction under
Section 68 of the Code if the individual's adjusted gross income exceeds certain
limits.
The Trust intends to make all tax calculations relating to
income and allocations to Certificateholders on an aggregate basis. If the IRS
were to require that such calculations be made separately for each Receivable,
the Trust might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Receivables will
not be issued with OID, and, therefore, the Trust should not have OID income.
However, the purchase price paid by the Trust for the Receivables may be greater
or less than the remaining principal balance of the Receivables at the time of
purchase. If so, the Receivables will have been acquired at a premium or
discount, as the case may be. (As indicated above, the Trust will make this
calculation on an aggregate basis, but might be required to recompute it on a
Receivable-by-Receivable basis.)
If the Trust acquires the Receivables at a market discount or
premium, the Trust will elect to include any such discount in income currently
as it accrues over the life of the Receivables or to offset any such premium
against interest income on the Receivables. As indicated above, a portion of
such market discount income or premium deduction will be allocated to
Certificateholders if the related Trust Agreement so provides.
Any such allocation will be disclosed in the related Prospectus Supplement.
Section 708 Termination. Under Section 708 of the Code, the
Trust will be deemed to terminate for federal income tax purposes if 50% or more
of the capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the Trust will be considered to
distribute its assets to the partners, who would then be treated as
recontributing those assets to the Trust, as a new partnership. Treasury
regulations provide that if a termination occurs the partnership will be
considered to transfer its assets and liabilities to a new partnership in
exchange for interests in that new partnership which it would then be treated as
transferring
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to its partners. The Trust will not comply with certain technical requirements
that might apply when such a constructive termination occurs. As a result, the
Trust may be subject to certain tax penalties and may incur additional expenses
if it is required to comply with those requirements. Furthermore, the Trust
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 Certificates in an amount equal to the
difference between the amount realized and the seller's tax basis in the
Certificates sold. A Certificateholder's tax basis in a Certificate will
generally equal the holder's cost increased by the holder's share of Trust
income (includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the Certificates
and the amount realized on a sale of a Certificate would include the holder's
share of the Notes and other liabilities of the Trust. 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 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 Receivables would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The Trust does not expect to have any other
assets that would give rise to such special reporting requirements. To avoid
those special reporting requirements, the Trust will elect to include market
discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate
amount of income (not including income attributable to disallowed 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 Transferors and Transferees. In general,
the Trust'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 close of the last day of such month. As a result, a holder
purchasing Certificates may be allocated tax items (which will affect its tax
liability and tax basis) 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 only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. The Affiliated
Purchaser is authorized to revise the Trust's method of allocation between
transferors and transferees to conform to a method permitted by future
regulations.
Section 754 Election. In the event that a Certificateholder
sells its Certificates at a profit (or loss), the purchasing Certificateholder
will have a higher (or lower) basis in the Certificates than the selling
Certificateholder had. The tax basis of the Trust's assets will not be adjusted
to reflect that higher (or lower) basis unless the Trust were to file 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 Trust will
not make such election. As a result, Certificateholders might be allocated a
greater or lesser amount of Trust income than would be appropriate based on
their own purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep
or have kept complete and accurate books of the Trust. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
fiscal year of the Trust will be the calendar year. The Owner Trustee will file
a partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust and will report each Certificateholder's allocable share of
items of Trust income and expense to holders and the IRS on Schedule K-l. The
Trust will provide the Schedule K-l information to nominees that fail to provide
the Trust with the information statement described below and such nominees will
be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust 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 at any time during a calendar year is required to
furnish the Trust with a statement containing certain information on the
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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 on Certificates that were held, bought or
sold 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 Trust information as to themselves and their ownership
of Certificates. A clearing agency registered under Section 17A of the Exchange
Act is not required to furnish any such information statement to the Trust. The
information referred to above for any calendar year must be furnished to the
Trust on or before the following January 31. Nominees, brokers and financial
institutions that fail to provide the Trust with the information described above
may be subject to penalties.
The Transferor will be designated as the tax matters partner
in the related Trust Agreement and, as such, 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 Trust
by the appropriate taxing authorities could result in an adjustment of the
returns of the Certificateholders, and a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust. 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 Trust.
Tax Consequences to Foreign Certificateholders. As discussed
below, an investment in a Certificate is not suitable for any Foreign Person, as
defined above, 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 Foreign Person.
No regulations, published rulings or judicial decisions exist
that would discuss the characterization for Federal withholding tax purposes
with respect to a Foreign Person of a partnership with activities substantially
the same as the Trust. Depending upon the particular terms of the related Trust
Agreement and Sale and Servicing Agreement, a trust may 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 Trust is considered
to be engaged in a trade or business in the United States for such purposes, the
income of the Trust 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 Foreign Persons. Also, in such cases, a Foreign Person
that is a corporation may be subject to the branch profits tax. If the Trust is
notified that a Certificateholder is a Foreign Person, the Trust may withhold as
if it were engaged in a trade or business in the United States in order to
protect the Trust from possible adverse consequences of a failure to withhold.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures.
If a Trust is engaged in a trade or business, each foreign
Certificateholder will be required to file a United States federal individual or
corporate income tax return (including in the case of a corporation, the branch
profits tax) on its share of the Trust's income. A foreign holder generally
would be entitled to file with the IRS a claim for refund with respect to
withheld taxes, taking the position that no taxes were due because the Trust was
not engaged in a United States 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 Trust and for that reason or because of the
nature of the Receivables, the interest will likely not be considered "portfolio
interest." See "--Tax Consequences to Holders of the Notes Issued by a
Partnership-Foreign Holders" for a discussion of portfolio interests. As a
result, even if the Trust is not considered to be engaged in a U.S. trade or
business, Certificateholders would be subject to United States Federal income
tax which must be withheld at a rate of 30% on their share of the Trust's income
(without reduction for interest expense), unless reduced or eliminated pursuant
to an applicable income tax treaty. If the Trust is notified that a
Certificateholder is a Foreign Person, the Trust may be required to withhold and
pay over such tax, which can exceed the amounts otherwise available for
distribution to such a Certificateholder. A Foreign Person 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
Certificateholder should
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consult its tax advisor as to whether the tax consequences of holding an
interest in a Certificate make it an unsuitable investment.
Backup Withholding. Distributions made on the Certificates and
proceeds from the sale of the Certificates will 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.
TRUSTS TREATED AS GRANTOR TRUSTS
Tax Characterization of the Trust as a Grantor Trust
As specified in the related Prospectus Supplement, if a
partnership election is not made and the Certificates are not treated as debt
for federal income tax purposes as discussed below, Federal Tax Counsel will
deliver its opinion that the Trust will not be classified as an association
taxable as a corporation and that such Trust will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case, owners
of Certificates (referred to herein as "Grantor Trust Certificateholders") will
be treated for federal income tax purposes as owners of a portion of the Trust's
assets as described below. The Certificates issued by a Trust that is treated as
a grantor trust are referred to herein as "Grantor Trust Certificates."
Characterization. Each Grantor Trust Certificateholder will be
treated as the owner of a pro rata undivided interest in the interest and
principal portions of the Trust represented by the Grantor Trust Certificates
and will be considered the equitable owner of a pro rata undivided interest in
each of the Receivables in the Trust. Any amounts received by a Grantor Trust
Certificateholder in lieu of amounts due with respect to any Receivable because
of a default or delinquency in payment will be treated for federal income tax
purposes as having the same character as the payments they replace.
Each Grantor Trust Certificateholder will be required to
report on its federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire income
from the Receivables in the Trust represented by Grantor Trust Certificates,
including interest, OID, if any, prepayment fees, assumption fees, any gain
recognized upon an assumption and late payment charges received by the Servicer.
Under Sections 162 or 212 each Grantor Trust Certificateholder will be entitled
to deduct its pro rata share of servicing fees, prepayment fees, assumption
fees, any loss recognized upon an assumption and late payment charges retained
by the Servicer, provided that such amounts are reasonable compensation for
services rendered to the Trust. Grantor Trust Certificateholders that are
individuals, estates or trusts will be entitled to deduct their share of
expenses only to the extent such expenses plus such holder's other miscellaneous
itemized deductions exceed two percent of such holder's adjusted gross income.
Such deductions may also be limited by Code Section 68 for an individual whose
adjusted gross income exceeds certain limits. A Grantor Trust Certificateholder
using the cash method of accounting must take into account its pro rata share of
income and deductions as and when collected by or paid to the Servicer. A
Grantor Trust Certificateholder using an accrual method of accounting must take
into account its pro rata share of income and deductions as they become due or
are paid to the Servicer, whichever is earlier. If the servicing fees or other
amounts paid to the Servicer exceed reasonable servicing compensation, the
amount of such excess would be considered as an ownership interest retained by
the Servicer (or any person to whom the Servicer assigned all or a portion of
the servicing fees) in a portion of the interest payments on the Receivables.
The Receivables would then be subject to the stripped bond rules of the Code
discussed below.
Taxation of Holders If Stripped Bond Rules Apply
In the absence of comprehensive regulations, Federal Tax
Counsel is unable to opine as to the tax treatment of stripped bonds. The
preamble to certain stripped bond regulations suggests that each purchaser of a
Grantor Trust Certificate will be treated with respect to each Receivable as the
purchaser of a single stripped bond consisting of all of the stripped portions
of the applicable Receivable (such portions with respect to a Receivable are
referred to herein as a "Stripped Bond") which generally should be treated as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Generally, under Treasury regulations
relating to Stripped Bonds (the "Section 1286 Treasury Regulations"), if the
discount on a Stripped Bond is larger than a de minimis amount (as calculated
for purposes of the OID rules of the Code) such Stripped Bond will be
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considered to have been issued with OID. See "--Original Issue Discount" herein.
Based on the preamble to the Section 1286 Treasury regulations, although the
matter is not entirely clear, the interest income on the Certificates at the sum
of the Pass-Through Rate and the portion of the Servicing Fee Rate that does not
constitute excess servicing should be treated as "qualified stated interest"
within the meaning of the Section 1286 Treasury regulations, assuming all other
requirements for treatment as qualified stated interest are satisfied, and such
income will be so treated in the Trustee's tax information reporting.
Original Issue Discount. When Stripped Bonds have more than a
de minimis amount of OID, the special rules of the Code relating to "original
issue discount" (currently Sections 1271 through 1275) will be applicable to a
Grantor Trust Certificateholder's interest in those Stripped Bonds. Generally, a
Grantor Trust Certificateholder that acquires an interest in a Stripped Bond
issued or acquired with OID must include in gross income the sum of the "daily
portions," as defined below, of the OID on such Stripped Bond for each day on
which it owns a Certificate, including the date of purchase but excluding the
date of disposition. Although the proper method is not entirely clear, the Trust
intends to calculate the daily portions of OID with respect to a Stripped Bond
generally as follows. A calculation will be made of the portion of OID that
accrues on the Stripped Bond during each successive monthly accrual period (or
shorter period in respect of the date of original issue or the final
Distribution Date). This will be done, in the case of each full monthly accrual
period, by adding (i) the present value of all remaining payments to be received
on the Stripped Bond under the prepayment assumption, if any, used in respect of
the Stripped Bonds and (ii) any payments received during such accrual period,
and subtracting from that total the "adjusted issue price" of the Stripped Bond
at the beginning of such accrual period. No representation is made that the
Stripped Bonds will prepay at any prepayment assumption. The "adjusted issue
price" of a Stripped Bond at the beginning of the first accrual period is its
issue price (as determined for purposes of the OID rules of the Code) and the
"adjusted issue price" of a Stripped Bond at the beginning of a subsequent
accrual period is the "adjusted issue price" at the beginning of the immediately
preceding accrual period plus the amount of OID allocable to that accrual period
and reduced by the amount of any payment (other than "qualified stated
interest") made at the end of or during that accrual period. The OID accruing
during such accrual period will then be divided by the number of days in the
period to determine the daily portion of OID for each day in the period. With
respect to an initial accrual period shorter than a full monthly accrual period,
the daily portions of OID must be determined according to an appropriate
allocation under either an exact or approximate method set forth in the OID
Regulations, or some other reasonable method, provided that such method is
consistent with the method used to determine the yield to maturity of the
Receivables.
With respect to the Stripped Bonds, the method of calculating
OID as described above will cause the accrual of OID to either increase or
decrease (but never below zero) in any given accrual period to reflect the fact
that prepayments are occurring at a faster or slower rate than the prepayment
assumption used in respect of the Stripped Bonds.
Taxation of Holders If Stripped Bond Rules Do Not Apply
Premium. The price paid for a Grantor Trust Certificate by a
holder will be allocated to such holder's undivided interest in each Receivable
based on each Receivable's relative fair market value, so that such holder's
undivided interest in each Receivable will have its own tax basis. A Grantor
Trust Certificateholder that acquires an interest in Receivables at a premium
may elect to amortize such premium under a constant interest method. Amortizable
bond premium will be treated as an offset to interest income on such Grantor
Trust Certificate. The basis for such Grantor Trust Certificate will be reduced
to the extent that amortizable premium is applied to offset interest payments.
It is unclear whether a reasonable prepayment assumption should be used in
computing amortization of premium allowable under Section 171. A Grantor Trust
Certificateholder that makes this election for Receivables that are construed to
be acquired at a premium will be deemed to have made an election to amortize
bond premium with respect to all debt instruments having amortizable bond
premium that such Grantor Trust Certificateholder acquires during the year of
the election or thereafter.
If a premium is not subject to amortization using a reasonable
prepayment assumption or it prepays faster than the prepayment assumption, the
holder of a Grantor Trust Certificate acquired at a premium should recognize a
loss if a Receivable prepays in full, equal to the difference between the
portion of the prepaid principal amount of such Receivable that is allocable to
the Grantor Trust Certificate and the portion of the adjusted basis of the
Grantor Trust Certificate that is allocable to such Receivable.
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Market Discount. A Grantor Trust Certificateholder that
acquires an undivided interest in Receivables may be subject to the market
discount rules of Sections 1276 through 1278 to the extent an undivided interest
in a Receivable is considered to have been purchased at a "market discount."
Generally, the amount of market discount is equal to the excess of the portion
of the principal amount of such Receivable allocable to such holder's undivided
interest over such holder's tax basis in such interest. Market discount with
respect to a Receivable will be considered to be zero if the amount allocable to
the Receivable is less than 0.25% of the Receivable's stated redemption price at
maturity multiplied by the weighted average maturity remaining after the date of
purchase. Treasury regulations implementing the market discount rules have not
yet been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a
scheduled payment or a prepayment) or any gain on disposition of a market
discount bond shall be treated as ordinary income to the extent that it does not
exceed the accrued market discount at the time of such payment. The amount of
accrued market discount for purposes of determining the tax treatment of
subsequent principal payments or dispositions of the market discount bond is to
be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to
issue regulations providing for the computation of accrued market discount on
debt instruments, the principal of which is payable in more than one
installment. Because the regulations described above have not been issued,
Federal Tax Counsel is unable to opine as to what effect those regulations might
have on the tax treatment of a Grantor Trust Certificate purchased at a
discount.
A holder who acquired a Grantor Trust Certificate at a market
discount also may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry such Grantor Trust Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Election to Treat All Interest as OID. The OID regulations
permit a Grantor Trust Certificateholder to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method. If such an election were
to be made with respect to a Grantor Trust Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Grantor Trust Certificateholder acquires during the
year of the election or thereafter. Similarly, a Grantor Trust Certificateholder
that makes this election for a Grantor Trust Certificate that is acquired at a
premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Grantor Trust Certificateholder owns or acquires. See "--Premium" herein. The
election to accrue interest, discount and premium on a constant yield method
with respect to a Grantor Trust Certificate is irrevocable.
Taxation of Holders Regardless of Whether Stripped Bond Rules Apply
Sale or Exchange of a Grantor Trust Certificate. Sale or
exchange of a Grantor Trust Certificate prior to its maturity will result in
gain or loss equal to the difference, if any, between the amount received and
the owner's adjusted basis in the Grantor Trust Certificate. Such adjusted basis
generally will equal the seller's purchase price for the Grantor Trust
Certificate, increased by the OID included in the seller's gross income with
respect to the Grantor Trust Certificate, and reduced by principal payments on
the Grantor Trust Certificate previously received by the seller. Subject to the
discussion of market discount above, such gain or loss generally will be capital
gain or loss to an owner for which a Grantor Trust Certificate is a "capital
asset" within the meaning of Section 1221, and will be long-term or short-term
depending on whether the Grantor Trust Certificate has been owned for the
long-term capital gain holding period (currently more than one year).
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Grantor Trust Certificates will be "evidences of indebtedness"
within the meaning of Section 582(c)(1), so that gain or loss recognized from
the sale of a Grantor Trust Certificate by a bank or a thrift institution to
which such section applies will be treated as ordinary income or loss.
Non-U.S. Persons. To the extent that a Grantor Trust
Certificate evidences ownership in underlying Receivables that were issued on or
before July 18, 1984, interest or OID paid by the person required to withhold
tax under Section 1441 or 1442 to (i) an owner that is a Foreign Person or (ii)
a Grantor Trust Certificateholder holding on behalf of an owner that is a
Foreign Person will be subject to federal income tax, collected by withholding,
at a rate of 30% or such lower rate as may be provided for interest by an
applicable tax treaty. Accrued OID recognized by the owner on the sale or
exchange of such a Grantor Trust Certificate also will be subject to federal
income tax at the same rate. Generally, such payments would be considered
portfolio interest and would not be subject to withholding to the extent that a
Grantor Trust Certificate evidences ownership in Receivables issued after July
18, 1984, if such Grantor Trust Certificateholder complies with certain
identification requirements (including delivery of a statement, signed by the
Grantor Trust Certificateholder under penalties of perjury, certifying that such
Grantor Trust Certificateholder is the beneficial owner, is not a U.S. Person
and providing the name and address of such Grantor Trust Certificateholder).
Additional restrictions apply to Receivables where the Obligor is not a natural
person in order to qualify for the exemption from withholding. See "--Tax
Consequences to Holders of the Notes Issued by a Partnership--Foreign Holders"
for a discussion of when interest will constitute portfolio interest.
Information Reporting and Backup Withholding. The Servicer
will furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a Grantor Trust Certificateholder at any
time during such year, such information as may be deemed necessary or desirable
to assist Grantor Trust Certificateholders in preparing their federal income tax
returns, or to enable holders to make such information available to beneficial
owners or financial intermediaries that hold Grantor Trust Certificates as
nominees on behalf of beneficial owners. If a holder, beneficial owner,
financial intermediary or other recipient of a payment on behalf of a beneficial
owner fails to supply a certified taxpayer identification number or if the
Secretary of the Treasury determines that such person has not reported all
interest and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with respect to any payments. Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability.
CERTAIN CERTIFICATES TREATED AS INDEBTEDNESS
Upon the issuance of Notes that are intended to be treated as
indebtedness for federal income tax purposes, Federal Tax Counsel will opine
that based upon its analysis of the factors discussed below and certain
assumptions and qualifications the Certificates will be treated as indebtedness
for federal income tax purposes. However, opinions of counsel are not binding on
the IRS and there can be no assurance that the IRS could not successfully
challenge this conclusion.
The Transferor will express in the Trust Documents its intent
that for federal, state and local income and franchise tax purposes, the Notes
will be indebtedness secured by the Receivables. The Transferor agrees and each
Noteholder, by acquiring an interest in a Note, agrees or will be deemed to
agree to treat the Notes as indebtedness for federal state and local income or
franchise tax purposes. However, because different criteria are used to
determine the non-tax accounting characterization of the transactions
contemplated by the Trust Documents, the Transferor expects to treat such
transactions, for regulatory and financial accounting purposes, as a sale of
ownership interests in the Receivables and not as debt obligations.
In general, whether for federal income tax purposes a
transaction constitutes a sale of property or a loan the repayment of which is
secured by the property, is a question of fact, the resolution of which is based
upon the economic substance of the transaction. The form of a transaction, while
a relevant factor, is not conclusive evidence of its economic substance. In
appropriate circumstances, the courts have allowed taxpayers, as well as the IRS
to treat a transaction in accordance with its economic substance, as determined
under federal income tax laws, notwithstanding that the participants
characterize the transaction differently for non-tax purposes. In some
instances, however, courts have held that a taxpayer is bound by a particular
form it has chosen for a transaction, even if the substance of the transaction
does not accord with its form. It is expected that Federal Tax Counsel will
advise that the rationale of those cases will not apply to the transactions
evidenced by a series of Notes.
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While the IRS and the courts have set forth several factors to
be taken into account in determining whether the substance of a transaction is a
sale of property or a secured indebtedness for federal income tax purposes, the
primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the economic benefits of ownership thereof. Federal Tax Counsel
will analyze and rely on several factors in reaching its opinion that the weight
of the benefits and burdens of ownership of the Receivables has not been
transferred to the Noteholders and that the Notes are properly characterized as
indebtedness for federal income tax purposes. Contrary characterizations that
could be asserted by the IRS are described below under "--Possible
Characterization of the Transaction as a Partnership or as an Association
Taxable as a Corporation."
Taxation of Income of Debt Certificateholders
As set forth above, it is expected that Federal Tax Counsel
will advise the Transferor that the Notes will constitute indebtedness for
Federal income tax purposes, and accordingly, holders of Notes generally will be
taxed in the manner described above in "Trusts Treated as Partnerships--Tax
Consequences to Holders of Notes Issued by a Partnership."
If the Notes are issued with OID that is more than a de
minimis amount as defined in the Code and Treasury regulations (see "Trusts
Treated as Partnerships--Tax Consequences to Holders of Notes Issued by a
Partnership") a United States holder of a Notes (including a cash basis holder)
generally would be required to accrue the OID on its interest in a Certificate
in income for federal income tax purposes on a constant yield basis, resulting
in the inclusion of OID in income in advance of the receipt of cash attributable
to that income. Under Section 1272(a)(6) of the Code, special provisions apply
to debt instruments on which payments may be accelerated due to prepayments of
other obligations securing those debt instruments. However, no regulations have
been issued interpreting those provisions, and the manner in which those
provisions would apply to the Notes is unclear. Additionally, the IRS could take
the position based on Treasury regulations that none of the interest payable on
a Note is "unconditionally payable" and hence that all of such interest should
be included in the Note's stated redemption price at maturity. Accordingly,
Federal Tax Counsel is unable to opine as to whether interest payable on a Note
constitutes "qualified stated interest" that is not included in a Note's stated
redemption price at maturity. Consequently, prospective investors in Notes
should consult their own tax advisors concerning the impact to them in their
particular circumstances. The Prospectus Supplement will indicate whether the
Trust intends to treat the interest on the Notes as "qualified stated interest".
Tax Characterization of Trust
Consistent with the treatment of the Notes as indebtedness,
the Trust will be treated as a security device to hold Receivables securing the
repayment of the Notes. In connection with the issuance of Notes of any series,
Federal Tax Counsel will render an opinion that, based on the assumptions and
qualifications set forth therein, under then current law, the issuance of the
Notes of such series will not cause the applicable Trust to be characterized for
Federal income tax purposes as an association (or publicly traded partnership)
taxable as a corporation.
Possible Classification of the Transaction as a Partnership or as an Association
Taxable as a Corporation
The opinion of Federal Tax Counsel with respect to Debt
Certificates will not be binding on the courts or the IRS. It is possible that
the IRS could assert that, for federal income tax purposes, the transactions
contemplated constitute a sale of the Receivables (or an interest therein) to
the Debt Certificateholders and that the proper classification of the legal
relationship between the Transferor and some or all of the Debt
Certificateholders resulting from the transactions is that of a partnership
(including a publicly traded partnership), a publicly traded partnership taxable
as a corporation, or an association taxable as a corporation. The Transferor
currently does not intend to comply with the federal income tax reporting
requirements that would apply if any Classes of Debt Certificates were treated
as interests in a partnership or corporation.
If a transaction were treated as creating a partnership
between the Transferor and the Debt Certificateholders, the partnership itself
would not be subject to federal income tax (unless it were characterized as a
publicly traded partnership taxable as a corporation); rather, the partners of
such partnership, including the Debt Certificateholders, would be taxed
individually on their respective distributive shares of the partnership's
income,
55
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gain, loss, deductions and credits. The amount and timing of items of income and
deductions of a Debt Certificate could differ if the Debt Certificates were held
to constitute partnership interests, rather than indebtedness. Moreover, unless
the partnership were treated as engaged in a trade or business, an individual's
share of expenses of the partnership would be miscellaneous itemized deductions
that, in the aggregate, are allowed as deductions only to the extent they exceed
two percent of the individual's adjusted gross income, and would be subject to
reduction under Section 68 of the Code if the individual's adjusted gross income
exceeded certain limits. As a result, the individual might be taxed on a greater
amount of income than the stated rate on the Debt Certificates. Finally, all or
a portion of any taxable income allocated to a Debt Certificateholder that is a
pension, profit-sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may, under certain circumstances,
constitute "unrelated business taxable income" which generally would be taxable
to the holder under the Code.
If it were determined that a transaction created an entity
classified as an association or as a publicly traded partnership taxable as a
corporation, the Trust would be subject to federal income tax at corporate
income tax rates on the income it derives from the Receivables, which would
reduce the amounts available for distribution to the Noteholders. Such
classification may also have adverse state and local tax consequences that would
reduce amounts available for distribution to Noteholders. Moreover,
distributions on Notes that are recharacterized as equity in an entity taxable
as a corporation would not be deductible in computing the entity's taxable
income, and cash distributions on such Notes generally would be treated as
dividends for tax purposes to the extent of such deemed corporation's earnings
and profits.
Foreign Investors
If the IRS were to contend successfully that the Notes are
interest in a partnership and if such partnership were considered to be engaged
in a trade or business in the United States, the partnership would be subject to
a withholding tax on income of the Trust that is allocable to a Foreign Investor
and such Foreign Investor would be credited for his or her share of the
withholding tax paid by the partnership. In such case, the holder generally
would be subject to United States federal income tax at regular income tax
rates, and possibly a branch profits tax in the case of a corporate holder.
Alternatively, although there may be arguments to the
contrary, if such partnership is not considered to be engaged in a trade or
business within the United States and if income with respect to the Notes is not
otherwise effectively connected with the conduct of a trade or business in the
United States by the Foreign Investor, the Foreign Investor would be subject to
United States income tax and withholding at a rate of 30% (unless reduced by an
applicable tax treaty) on the holder's distributive share of the partnership's
interest income. See "Trusts Treated as Partnerships--Tax Consequences to
Holders of the Certificates Issued by the Partnership--Tax Consequences to
Foreign Certificateholders" for a more detailed discussion of the consequences
of an equity investment by a Foreign Investor in an entity characterized as a
partnership.
If the Trust were taxable as a corporation, distribution to
foreign investors, to the extent treated as dividends, would generally be
subject to withholding at the rate of 30% unless such rate were reduced or
eliminated by an applicable income tax treaty.
STATE AND LOCAL TAXATION
The discussion above does not address the tax treatment of a
Trust, the Certificates, the Notes or the holders of Certificates or Notes of
any series under state and local tax laws. Prospective investors are urged to
consult their own tax advisors regarding state and local tax treatment of the
Trust, the Certificates, the Notes and the consequences of purchase, ownership
or disposition of the Certificates and Notes under any state or local tax law.
ERISA CONSIDERATIONS
The Prospectus Supplement for each series of Securities will
summarize, subject to the limitations discussed therein, considerations under
ERISA relevant to the purchase of such Securities by employee benefit plans and
individual retirement accounts.
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METHODS OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus
Supplement will be offered in series through one or more of the methods
described below. The Prospectus Supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the public offering or purchase price of such series and the net proceeds to the
Company from such sale.
The Company intends that Securities will be offered through
the following methods from time to time and that offerings may be made
concurrently through more than one of these methods or that an offering of a
particular series of Securities may be made through a combination of two or more
of these methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts
underwriting and public re-offering by underwriters;
2. By placements by the Company with institutional
investors through dealers;
3. By direct placements by the Company with institutional
investors; and
4. By competitive bid.
If underwriters are used in a sale of any Securities (other
than in connection with an underwriting on a best efforts basis), such
Securities will be acquired by the underwriters for their own account and may be
resold from time to time in one or more transactions, including negotiated
transactions, at fixed public offering prices or at varying prices to be
determined at the time of sale or at the time of commitment therefor. The
Securities will be set forth on the cover of the Prospectus Supplement relating
to such series and the members of the underwriting syndicate, if any, will be
named in such Prospectus Supplement.
In connection with the sale of the Securities, underwriters
may receive compensation from the Company or from purchasers of the Securities
in the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Securities may be deemed to be
underwriters in connection with such Securities, and any discounts or
commissions received by them from the Company and any profit on the resale of
Securities by them may be deemed to be underwriting discounts and commissions
under the Securities Act. The Prospectus Supplement will describe any such
compensation paid by the Company.
It is anticipated that the underwriting agreement pertaining
to the sale of any series of Securities will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Securities if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Company will indemnify the
several underwriters and the underwriters will indemnify the Company against
certain civil liabilities, including liabilities under the Securities Act or
will contribute to payments required to be made in respect thereof. The
Commission is of the opinion that indemnification for securities law violations
is contrary to the public policy expressed in the federal securities laws, and,
consequently, that such indemnification provisions are unenforceable.
The Prospectus Supplement with respect to any series offered
by placements through dealers will contain information regarding the nature of
such offering and any agreements to be entered into between the Company and
purchasers of Securities of such series.
Purchasers of Securities, including dealers, may, depending on
the facts and circumstances of such purchases, be deemed to be "underwriters"
within the meaning of the Securities Act in connection with reoffers and sales
by them of Securities. Holders of Securities should consult with their legal
advisors in this regard prior to any such reoffer or sale.
LEGAL OPINIONS
Certain legal matters relating to the issuance of the
Securities of any series, including certain federal and state income tax
consequences with respect thereto, will be passed upon by Dewey Ballantine LLP,
New York, New York, or other counsel specified in the related Prospectus
Supplement.
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FINANCIAL INFORMATION
Certain specified Trust Property will secure each series of
Securities, no Trust will engage in any business activities or have any assets
or obligations prior to the issuance of the related series of Securities, except
for serial issuances by a Master Trust. Accordingly, no financial statements
with respect to any Trust Property will be included in this Prospectus or in the
related Prospectus Supplement.
A Prospectus Supplement may contain the financial statements
of the related Credit Enhancer, if any.
ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for
each series of Securities, contains a summary of the material terms of the
applicable exhibits to the Registration Statement and the documents referred to
herein and therein. Copies of such exhibits are on file at the offices of the
Securities and Exchange Commission in Washington, D.C., and may be obtained at
rates prescribed by the Commission upon request to the Commission and may be
inspected, without charge, at the Commission's offices.
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INDEX OF TERMS
Set forth below is a list of the defined terms used in this
Prospectus and the pages on which the definitions of such terms may be found
herein.
Accrual Securities..................................................6
Additional Receivables.............................................11
Adjustable Rate Receivables........................................11
Advanta.............................................................4
APR.............................................................9, 21
Balloon Payments...................................................11
caps...............................................................11
Cede...............................................................12
CEDEL Participants.................................................30
Certificateholders.................................................36
Certificates.....................................................1, 4
Class...............................................................1
Closing Date...................................................32, 33
Collection Account.................................................34
Commission..........................................................2
Commodity Indexed Securities.......................................28
Company.............................................................4
Company Investment Contracts.......................................34
Contracts........................................................1, 4
Cooperative........................................................30
Credit Enhancement.................................................19
Credit Enhancer....................................................19
Currency Indexed Securities........................................28
Dealers.............................................................4
Debt Securities....................................................13
Defaulted Contracts................................................17
Definitive Securities..............................................31
Depositaries.......................................................29
Direct Participants................................................19
Distribution Account...............................................34
DTC................................................................12
Eligible Deposit Account...........................................34
Eligible Institution...............................................34
Eligible Investments...............................................34
ERISA..............................................................14
Euroclear Operator.................................................30
Euroclear Participants.............................................30
Exchange Act....................................................2, 14
Face Amount........................................................29
FASIT..............................................................14
Federal Tax Counsel................................................44
Finance Subsidiary.................................................17
Fixed Income Securities.............................................6
floors.............................................................11
Forward Purchase Agreement.........................................32
FTC Rule...........................................................43
Funding Period.....................................................32
Grantor Trust Securities...........................................13
Holder-in-Due-Course Rule..........................................43
Indenture...........................................................5
Indenture Trustee...................................................5
Index..............................................................28
Indexed Commodity..................................................28
Indexed Currency...................................................28
Indexed Principal Amount...........................................28
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Indexed Securities.................................................28
Indirect Participants..........................................19, 29
Insolvency Event...................................................38
Insolvency Laws....................................................17
Interest Rate....................................................2, 6
Investment Company Act..............................................8
Investment Earnings................................................34
Issuer..........................................................4, 21
market discount....................................................53
Master Trust........................................................8
Master Trust Agreement..............................................8
Master Trust New Issuance..........................................27
negative arbitrage.................................................34
negative carry.....................................................34
Noteholders........................................................36
Notes............................................................1, 4
Participants.......................................................29
Partnership Interests..............................................13
Pass-Through Rate...................................................2
Pay for Performance Program........................................12
Payment Date....................................................7, 26
Policy...........................................................1, 5
Pool Balance.......................................................25
Pool Factor........................................................25
Pooling Agreement...................................................5
Pre-Funding Account............................................11, 32
Pre-Funding Period.................................................11
Prepayment.........................................................19
principal statistical characteristics..............................33
Prospectus Supplement...............................................1
Rating Agencies....................................................14
Ratings Effect.................................................19, 28
Receivables......................................................1, 5
Receivables Acquisition Agreement..................................20
Record Date.....................................................7, 26
Registration Statement..............................................2
Relief Act.....................................................20, 44
Remittance Period...................................................7
Residual Interest...................................................8
Rule of 78s.....................................................9, 21
Rule of 78s Contracts...........................................9, 21
Rules..............................................................30
Section 1286 Treasury Regulations..................................51
Securities..........................................................1
Securities Act......................................................2
Security Insurer...................................................12
Securityholders.....................................................7
Senior Securities...................................................6
Servicer.........................................................1, 4
Servicer Default...................................................37
Servicing Agreement.................................................5
Servicing Fee......................................................35
Servicing Fee Rate.................................................35
Short-Term Note....................................................46
Simple Interest Contracts......................................10, 22
Stock Index........................................................28
Stock Indexed Securities...........................................28
Strip Securities....................................................6
Stripped Bond......................................................51
Subordinate Securities..............................................7
Terms and Conditions...............................................31
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Transferor..........................................................4
Trust............................................................1, 4
Trust Accounts.....................................................34
Trust Agreement.................................................5, 33
Trust Property................................................1, 4, 9
Trustee.............................................................5
Vehicles.........................................................1, 5
Vendors.............................................................4
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
Securities (the "Global Securities") will be available only in book-entry form.
Investors in the Global Securities may hold such Global Securities through any
of DTC, CEDEL or Euroclear. The Global Securities will be tradeable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors through CEDEL and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of CEDEL and Euroclear and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and
DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of CEDEL and
Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities
will be subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC
in the name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
Relevant Depository which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC
will follow DTC settlement practices. Investor securities custody accounts will
be credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold their Global Securities through
CEDEL or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is
important to establish at the time of the trade where both the purchaser's and
seller's accounts are located to ensure that settlement can be made on the
desired value date.
Trading between DTC Participants. Secondary market trading
between DTC Participants will be settled using the procedures applicable to
prior home equity loan asset-backed certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary
market trading between CEDEL Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC, Seller and CEDEL or Euroclear
Participants. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a CEDEL Participant or a Euroclear
Participant, the purchaser will send instructions to CEDEL or Euroclear through
a CEDEL Participant or Euroclear
A-1
<PAGE>
Participant at least one business day prior to settlement. CEDEL or Euroclear
will instruct the Relevant Depository, as the case may be, to receive the Global
Securities against payment. Payment will include interest accrued on the Global
Securities from and including the last coupon payment date to and excluding the
settlement date, on the basis of the actual number of days in such accrual
period and a year assumed to consist of 360 days. For transactions settling on
the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. Payment will then be made by the Relevant
Depository to the DTC Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to
make available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line
of credit to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business
hours, DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depository for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser.
Due to time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depository, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depository, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist to
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). In the event that the CEDEL Participant or Euroclear Participant have
a line of credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that
purchase Global Securities from DTC Participants for delivery to CEDEL
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action is taken. At least
three techniques should be readily available to eliminate this potential
problem:
A-2
<PAGE>
(a) borrowing through CEDEL or Euroclear for one day (until the purchase side of
the trade is reflected in their CEDEL or Euroclear accounts) in accordance with
the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no later
than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their CEDEL or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so that
the value date for the purchase from the DTC Participant is at least one day
prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities
through CEDEL or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners
of Global Securities that are Non-U.S. Persons (as defined below) can obtain a
complete exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status). If the information shown on Form W-8 changes, a
new Form W-8 must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected
income (Form 4224). A Non-U.S. Person (as defined below), including a non-U.S.
corporation or bank with a U.S. branch, for which the interest income is
effectively connected with its conduct of a trade or business in the United
States, can obtain an exemption from the withholding tax by filing Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in
treaty countries (Form 1001). Non-U.S. Persons residing in a country that has a
tax treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain
a complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
On April 22, 1996, the IRS proposed regulations relating to
withholding, backup withholding and information reporting that, if adopted in
their current form would, among other things, unify current certification
procedures and forms and clarify certain reliance standards. The regulations are
proposed to be effective for payments made after December 31, 1997 but provide
that certificates issued on or before the date that is 60 days after the
proposed regulations are made final will continue to be valid until they expire.
Proposed regulations, however, are subject to change prior to their adoption in
final form.
The term "U.S. Person" means (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity organized in or
under the laws of the United States or any political subdivision thereof, (iii)
an estate that is subject to U.S. federal income tax regardless of the source of
its income or (iv) a trust if a court within the United States can exercise
primary supervision over its administration and at least one United States
fiduciary has the authority to control all substantial decisions of the trust.
The term "Non-U.S. Person" means any person who is not a U.S. Person. This
summary does not deal with all aspects of U.S. Federal income tax
A-3
<PAGE>
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
A-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Set forth below is an estimate of the amount of fees and expenses (other
than underwriting discounts and commissions) to be incurred in connection with
the issuance and distribution of the Offered Certificates.
<TABLE>
<CAPTION>
<S> <C>
SEC Filing Fee...................................................... $ 90,909*
Trustee's Fees and Expenses......................................... 15,000
Legal Fees and Expenses............................................. 212,500
Accounting Fees and Expenses........................................ 30,000
Printing and Engraving Expenses..................................... 35,000
Blue Sky Qualification and Legal Investment Fees and Expenses....... 10,000
Rating Agency Fees.................................................. 40,000
Certificate Insurer's Fee........................................... 40,000
Miscellaneous....................................................... 200,000
- -------------------------------------------------------------------- ---------
TOTAL $ 673,409
- ------------------------------
* In accordance with Rule 429 under the Securities Act of 1933, the
Prospectus included herein is a combined prospectus which also relates to
the Prior Registration Statement. The amount of securities eligible to be
sold under the Prior Registration Statement ($118,308,000.00, as of March
30, 1998) shall be carried forward to this Registration Statement. A filing
fee of $55,058.18 is paid pursuant to this Registration Statement. The
remaining $35,850.91 of the registration fee, attributable to the amount
being carried forward, was paid with the Prior Registration Statement.
Item 15. Indemnification of Directors and Officers.
Indemnification. Under the laws which govern the organization of the
registrant, the registrant has the power and in some instances may be required
to provide an agent, including an officer or director, who was or is a party or
is threatened to be made a party to certain proceedings, with indemnification
against certain expenses, judgments, fines, settlements and other amounts under
certain circumstances.
Section 8 of the Certificate of Incorporation of Advanta Auto Finance
Corporation provides that all officers and directors of the corporation shall be
indemnified by the corporation from and against all expenses, liabilities or
other matters arising out of their status as an officer or director for their
acts, omissions or services rendered in such capacities. Advanta Corp., the
ultimate corporate parent of Advanta Auto Finance Corporation, maintains certain
policies of liability insurance coverage for the officers and directors of
Advanta Corp. and certain of its subsidiaries, including Advanta Auto Finance
Corporation.
The forms of the Underwriting Agreement, filed as Exhibits 1.1 and 1.2
to this Registration Statement, provide that Advanta Auto Finance Corporation
will indemnify and reimburse the underwriter(s) and each controlling person of
the underwriter(s) with respect to certain expenses and liabilities, including
liabilities under the 1933 Act or other federal or state regulations or under
the common law, which arise out of or are based on certain material
misstatements or omissions in the Registration Statement. In addition, the
Underwriting Agreements provide that the underwriter(s) will similarly indemnify
and reimburse Advanta Auto Finance Corporation with respect to certain material
misstatements or omissions in the Registration Statement which are based on
certain written information furnished by the underwriter(s) for use in
connection with the preparation of the Registration Statement.
Insurance. As permitted under the laws which govern the organization of
the registrant, the registrant's By-laws permit the board of directors to
purchase and maintain insurance on behalf of the registrant's agents, including
its officers and directors, against any liability asserted against them in such
capacity or arising out of such agents'
II-1
<PAGE>
status as such, whether or not such registrant would have the power to
indemnify them against such liability under applicable law.
Item 16. Exhibits.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
1.1 Form of Underwriting Agreement - Notes.**
1.2 Form of Underwriting Agreement - Certificates.**
3.1 Certificate of Incorporation of Advanta Auto Finance Corporation.**
3.2 By-Laws of Advanta Auto Finance Corporation.**
4.1 Form of Indenture between the Trust and the Indenture Trustee.**
4.2 Form of Indenture between the Sponsor and the Indenture Trustee.**
4.3 Form of Pooling and Servicing Agreement.**
4.4 Form of Trust Agreement.**
5.1 Opinion of Dewey Ballantine LLP with respect to validity.*
8.1 Opinion of Dewey Ballantine LLP with respect to tax matters.*
10.1 Form of Receivables Acquisition Agreement.**
23.1 Consents of Dewey Ballantine (included in Exhibits 5.1 and 8.1 hereto).
99.1 Form of Prospectus Supplement - Certificates and Notes.**
99.2 Form of Prospectus Supplement - Notes.**
99.3 Form of Prospectus Supplement - Certificates.**
99.4 Form of Prospectus Supplement - Master Trust.**
</TABLE>
- --------------------------
* Filed herewith.
** Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Reg. No. 333-19733)
Item 17. Undertakings.
A. Undertaking in respect of indemnification
Insofar as indemnification for liabilities arising
under the 1933 Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described above in Item 15,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by them is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
B. Undertaking pursuant to Rule 415.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the Prospectus any facts
or events arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement;
(iii) to include any material information
with respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change of such information in the
Registration Statement; provided, however, that paragraphs (i) and (ii) do not
apply if the information required to be included in the post-effective amendment
is contained in periodic reports filed by the Issuer pursuant to Section 13
II-2
<PAGE>
or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the Registration Statement.
(2) That, for the purpose of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
C. Undertaking pursuant to Rule 430A.
The Registrant hereby undertakes:
(1) For purposes of determining any liability under
the Securities Act of 1933, the information omitted from the form of prospectus
filed as part of a registration statement in Reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability
under the Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) With respect to Securities styled as Notes, the
Registrant hereby undertakes to file an application for the purpose of
determining the eligibility of the trustee to act under subsection (a) of
section 310 of the Trust Indenture Act ("Act") in accordance with the rules and
regulations prescribed by the Commission under section 305(b)(2) of the Act."
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Washington, State of Pennsylvania on the 30th
day of March, 1998. As of the date hereof, the Registrant reasonably believes
that the Security rating requirement for asset-backed offerings on Form S-3
will be met at the time of each sale.
ADVANTA AUTO FINANCE CORPORATION
By: /S/ DAVID E. PLANTE
---------------------------------------
Name: David E. Plante
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/ DAVID E. PLANTE Director and President March 30, 1998
- ---------------------------------- (Principal Executive Officer)
David E. Plante
/S/ MARK T. DUNSHEATH Vice President and Treasurer March 30, 1998
- ---------------------------------- (Principal Financial Officer and
Mark T. Dunsheath Principal Accounting Officer)
/S/ MILTON RISEMAN Director and Chairman of the Board March 30, 1998
- ---------------------------------- of Directors
Milton Riseman
II-4
<PAGE>
EXHIBIT INDEX
1.1 Form of Underwriting Agreement - Notes.**
1.2 Form of Underwriting Agreement - Certificates.**
3.1 Certificate of Incorporation of Advanta Auto Finance Corporation.**
3.2 By-Laws of Advanta Auto Finance Corporation.**
4.1 Form of Indenture between the Trust and the Indenture Trustee.**
4.2 Form of Indenture between the Sponsor and the Indenture Trustee.**
4.3 Form of Pooling and Servicing Agreement.**
4.4 Form of Trust Agreement.**
5.1 Opinion of Dewey Ballantine with respect to validity.*
8.1 Opinion of Dewey Ballantine with respect to tax matters.*
10.1 Form of Receivables Acquisition Agreement.**
23.1 Consents of Dewey Ballantine (included in Exhibits 5.1 and 8.1 hereto).
99.1 Form of Prospectus Supplement - Certificates and Notes.**
99.2 Form of Prospectus Supplement - Notes.**
99.3 Form of Prospectus Supplement - Certificates.**
99.4 Form of Prospectus Supplement - Master Trust.**
- ----------------------------
* Filed herewith.
** Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (Reg. No. 333-19733)
II-5
</TABLE>
<PAGE>
EXHIBIT 5.1
[Letterhead of Dewey Ballantine LLP]
March 30, 1998
Advanta Auto Finance Corporation
500 Office Center Drive, Suite 400
Fort Washington, Pennsylvania 19034
Re: Advanta Auto Finance Corporation
Automobile Receivables-Backed Securities
Ladies and Gentlemen:
We have acted as counsel to Advanta Auto Finance Corporation
(the "Registrant") in connection with the preparation and filing of the
registration statement on Form S-3 (such registration statement, the
"Registration Statement") being filed today with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"), in
respect of Automobile Receivables-Backed Securities ("Securities") which the
Registrant plans to offer in series, each series to be issued under a separate
pooling and servicing agreement (a "Pooling and Servicing Agreement) or trust
agreement (a "Trust Agreement"), in substantially one of the forms incorporated
by reference as Exhibits to the Registration Statement, among the Registrant and
an issuer, seller, back-up servicer and trustee, as applicable, to be identified
in the prospectus supplement for such series of Securities (the "Issuer," the
"Seller," the "Back-up Servicer" and the "Trustee," respectively, for such
series of Securities).
We have examined and relied on the originals or copies
certified or otherwise identified to our satisfaction of all such documents and
records of the Company and such other instruments and other certificates of
public officials, officers and representatives of the Company and such other
persons, and we have made such investigations of law, as we have deemed
appropriate as a basis for the opinions expressed below.
The opinions expressed below are subject to bankruptcy,
insolvency, reorganization, moratorium and other laws relating to or affecting
creditors' rights generally and to general equity principles.
We are admitted to the Bar of the State of New York and we
express no opinion as to the laws of any other jurisdiction except as to matters
that are governed by Federal law or the laws of the State of New York. All
opinions expressed herein are based on laws, regulations and policy guidelines
currently in force and may be affected by future
<PAGE>
Advanta Auto Finance Corporation
March 30, 1998
Page 2 of 2
regulations.
Based upon the foregoing, we are of the opinion that:
1. When, in respect of a series of Securities, a Pooling and
Servicing Agreement or Trust Agreement has been duly authorized by all
necessary action and duly executed and delivered by the Registrant, the
Issuer, the Seller, the Back-up Servicer and the Trustee, as
applicable, such Pooling and Servicing Agreement or Trust Agreement
will be a valid and legally binding obligation of the Registrant; and
2. When a Pooling and Servicing Agreement or Trust Agreement
for a series of Securities has been duly authorized by all necessary
action and duly executed and delivered by the Registrant, the Issuer,
the Seller, the Back-up Servicer and the Trustee, as applicable, for
such series, and when the Securities of such series have been duly
executed and authenticated in accordance with the provisions of such
Pooling and Servicing Agreement or Trust Agreement and issued and sold
as contemplated in the Registration Statement and the prospectus, as
amended or supplemented and delivered pursuant to Section 5 of the Act
in connection therewith, such Securities will be legally and validly
issued, fully paid and non-assessable, and the holders of such
Securities will be entitled to the benefits of such Pooling and
Servicing Agreement or Trust Agreement, as applicable.
This opinion is furnished by us as counsel to the Registrant.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to Dewey Ballantine LLP in the
Registration Statement and the related prospectus under the heading "Legal
Matters."
Very truly yours,
/s/ DEWEY BALLANTINE LLP
<PAGE>
EXHIBIT 8.1
[Letterhead of Dewey Ballantine LLP]
March 30, 1998
Advanta Auto Finance Corporation
500 Office Center Drive, Suite 400
Fort Washington, Pennsylvania 19034
Re: Advanta Auto Finance Corporation
Automobile Receivables-Backed Securities
----------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Advanta Auto Finance Corporation
in connection with the preparation and filing of a registration statement on
Form S-3 (the "Registration Statement") being filed today with the Securities
and Exchange Commission pursuant to the Securities Act of 1933, as amended (the
"Act"), in respect of Automobile Receivables-Backed Securities (the
"Securities") which the Registrant plans to offer in series.
The opinion contained in the prospectus contained in the
Registration Statement under the heading "Federal Income Tax Consequences," to
the extent they constitute legal conclusions with respect to matters federal
law, have been prepared by us and, in our opinion, provide a fair and accurate
summary of such law or conclusions.
We hereby consent to the filing of this letter as an Exhibit
to the Registration Statement and to the reference to Dewey Ballantine LLP in
the Registration Statement and related prospectus under the heading "Federal
Income Tax Consequences."
Very truly yours,
/s/ DEWEY BALLANTINE LLP
