<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MID-STATE TRUST VI
(Name of trust issuing Asset Backed Notes)
OF WHICH MID-STATE HOMES, INC. IS DEPOSITOR
(Exact name of registrant as specified in its governing instruments)
------------------------
MID-STATE TRUST VI
C/O WILMINGTON TRUST COMPANY
1100 NORTH MARKET STREET
WILMINGTON, DELAWARE 19890
(302) 651-1000
(Address of principal executive offices)
------------------------
WILMINGTON TRUST COMPANY,
AS OWNER TRUSTEE OF MID-STATE TRUST VI
1100 NORTH MARKET STREET
WILMINGTON, DELAWARE 19890
(302) 651-1000
ATTENTION: CORPORATE TRUST ADMINISTRATION
(Name and address of agent for service)
------------------------
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C> <C>
JORDAN M. SCHWARTZ, ESQ. EDWARD PORTER, ESQ. RENWICK D. MARTIN, ESQ.
PATRICK T. QUINN, ESQ. MID-STATE HOMES, INC. BROWN & WOOD LLP
CADWALADER, WICKERSHAM & TAFT 1500 NORTH DALE MABRY HIGHWAY ONE WORLD TRADE CENTER
100 MAIDEN LANE TAMPA, FLORIDA 33607 NEW YORK, NEW YORK 10048
NEW YORK, NEW YORK 10038 (813) 871-4811 (212) 839-5300
(212) 504-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable 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, please check the following box. / /
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 statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement 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>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED BE REGISTERED UNIT PRICE* REGISTRATION FEE
<S> <C> <C> <C> <C>
Mid-State Trust VI Asset Backed Notes $1,000,000 100% $1,000,000 $303.03
</TABLE>
* Estimated for the purpose of calculating the registration fee.
------------------------
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 THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION, DATED MARCH 20, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
$[ ]
MID-STATE TRUST VI
$[ ] [ ]% ASSET-BACKED NOTES, CLASS A-1
$[ ] [ ]% ASSET-BACKED NOTES, CLASS A-2
$[ ] [ ]% ASSET-BACKED NOTES, CLASS A-3
$[ ] [ ]% ASSET-BACKED NOTES, CLASS A-4
------------------
MID-STATE HOMES, INC.
SERVICER
------------------
Mid-State Trust VI (the "Issuer" or the "Trust"), a business trust
established by Mid-State Homes, Inc. ("Mid-State," the "Depositor" or the
"Servicer"), is offering $[ ] aggregate principal amount of Asset Backed
Notes (the "Notes"). The Trust will issue four classes (each, a "Class") of
Notes, designated as the Class A-1, Class A-2, Class A-3 and Class A-4 Notes.
Interest on the Notes will be payable quarterly on each January 1, April 1, July
1 and October 1 (each, a "Payment Date"), commencing July 1, 1997. The amount of
interest payable on each Payment Date will equal the interest accrued during the
three-month period (or, in the case of the first Payment Date, the
[ ]-month period) ending on the day prior to such Payment Date (each such
period, an "Interest Accrual Period"). On each Payment Date, subject to the
availability of funds, a payment of principal of the Notes, in the amount
described herein, will be applied to the Notes. See "DESCRIPTION OF THE
NOTES--Interest and Principal Payments."
The Notes will be secured by (i) certain building and installment sales
contracts, promissory notes, related mortgages and other security agreements
(the "Accounts") owned directly or indirectly by the Depositor (collectively,
the "Mortgage Collateral") on February 28, 1997 (the "Cut-Off Date"), which will
be transferred to the Trust on the Closing Date (as defined herein), and (ii)
the Collection Account described herein.
There is currently no secondary market for the Notes. The underwriters named
herein (the "Underwriters") intend to make a secondary market in the Notes, but
have no obligation to do so. There can be no assurance that a secondary market
for the Notes will develop or, if it does develop, that it will continue.
PROSPECTIVE INVESTORS SHOULD CONSIDER AND REVIEW THE INFORMATION UNDER "RISK
FACTORS" ON PAGE 11.
It is a condition of issuance that the Class A-1 Notes be rated "Aaa" by
Moody's Investors Service, Inc. ("Moody's") and "AAA" by Standard & Poor's
Ratings Services ("Standard & Poor's"); the Class A-2 Notes be rated at least
"Aa2" by Moody's and "AA" by Standard & Poor's; the Class A-3 Notes be rated at
least "A2" by Moody's and "A" by Standard & Poor's; and the Class A-4 Notes be
rated at least "Baa2" by Moody's and "BBB" by Standard & Poor's.
--------------------------
THE NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT
OBLIGATIONS OF OR INTERESTS IN THE DEPOSITOR OR ANY AFFILIATE THEREOF.
NEITHER THE NOTES NOR THE ACCOUNTS WILL BE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR ANY OTHER ENTITY.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO PUBLIC (1) UNDERWRITING DISCOUNT DEPOSITOR (1)(2)
<S> <C> <C> <C>
Per Class A-1 Note............................... [ ]% [ ]% [ ]%
Per Class A-2 Note............................... [ ]% [ ]% [ ]%
Per Class A-3 Note............................... [ ]% [ ]% [ ]%
Per Class A-4 Note............................... [ ]% [ ]% [ ]%
Total............................................ $[ ] $[ ] $[ ]
</TABLE>
(1) Plus accrued interest, if any, from [ ] 1, 1997.
(2) Before deducting expenses, estimated to be $[ ].
------------------------
The Notes are offered by the Underwriters subject to prior sale, when, as
and if issued to and accepted by them and subject to the Underwriters' right to
reject orders in whole or in part. It is expected that delivery of the Notes
will be made in book-entry form only through the Same Day Funds Settlement
System of The Depository Trust Company on or about [ ], 1997.
--------------------------
LEHMAN BROTHERS
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES INCLUDING
OVER-ALLOTMENT, AND STABILIZING TRANSACTIONS IN SUCH SECURITIES, DURING AND
AFTER THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF
DISTRIBUTION."
AVAILABLE INFORMATION
The Issuer has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (including any amendments thereto) under
the Securities Act of 1933, as amended, with respect to the Notes. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete; with respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. The Registration Statement and such other reports and
information filed by the Issuer can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York
10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The Commission also maintains a site on the World Wide Web at
"http://www.sec.gov" at which users can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system.
The Issuer has filed the Registration Statement, including all exhibits thereto,
through the EDGAR system and therefore such materials should be available by
logging onto the Commission's Web site. The Commission maintains computer
terminals providing access to the EDGAR system at each of the offices referred
to above. Copies of such material also can be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
The address of the principal executive offices of the Issuer is Mid-State
Trust VI, c/o Wilmington Trust Company, 1100 North Market Street, Wilmington,
Delaware 19890, Attention: Corporate Trust Administration and the telephone
number of the principal executive offices of the Issuer is (302) 651-1000.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by the Issuer with the Commission pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), on or after the date of this Prospectus and prior
to the termination of any offering of the Notes, shall be deemed to be
incorporated by reference in this Prospectus and to be a part of this Prospectus
from the date of the filing of such documents. Any statement contained herein or
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference 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.
The Issuer will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents referred to above that have been or may be
incorporated by reference in this Prospectus (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Such requests should be directed to Mid-State Trust VI, c/o
Wilmington Trust Company, 1100 North Market, Wilmington, Delaware 19890,
Attention: Corporate Trust Administration (302) 651-1000.
REPORTS TO NOTEHOLDERS
Unless and until definitive Notes are issued, quarterly unaudited reports as
to the payments made on the Notes will be prepared by the Indenture Trustee and
sent on behalf of the Issuer only to Cede & Co. ("Cede"), as nominee of the
Depository Trust Company ("DTC") and registered holder of the Notes. See
"Description of the Notes--Registration of Notes." Such reports will not
constitute financial statements prepared in accordance with generally accepted
accounting principles. The Issuer will file with the Commission such periodic
reports as are required under the Exchange Act, and the rules and regulations of
the Commission thereunder.
3
<PAGE>
TRANSACTION SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY INTENDED TO OUTLINE THE MAIN FEATURES OF
THE TRANSACTION. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED
IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS. TERMS USED AND NOT DEFINED IN THIS SUMMARY ARE DEFINED ELSEWHERE IN
THIS PROSPECTUS. SEE "INDEX TO PRINCIPAL DEFINED TERMS."
On [ ], 1997 (the "Closing Date"), Mid-State will transfer the Accounts
to the Issuer, and the Issuer will issue the Notes, which will initially be
overcollateralized as described herein. The Issuer's sole source of funds to
make payments on the Notes will be collections on the Accounts. On each Payment
Date the Issuer will be obligated to pay (i) interest due on the Notes and (ii)
principal of the Notes in accordance with the Available Funds Allocation as set
forth under "DESCRIPTION OF THE NOTES-- Interest and Principal Payments."
Following the Target Overcollateralization Date, unless there exists an uncured
Trigger Event, any funds remaining after the Available Funds Allocation will be
released to the Issuer, free of the lien of the Indenture, and then to the
holder of the beneficial interest in the Issuer, which initially will be
Mid-State.
SUMMARY OF NOTES
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Size............................................................... $ $ $ $
Payment Window (in months)*........................................
Initial Weighted Average Life (in years)*..........................
Expected Maturity*.................................................
Maturity Date......................................................
Initial Subordination.............................................. $ $ $ $
</TABLE>
The Payment Dates for each Class of Notes are January 1, April 1, July 1 and
October 1 commencing July 1, 1997.
- ------------------------
* Assumes [ ]% CPR; computed on the basis of the assumptions under
"DESCRIPTION OF THE NOTES--Weighted Average Life of the Notes", including the
assumption that no delinquencies or losses occur with respect to the Accounts.
<TABLE>
<CAPTION>
RATING BY
CLASS INTEREST RATE STANDARD & POOR'S/MOODY'S
- ---------------------------------------------------------------- --------------- -------------------------------
<S> <C> <C>
A-1 % AAA/Aaa
A-2 % AA/Aa2
A-3 % A/A2
A-4 % BBB/Baa2
</TABLE>
4
<PAGE>
SUMMARY OF TERMS
THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS.
TERMS NOT DEFINED IN THIS SUMMARY ARE USED AS DEFINED ELSEWHERE IN THIS
PROSPECTUS. SEE "INDEX TO PRINCIPAL DEFINED TERMS."
<TABLE>
<S> <C>
Securities Offered........... The Class A-1, Class A-2, Class A-3 and Class A-4 Notes will
be issued pursuant to an indenture (the "Indenture") dated
as of [ ] 1, 1997, between Mid-State Trust VI, a
business trust, and First Union National Bank of Florida, as
trustee (the "Indenture Trustee") for the benefit of the
holders of the Notes. See "DESCRIPTION OF THE NOTES." The
Notes will be offered for purchase in denominations of
$1,000 and integral multiples thereof in book-entry form
only.
Issuer....................... The Issuer is a business trust established under the laws of
Delaware by a trust agreement dated as of [ ], 1997
(the "Trust Agreement") between the Depositor and Wilmington
Trust Company, not in its individual capacity but solely as
owner trustee (the "Owner Trustee"). The settlor and sole
beneficiary of the Issuer is the Depositor, an indirect
wholly-owned subsidiary of Walter Industries, Inc. ("Walter
Industries"). The Owner Trustee will act as trustee of the
Trust. See "THE ISSUER." The Notes will be obligations
solely of the Issuer.
Interest and Principal
Payments on the Notes...... Interest on each Class of the Notes will be payable from
Available Funds on each Payment Date in an amount equal to
interest accrued during the three-month period (or the
[ ]-month period, in the case of the first Payment
Date) ending on the day prior to the Payment Date (each such
period, an "Interest Accrual Period"), with respect to (i)
the Class A-1 Notes at the Class A-1 Note Rate, (ii) the
Class A-2 Notes at the Class A-2 Note Rate, (iii) the Class
A-3 Notes at the Class A-3 Note Rate and (iv) the Class A-4
Notes at the Class A-4 Note Rate, in each such case on the
unpaid principal balance of the applicable Class of Notes.
The "Note Rate" of the Class A-1, Class A-2, Class A-3 and
Class A-4 Notes is [ ]%, [ ]%, [ ]% and [ ]%,
respectively. Interest will be calculated on the basis of a
360-day year consisting of twelve 30-day months. See
"DESCRIPTION OF THE NOTES--Interest and Principal Payments."
"Available Funds" for a Payment Date are the funds in the
Collection Account representing (i) collections on the
Accounts during the three-month period (or in the case of
the first Payment Date, the [ ]-month period) (each
such period, a "Collection Period") ending on the close of
business on the last business day of the second month
preceding the month in which such Payment Date occurs plus
(ii) any net reinvestment income earned on funds described
in clause (i) above, from the date two business days prior
to the preceding Payment Date through the date two business
days prior to such Payment Date (each such period, a
"Reinvestment Period"). Available Funds will be net of
Issuer Expenses paid to the time of calculation thereof. On
each Payment Date, Available Funds will be paid first to the
Classes of Notes in the order of their numerical Class
designations
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
until each has received a full payment of interest together
with any unpaid interest which was due in respect of a
previous Payment Date and then to the Classes of Notes in
the order of their numerical Class designations until each
receives the payment in respect of principal described
herein under "DESCRIPTION OF THE NOTES--Interest and
Principal Payments."
Following the Target Overcollateralization Date, unless
there exists an uncured Trigger Event, the portion, if any,
of the funds remaining on any Payment Date after the
allocation of Available Funds described in the preceding
paragraph will be released to the Issuer on that Payment
Date, free of the lien of the Indenture, and will no longer
be available to make payments on the Notes. Such funds will
then be distributed to the owner of the beneficial interest
in the Issuer, which will initially be Mid-State. See
"DESCRIPTION OF THE NOTES-- Interest and Principal
Payments."
Record Date.................. The record date for each Payment Date is the fifteenth day
of the month preceding the month of such Payment Date (the
"Record Date").
Subordination................ The rights of holders of each Class of Notes other than the
Class A-1 Notes (each, a "Subordinated Class") to receive
payments will, in each case, be subordinated to the extent
described herein, to the rights of holders of each Class, if
any, with a prior numerical Class designation. See "RISK
FACTORS--Subordination." This subordination is intended to
enhance the likelihood of timely receipt by the holders of
the Class A-1 Notes of the full amount of interest and
principal to which such Class is entitled. Similarly, but to
decreasing degrees, this subordination is also intended to
enhance the likelihood of timely receipt by the holders of
the Class A-2 and Class A-3 Notes of the full amount of
interest and principal to which such Class is entitled on
each Payment Date. The protection afforded to the holders of
the Class A-1, Class A-2 and Class A-3 Notes by means of
subordination will be accomplished by (i) the application of
the Available Funds on each Payment Date in the sequential
order provided by the Available Funds Allocation and (ii)
the allocation of losses of the Trust to the respective
Classes of Notes in reverse numerical order of their Class
designations. See "DESCRIPTION OF THE NOTES--Interest and
Principal Payments."
Optional Redemption of
Notes...................... All (but not less than all) Classes of Notes may be redeemed
on any Payment Date at the option of the Issuer, at 100% of
the unpaid principal amount of each Class of Notes plus
accrued interest, if, after giving effect to the payment of
principal that would be made on such Payment Date absent
such redemption, the aggregate principal amount of each
Class of Notes outstanding is less than or equal to 10% of
the original aggregate principal amount of such Class of
Notes.
Events of Default............ An Event of Default with respect to the Notes is defined in
the Indenture to include: (a) a Trigger Event shall have
occurred and
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
exists on or after [ ] 1, [ ], or (b) one
or more of the following events occur: (i) a default in the
payment of any amount due under the Notes by the Maturity
Date; (ii) a default in the payment when due of interest on
any Class of Notes and the expiration of a 30-day grace
period; (iii) a default in the observance of certain
negative covenants in the Indenture, (iv) a default in the
observance of any other covenant in the Indenture, and the
continuation of any such default for a period of thirty days
after notice or (v) certain events of bankruptcy or
insolvency with respect to the Issuer. See "THE
INDENTURE--Events of Default."
Security..................... Payments of amounts due on the Notes will be secured by the
following (collectively, the "Collateral"):
A. Mortgage Collateral..... 9,220 Accounts, having on February 28, 1997 (the "Cut-Off
Date") an aggregate Economic Balance of approximately
$462,332,407, will secure the Notes. Such Accounts will
have, as of the Cut-Off Date, a weighted average finance
charge of approximately [ ]% and a weighted average
remaining term to maturity of approximately [ ] years. See
"THE MORTGAGE COLLATERAL" and "SECURITY."
SERVICER; SERVICING AGREEMENT; SUBSERVICING. Mid-State or
any successor servicer will perform all servicing functions
in respect of the Accounts as required by the Servicing
Agreement dated as of [ ] 1, 1997 among the Issuer,
the Servicer and the Indenture Trustee (the "Servicing
Agreement") either directly or through one or more sub-
servicers. The Servicing Agreement will (i) define the
Servicer's servicing obligations; (ii) provide for the
payment of a servicing fee of $25 per month for each Account
outstanding from the Issuer to the Servicer; (iii) include
certain representations and warranties; (iv) impose
reporting requirements on the Servicer; and (v) include
events of default. Jim Walter Homes, Inc. ("Jim Walter
Homes"), an affiliate of the Depositor or unaffiliated third
parties will perform certain servicing functions with
respect to the Accounts pursuant to a subservicing agreement
(the "Subservicing Agreement"). See "THE SERVICING
AGREEMENT."
CERTAIN CONTRACTUAL RIGHTS. The Issuer will assign to the
Indenture Trustee all of its right, title and interest
(including the right to compel performance of the
subservicer and certain rights to the Servicer's servicing
software) under the Servicing Agreement and under the
Purchase and Sale Agreement described below.
B. Collection Account...... Prior to the Closing Date, a collection account relating to
the Collateral (the "Collection Account") will be
established with and in the name of the Indenture Trustee.
On the Closing Date, the Issuer will deposit into the
Collection Account cash in an amount equal to all payments
(including prepayments) received in respect of the Accounts
since the Cut-Off Date and up to the date that is five
business days prior to the Closing Date. Thereafter, as long
as any Note remains outstanding, all payments received in
respect of the Accounts and required to be so deposited will
be deposited in the Collection Account. The foregoing
amounts deposited into the Collection
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Account, less Issuer Expenses, will be available to make
payments of principal of, and interest on, the Notes.
Amounts on deposit in the Collection Account will be
invested in Eligible Investments. See "SECURITY--Collection
Account."
Representations and
Warranties Concerning the
Mortgage Collateral........ The Issuer will represent and warrant, among other things,
that (i) the information delivered to the Indenture Trustee
with respect to the Mortgage Collateral is true and correct
as of the date such information was given; (ii) at the
Closing Date, each mortgage, deed of trust or other security
agreement that constitutes the Mortgage Collateral shall
constitute a valid first priority lien upon and secure title
to the property (the "Mortgaged Property") described therein
and such security agreement and the promissory note secured
thereby are enforceable in accordance with their terms; and
(iii) at the Closing Date, the Issuer is the sole owner of
each Account, has good title to such Account and has full
right and authority to transfer such Account and to grant a
security interest in such Account to the Indenture Trustee.
The Issuer is required to use its best efforts to eliminate
or otherwise cure any circumstances or conditions in respect
of which such representation or warranty was incorrect as of
the time made, but is not required to release or substitute
Mortgage Collateral. See "THE INDENTURE--Representations and
Warranties."
Origination of Accounts...... All of the Accounts were originated by Jim Walter Homes. Jim
Walter Homes is in the business of marketing and supervising
the construction of standardized, partially-finished,
detached, single-family residential homes. The homes are
sold directly to customers through approximately 109 branch
offices, serving approximately 24 states, primarily in the
southern region of the United States.
Purchase and Sale
Agreement.................. The Depositor and the Issuer will enter into a Purchase and
Sale Agreement dated as of the Closing Date (the "Purchase
and Sale Agreement") pursuant to which the Depositor will
sell and assign, and the Issuer will purchase, all of the
Accounts. See "THE PURCHASE AND SALE AGREEMENT."
Trustee...................... First Union National Bank of Florida will act as the
Indenture Trustee.
Owner Trustee................ Wilmington Trust Company will be the Owner Trustee pursuant
to the Trust Agreement. The liability of the Owner Trustee
in connection with the issuance and sale of the Notes and in
respect of the Issuer's obligations under the Notes is
limited solely to the express obligations of the Owner
Trustee set forth in the Trust Agreement and the Indenture.
Risk Factors................. Various risk factors related to the purchase of Notes are
discussed under "Risk Factors," including, among others, (i)
the factors (including the effect of changes in mortgage
market interest rates) affecting the weighted average life
of the Notes and the reinvestment risk borne by investors
and (ii) the risks related to the subordination of each
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Class of Notes (other than the Class A-1 Notes) to the
Classes of Notes having prior numerical Class designations.
Legal Investment
Considerations............. The Notes will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended. As a result, the appropriate
characterization of the Notes under various legal investment
restrictions, and thus the ability of investors subject to
these restrictions to purchase the Notes, may be subject to
significant interpretative uncertainties. Investors should
consult their legal advisors to determine whether and to
what extent the Notes constitute legal investments for them.
See "LEGAL INVESTMENT CONSIDERATIONS."
ERISA Considerations......... Under the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), and the Internal Revenue Code of 1986,
as amended (the "Code"), a pension or other employee benefit
plan covered by ERISA or retirement arrangements which are
subject to ERISA or Section 4975 of the Code (collectively,
"Plans") with respect to which the Depositor or any
affiliate is a service provider, may acquire the Notes only
under certain limited circumstances. [Brown & Wood LLP],
counsel for the Underwriters and special counsel for the
Issuer as to ERISA matters, is of the opinion that the Notes
will be considered debt instruments rather than equity
interests of the Issuer for ERISA purposes. See "ERISA
CONSIDERATIONS."
Tax Status of the Notes...... The Notes will be treated as debt for federal income tax
purposes. If the Notes are issued with original issue
discount, Noteholders generally will be required to include
the original issue discount in gross income over the life of
the Notes. The Notes will not constitute "loans secured by
an interest in real property" for "domestic building and
loan associations" or "real estate assets" for "real estate
investment trusts." See "CERTAIN FEDERAL INCOME TAX CONSE-
QUENCES."
Use of Proceeds.............. The net proceeds of the offering of the Notes will be used
by the Issuer to purchase the Mortgage Collateral from the
Depositor. See "USE OF PROCEEDS."
Ratings...................... It is a condition of issuance that the Class A-1 Notes be
rated "Aaa" by Moody's Investors Service, Inc. ("Moody's")
and "AAA" by Standard & Poor's Ratings Services ("Standard &
Poor's"); the Class A-2 Notes be rated at least "Aa2" by
Moody's and "AA" by Standard & Poor's; the Class A-3 Notes
be rated at least "A2" by Moody's and "A" by Standard &
Poor's; and the Class A-4 Notes be rated at least "Baa2" by
Moody's and "BBB" by Standard & Poor's. See "NOTE RATINGS."
</TABLE>
9
<PAGE>
RISK FACTORS
Prospective investors should consider the following risk factors in
considering the purchase of Notes.
LIMITED LIQUIDITY
THERE CURRENTLY IS NO SECONDARY MARKET FOR THE NOTES.
The Underwriters intend to make a market in the Notes but are not obligated
to do so. There can be no assurance that such a market will develop or, if one
does develop, that it will provide Noteholders with liquidity of investment or
will continue for the life of the Notes.
LIMITED ASSETS
The Notes will represent obligations of the Issuer, whose assets will
consist solely of the Collateral pledged as security under the Indenture. No
recourse is available with respect to payments on the Notes to the Depositor,
Jim Walter Homes, or any other affiliate of the Depositor. If the Issuer is
unable to make the payments due on the Notes and an Event of Default under the
Indenture occurs and the maturity of the Notes is accelerated, it is unlikely
that the Issuer will be able to pay the accelerated principal amount due on the
Notes at the time of acceleration. None of the Notes or the Accounts will be
guaranteed or insured by any governmental instrumentality or any other entity.
RISKS IN THE EVENT OF INSOLVENCY OF THE DEPOSITOR
Under the Purchase and Sale Agreement, the Depositor will represent and
warrant that it has validly sold and assigned to the Issuer all of its right,
title and interest in the Accounts. However, if, in a bankruptcy proceeding
involving the Depositor, a bankruptcy trustee, the Depositor as debtor in
possession or a creditor of the Depositor were to take the position that (i) the
transfer of the Accounts to the Issuer should be recharacterized as a transfer
for security rather than a sale or (ii) the assets of the Issuer (including the
Mortgage Collateral) should be substantively consolidated into the bankruptcy
estate of the Depositor, then delays in payments on the Notes could occur and
(should the bankruptcy court rule in favor of such bankruptcy trustee, debtor in
possession or creditor) reductions in payments on the Notes could result. It is
possible that the risk of recharacterizing the sale of the Accounts as a
transfer for security is increased by the position to be taken by the Depositor
that the transfer of the Accounts is not a sale under generally accepted
accounting principles or for income and other tax purposes and that the risk of
substantive consolidation is increased by the fact that the Issuer is a trust of
which the Depositor is the sole beneficiary.
The Purchase and Sale Agreement will provide that, if the intended sale is
recharacterized as a transfer for security, then the Depositor thereby grants to
the Issuer a security interest in the Mortgage Collateral. To the extent that
the Depositor is deemed to have granted a security interest in the Accounts to
the Issuer and such security interest was validly perfected (see "Security
Interest; Mortgage Collateral" below) more than 90 days prior to any insolvency
of the Depositor, was not granted or taken with the intent to hinder, delay or
defraud the Depositor or its creditors and has been validly assigned to the
Indenture Trustee, such security interest should not be subject to avoidance in
the event of the insolvency of the Depositor. In such event, while payments
already made to the Indenture Trustee with respect to the Accounts should not be
subject to recovery by a bankruptcy trustee of the Depositor, delays in payments
on the Notes and possible reductions in the amount of those payments could
occur.
OVERCOLLATERALIZATION
As of the Cut-Off Date, the aggregate Economic Balance of the Accounts (the
"Aggregate Economic Balance") was approximately $462,332,407. On each Payment
Date prior to the Target Overcollateralization Date, unless there exists an
uncured Trigger Event, Available Funds (which are net of Issuer
10
<PAGE>
Expenses), if any, in excess of the amount of interest due on the Notes on such
Payment Date ("Remaining
Available Funds") will be applied to pay principal of the Notes in accordance
with the Available Funds Allocation as set forth under "DESCRIPTION OF THE
NOTES--Interest and Principal Payments" which, in the absence of losses or
delinquencies on the Accounts, will have the effect of increasing the level of
overcollateralization from the original level. The Notes will be
overcollateralized by the Accounts to the extent, if any, by which (a) the
aggregate Economic Balance of the Accounts exceeds (b) the outstanding principal
amount of the Notes. The amount of such overcollateralization will be reduced or
eliminated to the extent that losses incurred in respect of defaulted Accounts,
together with payments on the Accounts cause the Economic Balance of the
Accounts to decline more than the principal amount of the Notes declines on
account of payments of principal thereon. If the protection afforded to the
Notes by such overcollateralization were to be exhausted, and the Accounts
incurred further losses, such losses would be allocated first to the Class A-4
Notes, then to the Class A-3 Notes, then to the Class A-2 Notes and finally to
the Class A-1 Notes, in each case until the principal balance of such Class of
Notes has been reduced to zero. See "THE ACCOUNTS" and "DESCRIPTION OF THE
NOTES--Interest and Principal Payments."
SUBORDINATION
The protection afforded to the holders of the Class A-1, Class A-2 and Class
A-3 Notes by means of subordination will be accomplished by (i) application of
the Available Funds on each Payment Date in the sequential order provided by the
Available Funds Allocation and (ii) the allocation of losses on the Accounts to
the Classes of Notes in reverse order of their numerical Class designations. The
rights of the holders of the Class A-2 Notes to receive payments on the Class
A-2 Notes will be subordinated to such rights of the holders of the Class A-1
Notes; the rights of the holders of the Class A-3 Notes to receive payments will
be subordinated to such rights of the holders of the Class A-1 and Class A-2
Notes; and the rights of the holders of the Class A-4 Notes to receive payments
will be subordinated to such rights of the holders of the Class A-1, Class A-2
and Class A-3 Notes, all to the extent described herein under "DESCRIPTION OF
THE NOTES--Interest and Principal Payments."
In addition, since no party is required to advance delinquent payments on
the Accounts, significant delinquencies (especially if combined with substantial
losses on the Accounts) may result in the inability to make full payments of
interest to all Classes of Notes on a Payment Date. Because Available Funds are
allocated on each Payment Date to the Classes of Notes in the order of their
numerical Class designations, the more subordinate Classes of Notes are more
likely to suffer any such shortfalls than the more senior Classes of Notes.
LOSSES ON ACCOUNTS
In most cases, amounts realized upon resale of repossessed properties may be
less than the outstanding Economic Balances of the related Accounts at the time
of repossession. In addition, certain states have adopted statutes limiting the
right of mortgagees to obtain deficiency judgments against customers following
foreclosure. In the event that the amount realized upon resale is less than the
outstanding Economic Balance of the related Account, the Servicer may be unable
to collect the amount of such deficiency. If losses incurred in connection with
repossessing homes are at levels higher than those historically experienced, the
ability of the Issuer to make required payments on the Notes may be adversely
affected and the Noteholders may incur a loss on their investment. See "THE
ACCOUNTS" and "CERTAIN LEGAL ASPECTS OF THE ACCOUNTS AND RELATED
MATTERS--Anti-Deficiency Legislation and Other Limitations on Creditors."
DELINQUENT ACCOUNTS
As of the Cut-Off Date, approximately [ ]%, [ ]% and [ ]% of
the Accounts had payments which were past due more than 30 days, 60 days and 90
or more days, respectively, and
11
<PAGE>
[ ]% Accounts were in foreclosure. See "DESCRIPTION OF THE
ACCOUNTS--Servicing" and "--Repossessions." Investors should consider the risk
that any of the Accounts may become defaulted Accounts and subsequently the
properties securing such Accounts may become repossessed properties. See
"--Losses on Accounts." Defaults by homeowners on the Accounts may result in the
failure of the Noteholders on a given Payment Date to receive payments in full
in respect of interest or principal. The allocation of losses on the Accounts to
the Classes of Notes in reverse order of their numerical designations may more
likely result in a reduction of the principal balance of the more subordinate
Classes of Notes than of the more senior Classes of Notes without a
corresponding payment of principal thereon. See "--Subordination." Such events
may cause a significant delay in the receipt of principal by the holders of the
more subordinate Classes of Notes, or may cause such Classes of Notes to fail to
receive any payment in respect of principal, and to a lesser extent, interest,
on a given Payment Date.
PREPAYMENT CONSIDERATIONS
The weighted average life and the maturity of each Class of the Notes will
be affected by the prepayment experience on the Accounts and the rate and
frequency of delinquencies of payments due on the Accounts. Prepayments on the
Accounts may be influenced by a variety of economic, geographic, social and
other factors, including national and local economic conditions, repossessions,
aging, seasonality and interest rates. Other factors affecting prepayments on
the Accounts include changes in housing needs, job transfers and unemployment.
Liquidations of defaulted Accounts are generally expected to result in resale of
the repossessed properties and the subsequent origination of new Accounts rather
than cash. In general, if prevailing interest rates fall significantly below the
effective financing rates on the Accounts, the rate of prepayments on the
Accounts is likely to be higher than if prevailing interest rates remain close
to or above the effective financing rates borne by such Accounts. Conversely, if
prevailing interest rates rise above the effective financing rates on such
Accounts, the rate of prepayment would be expected to decrease. As noted above,
no party is required to advance delinquent payments on the Accounts. Even if
Available Funds are sufficient to make full payments of interest on all Classes
of Notes, any such delinquencies will reduce the amount of Remaining Available
Funds available to make payments of principal in respect of the Notes. Any such
delinquencies occurring on or prior to the Target Overcollateralization Date or
during the existence of an uncured Trigger Event will have the effect of
extending the weighted average lives of all Classes of Notes. Following the
Target Overcollateralization Date, any such delinquencies may have the effect of
extending the weighted average lives of one or more Classes of Notes to the
extent that such delinquencies exceed the amount otherwise distributable to the
owner of the beneficial interest in the Issuer. See "DESCRIPTION OF THE
NOTES--Weighted Average Life of the Notes."
If Notes are purchased at a discount or a premium to their principal balance
and the purchaser calculates its anticipated yield to maturity based upon an
assumed rate of payment of principal that is faster or slower than that actually
experienced, the purchaser's actual yield to maturity will be different from
that initially calculated by the purchaser. Investors bear the risk of not being
able to reinvest payments of principal at a yield at least equal to the interest
rate borne by the Notes.
CONSUMER PROTECTION LAWS AND CONSUMER LITIGATION
The Accounts are subject to any claims or defenses that a customer may have
against Jim Walter Homes in connection with the sale, financing and construction
of such customer's home. Accordingly, the Servicer may not be able to recover
the amount due on an Account if a customer successfully asserts such claims or
defenses. See "CERTAIN LEGAL ASPECTS OF THE ACCOUNTS AND RELATED
MATTERS--Consumer Protection Laws."
In May 1991, 444 plaintiffs filed a group action in a Texas state court and
named as defendants, among others, Mid-State Trust II (which had purchased
almost all of the plaintiffs' accounts from Mid-State) and its trustee,
Wilmington Trust Company. The plaintiffs sought damages, based upon certain
alleged construction defects, for common law fraud and for violation of the
Texas Deceptive Trade Practices Act
12
<PAGE>
and the Texas Consumer Credit Code, as well as injunctive relief to prevent
Mid-State Trust II from foreclosing or attempting to collect on any of the
related accounts. Such litigation was settled pursuant to a court-approved
settlement agreement in July 1995. The settlement amount was approximately
$3,600,000 in account balance reductions, plus an approximate aggregate amount
of $27,500 cash to certain homeowner claimants and $2,900,000 as attorney's
fees. In August 1993, the purchasers of three homes in South Carolina instituted
a class action against Jim Walter Homes and Mid-State for alleged defects in
their homes and claims under the South Carolina Consumer Protection Code (the
"South Carolina Code"). The class of plaintiffs included approximately 1600
homeowners whose homes were completed after December 27, 1989. The plaintiffs
alleged violations of certain provisions of the South Carolina Code relating to
the right of homeowners to choose an attorney to represent them in the closing
of the purchase of their homes. In May 1995, the bankruptcy court approved a
settlement of such class action, which essentially provided for (i) a reduction
in the balances owed by the class of plaintiffs on the accounts in the aggregate
principal amount of approximately $15.5 million; (ii) cash disbursements of
$1,000 each (with an aggregate cap of $300,000) to certain classes of former
homeowners who no longer had balances on their accounts; (iii) waiver of the
first two months' payments on the related accounts after the settlement was
implemented; and (iv) legal fees and expenses for the plaintiffs' counsel in an
amount less than $3 million. In February 1995, Jim Walter Homes and Mid-State
filed an adversary action for declaratory judgment in the bankruptcy court in
Tampa, Florida against all South Carolina homeowners who purchased their homes
between July 1, 1982 and December 27, 1989. The complaint in the adversary
action sought a declaration that Jim Walter Homes and Mid-State did not violate
the South Carolina Code. The adversary action was settled for $3,000,000. The
legal fees incurred by Jim Walter Homes and Mid-State for such action were
approximately $360,000.
No group or class action litigation is currently pending against Jim Walter
Homes or Mid-State. In the event that similar actions are brought in Texas,
South Carolina or other jurisdictions involving other accounts, possibly
including Accounts to be sold to the Issuer, it is possible that the Trust would
be named a party thereto and the costs associated with such a litigation could
adversely affect payments on the Notes.
SERVICING
The effective servicing of the Accounts requires a significantly greater
local presence and number of employees than does the servicing of traditional
mortgage loans. In addition, although the Servicing Agreement does not allow the
Servicer to resign except under limited circumstances, it does permit the
Issuer, the Indenture Trustee or the holders of a majority of the aggregate
principal amount of the Notes to remove the Servicer under certain limited
circumstances. If Mid-State were removed as Servicer, Mid-State's and Jim Walter
Homes' system and expertise may be difficult for a successor servicer to
replicate, and collections and recoveries on the Accounts may be adversely
affected. Removal of the Servicer is a Trigger Event, which, under the
circumstances described herein, may result in an Event of Default under the
Indenture. See "THE SERVICING AGREEMENT."
SECURITY INTEREST; MORTGAGE COLLATERAL
The Issuer will grant to the Indenture Trustee, on behalf of the
Noteholders, a security interest in the promissory notes, building and
installment sales contracts and other security agreements underlying each
Account comprising the Mortgage Collateral. Local counsel in those jurisdictions
where a substantial number of properties are located ("Local Counsel") will
render opinions to the effect that, subject to certain exceptions, if certain
procedures prescribed therein are followed, the Indenture Trustee will have a
valid assignment of the mortgages, deeds of trust and similar security
instruments included in the Mortgage Collateral that were originated in each of
their respective jurisdictions. After the issuance of the Notes, the Indenture
Trustee and the Issuer intend to comply with the procedures set forth in such
opinions. In addition, the Issuer intends to comply with procedures customarily
followed by mortgage lenders and recommended by Local Counsel with respect to
the creation and perfection in favor of the Indenture
13
<PAGE>
Trustee of a lien on the promissory notes and building and installment sales
contracts and other security agreements included in the Mortgage Collateral and
collections thereof. However, there can be no assurance that such procedures
will be adequate to create and perfect a security interest in all items included
in the Mortgage Collateral and all amounts in the Collection Account. If the
security interest of the Indenture Trustee is challenged, delays in payments on
the Notes and possible reductions in the amount of payments of principal of, and
interest on, the Notes could occur.
THE DEPOSITOR
The Depositor was established in 1958 to purchase mortgage installment notes
from Jim Walter Homes relating to homes constructed and sold by Jim Walter Homes
and its predecessor and to service such installment notes. Jim Walter Homes
currently is the eighth largest builder of single-family detached housing in the
nation. Over 96% of the homes sold by Jim Walter Homes are financed by Jim
Walter Homes, which sells the related accounts to Mid-State. As of the Cut-Off
Date, the Depositor's mortgage portfolio (including mortgage indebtedness sold
to others and serviced by the Depositor) had an aggregate Economic Balance of
approximately $[ ] billion. Each of Jim Walter Homes and the Depositor is an
indirect wholly-owned subsidiary of Walter Industries. The offices of the
Depositor are located at 1500 North Dale Mabry Highway, Tampa, Florida 33607.
In December 1989, Walter Industries and 31 of its subsidiaries, including
the Depositor, each filed a voluntary petition for reorganization under Chapter
11 of the United States Bankruptcy Code with the Bankruptcy Court for the Middle
District of Florida, Tampa Division. In March 1995, Walter Industries and its
subsidiaries, including the Depositor, emerged from bankruptcy pursuant to an
Amended Joint Plan of Reorganization dated December 9, 1994 as modified on March
1, 1995. Pursuant to such plan, Walter Industries and its subsidiaries,
including the Depositor, have repaid substantially all of their unsecured claims
and senior and subordinated indebtedness subject to the Chapter 11 proceedings.
THE ISSUER
ISSUER
The Issuer has been created pursuant to the Trust Agreement between the
Depositor and the Owner Trustee. Under the terms of the Trust Agreement, the
Depositor has conveyed to the Owner Trustee a nominal amount of cash to
establish the Trust. In exchange, the Depositor has received certificates
evidencing beneficial ownership of the Trust created under such agreement. On
the Closing Date, the Issuer will purchase the Accounts from the Depositor with
the net proceeds from the sale of the Notes. The Issuer will pledge the Accounts
to the Indenture Trustee, for the benefit of the Noteholders, as security for
the Notes. See "USE OF PROCEEDS." Subject to certain restrictions, the Depositor
may sell or assign certificates of beneficial ownership in the Issuer to another
entity or entities.
The Trust Agreement provides that the Issuer may not conduct any activities
other than those related to the issuance and sale of Notes, the purchase of the
Accounts, the financing of properties repossessed by the Issuer, the investment
of certain funds in Eligible Investments, as defined in the Indenture, and such
other limited activities as may be required in connection with reports and
payments to holders of the Notes and the beneficial interest of the Trust. See
"SECURITY--Mortgage Collateral--Investment of Funds." Neither the Owner Trustee
in its individual capacity nor the holders of the beneficial interest of the
Trust are liable for payment of principal of or interest on the Notes and each
holder of Notes will be deemed to have released the Owner Trustee and each
holder of the beneficial interest of the Trust from any such liability. The
Trust Agreement provides that the Trust will terminate upon the earlier to occur
of (i) the final sale or disposition of the trust estate and the distribution of
all proceeds thereof to the owners or (ii) 21 years less one day following the
death of the survivor of certain individuals described in the Trust Agreement,
but in no event later than [ ] 1, 2062.
14
<PAGE>
It is not contemplated that annual or other regular meetings of the
Noteholders will be held. The Indenture, however, permits Holders of a certain
percentage of principal amount of each Class of Notes to approve certain
amendments to the Indenture and, in certain circumstances, to declare the
principal of the Notes due and payable. See "THE INDENTURE--Modification of
Indenture" and "--Rights Upon Event of Default."
USE OF PROCEEDS
The proceeds from the sale of the Notes will be used by the Issuer to
purchase the Accounts and to pay the expenses of the offering. The Depositor
will use a portion of the net proceeds from its sale of the Accounts to purchase
the Accounts from Mid-State Trust V and the remainder for general corporate
purposes. Mid-State Trust V is a Delaware business trust organized on February
27, 1995 for which Mid-State is the depositor. The Accounts have been owned and
will be owned by Mid-State Trust V until the Closing Date. The price the Issuer
pays for the Accounts will represent the net proceeds from the sale of the
Notes.
DISCUSSION AND ANALYSIS OF ISSUER'S FINANCIAL CONDITION
EXPENSES
Substantially all of the anticipated expenses of the Issuer will consist of
interest payments due on the Notes and amounts payable for the Issuer's
operating expenses (including, without limitation, amounts payable under the
Indenture, the Trust Agreement and the Servicing Agreement and any taxes that
may be payable by the Trust). Payments on the Accounts are intended to be
sufficient to make timely payments of interest on the Notes and to retire the
Notes not later than the Maturity Date.
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of the Issuer's funds will be collections in respect of
the Accounts and reinvestment income therefrom. The Issuer is expected to have
sufficient liquidity and capital resources to make timely payments of interest
on the Notes and to retire the Notes not later than the Maturity Date. See
"DESCRIPTION OF THE NOTES--Interest and Principal Payments" and "SECURITY."
RESULTS OF OPERATIONS
The Issuer's results of operations will depend primarily on the rate at
which payments are made on the Accounts, the level of income from reinvestment
of payments on the Accounts and the level of the Issuer's operating expenses.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation and increased prices may result in increases in the level of the
Issuer's operating expenses. However, such increases may be offset, in whole or
in part, by increases in income from reinvestment of payments on the Mortgage
Collateral. See "SECURITY."
THE ACCOUNTS
HOMEBUILDING ACTIVITIES
ALL OF THE ACCOUNTS WERE ORIGINATED BY JIM WALTER HOMES.
Jim Walter Homes is in the business of marketing and supervising the
construction of standardized, partially finished, detached, single-family
residential homes. The homes are sold directly to customers through
approximately 109 branch offices, serving approximately 24 states, primarily in
the southern region
15
<PAGE>
of the United States. A home is constructed on the customer's land only after a
building contract has been entered into and Jim Walter Homes is satisfied that
the customer has clear title to the land and that the site is suitable for
building. Currently, Jim Walter Homes offers over 30 models of homes in various
stages of completion ranging from a "shell" to a "90% completed" home. A shell
is a home completed on the outside with rough floors, partition studding and
closet framing but without interior walls, floor finishing, plumbing, electrical
wiring and fixtures, doors and cabinetry. A 90% completed home has a completed
interior except for interior paint, floor covering and utility hook-up.
Jim Walter Homes is a contractor rather than a developer, does not own or
sell land to customers except in connection with resales of repossessed homes
and does not maintain its own construction crews. Local independent contractors
construct the homes using their own construction crews. Jim Walter Homes'
employees, however, supervise construction to ensure that it conforms to its
specifications. The following chart shows the sales volume of Jim Walter Homes
and the percent of homes sold in three stages of completion for fiscal years
1978 to 1996 and for the nine months ended February 28, 1997:
HOMEBUILDING ACTIVITIES
<TABLE>
<CAPTION>
PERCENT OF UNIT SALES
----------------------
UNITS VARIOUS
SOLD SHELL STAGES 90%
------- --- --- ---
<S> <C> <C> <C> <C>
Nine Months Ended February 28, 1997....................
<CAPTION>
FISCAL YEAR ENDED MAY 31
- -------------------------------------------------------
<S> <C> <C> <C> <C>
1996................................................... 3,760 18 4 78
1995................................................... 4,126 25 9 66
1994................................................... 4,331 23 10 67
1993................................................... 4,784 26 12 62
1992................................................... 5,305 29 13 58
1991................................................... 5,229 30 13 57
1990................................................... 5,213 30 11 59
1989................................................... 5,126 27 9 64
1988 (nine months)..................................... 4,240 28 7 65
<CAPTION>
FISCAL YEAR ENDED AUGUST 31
- -------------------------------------------------------
<S> <C> <C> <C> <C>
1987................................................... 6,100 30 10 60
1986................................................... 6,403 28 12 60
1985................................................... 7,203 43 25 32
1984................................................... 7,809 37 25 38
1983................................................... 8,706 27 33 40
1982................................................... 10,267 26 34 40
1981................................................... 9,226 27 37 36
1980................................................... 10,095 27 36 37
1979................................................... 9,358 21 38 41
1978................................................... 8,952 20 38 42
</TABLE>
Jim Walter Homes' business has tended to be countercyclical to national home
construction activity when interest rates are high. In times of high interest
rates and limited availability of mortgage funds that result in limited new home
construction, Jim Walter Homes' volume of home sales tends to increase due to
the favorable financing it offers. During the period from 1982 through 1997
mortgage rates have generally declined substantially, creating greater
competition for Jim Walter Homes.
16
<PAGE>
UNDERWRITING AND CREDIT POLICIES
Substantially all homes Jim Walter Homes sells are purchased with financing
it arranges. Generally, 100% of the purchase price is financed. To qualify for
financing a potential customer must provide information concerning his or her
monthly income and employment history as well as a legal description of and
evidence that the customer owns the land on which the home is to be built. A
customer's income and employment usually are verified through telephone
conversations with such customer's employer and by examining his or her pay
stubs, W2 forms or, if the customer is self-employed, income tax returns. An
applicant must have a minimum of one year's continuous employment or, if he or
she has changed jobs, the new job must be in the same field of work. Only a
small percentage of secondary income (second jobs or part-time work) is utilized
in qualifying applicants. Ownership of the land is verified by examining the
title record. In addition, Jim Walter Homes' credit department obtains a credit
report. If a favorable report is obtained and the required monthly payment does
not exceed 25% of the customer's monthly gross income, the application usually
is approved and a building or installment sales contract is executed, a title
report is ordered and frequently a survey of the property is made. Surveys are
performed by independent registered surveyors when, in the opinion of Jim Walter
Homes, additional information beyond examination of the title record is needed.
Such additional information is primarily concerned with verification of legal
description, ownership of land and existence of any encroachments. Jim Walter
Homes does not use a point or grade credit scoring system. Particular attention
is paid to the credit information for the most recent three to five years.
Attention is also given to the customer's total indebtedness and total other
monthly payments on a judgmental basis by the credit department. The customer's
credit standing is considered favorable if the employment history, income and
credit report meet the aforementioned criteria. The building and installment
sale contract is subject to (i) except in the State of Texas, executing a
promissory note which is secured by a first lien on the land and the home to be
built, (ii) executing a mortgage, deed of trust, mechanic's lien contract or
other security instrument, (iii) receiving a satisfactory title report, (iv)
inspecting the land to determine that it is suitable for building and (v)
obtaining required permits. Although the mortgages, deeds of trust and similar
security instruments constitute a first lien on the land and the home to be
built, such security instruments are not insured by the Federal Housing
Administration or guaranteed by the Department of Veterans Affairs or otherwise
insured or guaranteed.
Jim Walter Homes does not obtain appraisals or title insurance. Although
consideration is given to the ratio of the amount financed to the estimated
value of the home and the land securing such amount, there is no explicit
appraisal-based loan-to-value test. However, there is a requirement that the
value of the lot on which the home is to be built, as estimated solely on the
basis of Jim Walter Homes' mortgage servicing division employees' experience and
knowledge, be at least equal to 10% of the cash selling price of the home.
Before occupying a new home, the customer must complete the utility and sewer
hook-ups, and any of the other components not purchased from Jim Walter Homes,
arrange for the building inspection and, if required, obtain a certificate of
occupancy. Upon construction of a new home to the agreed-upon percentage of
completion, Jim Walter Homes conveys the Account represented thereby, including
the underlying documents related thereto, to the Depositor in the ordinary
course of business.
In April 1988 the Depositor sold accounts having an aggregate Economic
Balance of approximately $1.75 billion to Mid-State Trust II; in July 1992 the
Depositor sold accounts having an aggregate Economic Balance of approximately
$301 million to Mid-State Trust III; in March 1995 the Depositor sold accounts
having an aggregate Economic Balance of approximately $827 million to Mid-State
Trust IV. As of the Cut-Off Date, there were 9,220 accounts (the "Trust V
Accounts") owned by Mid-State Trust V, with an aggregate Economic Balance of
approximately $462,332,407. The Trust V Accounts were sold by the Depositor to
Mid-State Trust V. Mid-State Trust V is party to a warehouse financing with
Enterprise Funding Corporation ("Enterprise") whereby Enterprise is obligated to
provide up to $500,000,000 of financing, from time to time (as of the Cut-Off
Date, approximately $345,000,000 was outstanding), to Mid-State Trust V. The
operations of Enterprise are administered by an affiliate of Nationsbank Capital
Markets, Inc., one of the Underwriters. The amounts outstanding under such
facility are secured by the
17
<PAGE>
Trust V Accounts. At the Closing Date, all of the Trust V Accounts will be
released from the warehouse facility and Mid-State Trust V will transfer such
accounts to the Depositor which accounts will, in turn, be sold to the Issuer
and will thereafter constitute the Accounts.
Each of Mid-State Trust II, Mid-State Trust III, Mid-State Trust IV and
Mid-State Trust V is a Delaware business trust for which Mid-State is the
depositor. The Depositor continues to service those accounts, and Jim Walter
Homes continues to act as subservicer. (The accounts owned by Mid-State Trust
II, Mid-State Trust III and Mid-State Trust IV are reflected in some of the
tables in this section but are not security for the Notes and will not benefit
the Noteholders in any way). As used herein, the term "account" includes
building and installment sales contracts, related mortgages, mechanic's lien
contracts and other security agreements and promissory notes originated by Jim
Walter Homes, including the accounts sold to Mid-State Trust II, Mid-State Trust
III, Mid-State Trust IV and Mid-State Trust V.
The following table summarizes certain aggregate characteristics of the
portfolio of the accounts during the last 19 fiscal years. The amounts presented
are the gross receivable amounts which consist of the amount financed and the
total dollar amount of finance charges to be paid over the duration of the
related accounts ("Gross Receivable Amount"). Although account production has
declined in recent years, the table shows that the aggregate balance of the
portfolio and scheduled payments thereon have generally increased due to higher
average sales prices resulting from the sale of larger models and a greater
percentage of 90% complete homes sold. The table also shows that repossessions
increased during the early 1990's due to unfavorable economic conditions,
including the real estate market, but since 1992 have generally declined. The
information presented summarizes the aggregate characteristics of such accounts
at the times indicated and is not intended to reflect characteristics of the
Mortgage Collateral.
CERTAIN ACCOUNT CHARACTERISTICS
<TABLE>
<CAPTION>
ACCOUNT AGGREGATE
PRODUCTION ANNUAL ACCOUNT
-------------------- SCHEDULED SALES ENDING
NEW RESALES PAYMENTS REPOSSESSIONS PREPAYMENTS (REPURCHASES) BALANCE
--------- --------- ----------- ------------- ------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Nine Months Ended
February 28, 1997.....................
FISCAL YEAR ENDED MAY 31,
1996.................................. 506,604 116,314 318,201 119,790 233,541 4,208,252
1995.................................. 527,230 130,687 285,780 128,897 162,414 4,256,866
1994.................................. 516,822 118,703 292,117 123,882 230,802 -- 4,176,040
1993.................................. 538,172 128,088 290,548 127,468 125,368 (11,810) 4,187,316
1992.................................. 551,894 123,715 272,149 131,635 84,988 (7,981) 4,052,630
1991.................................. 514,849 109,762 262,908 118,954 58,952 -- 3,857,812
1990.................................. 470,725 104,913 248,901 110,971 57,140 (10,616) 3,674,015
1989.................................. 420,170 105,846 231,651 127,080 59,163 -- 3,504,773
1988 (nine months).................... 329,526 67,433 168,430 88,553 39,984 -- 3,396,651
FISCAL YEAR ENDED AUGUST 31
1987.................................. 461,181 100,104 210,058 121,110 64,382 -- 3,296,659
1986.................................. 473,599 90,215 194,142 102,951 49,058 -- 3,130,924
1985.................................. 522,706 76,093 176,449 84,018 35,602 -- 2,913,261
1984.................................. 545,715 69,817 165,105 76,496 33,113 136,738 2,610,531
1983.................................. 591,928 65,443 148,352 69,212 25,109 156,631 2,406,451
1982.................................. 669,757 46,656 148,373 45,552 18,879 214,759 2,148,384
1981.................................. 501,329 42,974 136,242 39,841 28,101 -- 1,859,534
1980.................................. 428,515 32,999 115,047 34,585 28,657 -- 1,519,415
1979.................................. 341,512 31,043 97,405 34,296 39,342 -- 1,236,190
1978.................................. 282,170 30,868 95,843 33,592 45,727 -- 1,034,678
</TABLE>
18
<PAGE>
DESCRIPTION OF ACCOUNTS
With respect to sales of new homes, each Account (other than those
originated in the State of Texas) is evidenced by a promissory note (each, a
"Promissory Note"), a building contract (each, a "Building Contract"), a related
mortgage and certain other security agreements and each Account originated in
the State of Texas is evidenced by a retail installment contract (each, a "Texas
Building Contract") and a mechanic's lien contract with power of sale (each, a
"Mechanic's Lien Contract"). With respect to sales of repossessed homes, each
Account (other than those originated in the State of Texas) is evidenced by a
Promissory Note, a retail installment sales contract (each, a "Sales Contract,"
and together with the Building Contracts, "Retail Contracts"), a related
mortgage and certain other security agreements and each Account originated in
the State of Texas is evidenced by a retail installment sales contract (each, a
"Texas Sales Contract," and together with the Texas Building Contracts, "Texas
Contracts") and a deed with vendor's lien together with a purchase money deed of
trust (collectively, each, a "Texas Resale Mortgage," and together with the
Mechanic's Lien Contracts, "Texas Mortgages"). Each Account is secured by a
first lien on a single-unit residential home and the real property on which such
home is situated.
Each Promissory Note and Texas Contract obligates the homeowner to pay the
Gross Receivable Amount of the related Account. Each Promissory Note and Texas
Contract generally requires equal monthly payments in amounts sufficient to
amortize the Gross Receivable Amount over the term thereof. The terms of the
Promissory Notes and Texas Contracts generally range from 144 to 360 months. The
Promissory Notes do not have a stated interest rate and neither the Promissory
Notes nor the Texas Contracts divide the monthly payments into interest and
principal portions.
Each Retail Contract and Texas Contract sets forth (i) the amount that is
being financed by the related customer (generally the purchase price of the
related home), (ii) the total finance charge that such customer will incur
through the maturity date of the Promissory Note or the Texas Contract, as the
case may be, and (iii) the annual percentage rate (the "Effective Financing
Rate") used to calculate the total finance charge. Upon a prepayment in full by
a customer or an acceleration of the amount owed by such customer under the
Promissory Note or the Texas Contract, as the case may be, such customer will be
entitled to receive a credit for any unearned finance charge (i.e., that portion
of the total finance charge which has not yet been earned through the date of
the prepayment or acceleration, calculated using either the actuarial or rule of
78s method, whichever provides for a greater recovery to the customer).
The "Economic Balance" of an Account is the present value of the future
scheduled monthly payments due on the Account. Such present value is calculated
by discounting the remaining future scheduled monthly payments on an Account by
the Effective Financing Rate thereof. The "Effective Financing Rate" is
determined by calculating the discount rate which, when applied in a present
value calculation, results in the present value of all originally scheduled
monthly payments on such Account being equal to the original amount financed. In
effect, the Economic Balance of an Account is the amount of principal that can
be amortized by the installment payments due over the remaining term of the
Account at the Effective Financing Rate. The Economic Balance of any Account as
to which the related home has been repossessed and disposed of will be equal to
$0 and such Account will be removed from the lien of the Indenture. The Economic
Balance of any Account which is substituted (as described under "-- Recoveries"
below) for an Account described in the preceding sentence will be calculated as
described in this paragraph.
SERVICING
Mid-State, as the Servicer, has serviced and expects to continue to service
all Accounts from Tampa, Florida. Although the Servicer does not escrow payments
for insurance premiums and real estate taxes, it monitors these payments by
customers. Under the terms of the Servicing Agreement, the Servicer will be
responsible for paying unpaid taxes and insurance premiums and recovering such
amounts from customers
19
<PAGE>
or, in certain circumstances, from liquidation proceeds. See "THE SERVICING
AGREEMENT-- Insurance; Taxes."
Jim Walter Homes, pursuant to a subservicing agreement, has performed and
will continue to perform substantially all field servicing activities, which
include collecting or foreclosing on delinquent Accounts and reselling
repossessed homes. Mid-State currently intends to continue to use Jim Walter
Homes as a subservicer for such field servicing activities and to perform itself
the remaining servicing activities. Any subservicer engaged by Mid-State other
than Jim Walter Homes would be expected to have experience in servicing loans or
accounts similar to the Accounts and to have sufficient financial resources to
perform its duties. Each month the Servicer will send a delinquency list, which
includes all Accounts which are past due, to the branch and regional offices of
Jim Walter Homes. Representatives of Jim Walter Homes will contact the customer
in person, by phone or by mail. If an Account becomes more than three months
past due, generally, the customer surrenders the property or the Servicer
commences foreclosure proceedings. Mid-State's current policy is to continue to
show an Account as delinquent until it is brought current, the property is
surrendered or foreclosure proceedings are completed.
In the ordinary course of its business, Mid-State keeps historical
delinquency, repossession and real estate owned information according to
separate portfolios of accounts within the total portfolio. Mid-State, however,
believes that the total portfolio information shows the average performance of
its accounts over time, rather than a performance that might be affected by the
relative seasoning of a separate portfolio. In the case of the delinquency and
repossession experience, information as of the Cut-Off Date is given below for
the Accounts separately. No assurance can be given, however, that the future
experience of the Accounts will be comparable to the historical information set
forth below.
The following table summarizes the delinquency characteristics for all
accounts owned or serviced by Mid-State at the end of each of the past six
fiscal years and at February 28, 1997. As of each such date, the table presents
the number of delinquent accounts and the dollar amount (in millions) in Gross
Receivable Amounts.
<TABLE>
<CAPTION>
DELINQUENCIES AT MAY 31,
------------------------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995
-------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accounts/Gross
Receivable
Amount (Dollars
in
Millions).... 85,418 $ 3,858 88,751 $ 4,053 88,977 $ 4,187 83,945 $ 4,176 80,182 $ 4,257
Delinquencies as
a Percent of
Accounts/ Gross
Receivable
Amount:
31-60 Days..... 1.30% 1.04% 1.36% 1.07% 1.30% 0.96% 1.30% 1.09% 1.66% 1.59%
61-90 Days..... 0.62 0.55 0.57 0.52 0.51 0.45 0.61 0.55 0.54 0.53
91 Days or
more......... 4.32 3.04 4.47 3.31 3.99 3.12 4.16 3.23 4.22 3.12
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total (31 days or
more).......... 6.24% 4.63% 6.40% 4.90% 5.80% 4.53% 6.07% 4.87% 6.42% 5.29%
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
DELINQUENCIES
AT
FEBRUARY
1996 28, 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
Accounts/Gross
Receivable
Amount (Dollars
in
Millions).... 76,112 $ 4,208
Delinquencies as
a Percent of
Accounts/ Gross
Receivable
Amount:
31-60 Days..... 1.28% 1.10% 1.26% 1.08%
61-90 Days..... 0.63 0.62 0.56 0.64
91 Days or
more......... 4.10 3.14 3.74 3.08
--------- --------- --- ---
Total (31 days or
more).......... 6.01% 4.86% 5.56% 4.80%
--------- --------- --- ---
--------- --------- --- ---
</TABLE>
As of the Cut-Off Date, the delinquency characteristics for the Accounts as
a percentage of total Accounts and as a percentage of Gross Receivable Amounts
of the Accounts, were, respectively, 0.98% and 0.92% for Accounts 31-60 days
past due, 0.55% and 0.63% for Accounts 61-90 days past due, 2.67% and 2.55% for
Accounts 91 days or more past due and 4.20% and 4.10% for all delinquent
Accounts.
20
<PAGE>
REPOSSESSIONS
Repossessed property is rehabilitated, if necessary, and resold. The
following table sets forth certain information concerning the repossession
experience of accounts in the Depositor's servicing portfolio, for each of the
past six fiscal years and the nine months ended February 28, 1997.
REPOSSESSIONS
<TABLE>
<CAPTION>
NINE
MONTHS
FISCAL YEAR ENDED MAY 31, ENDED
---------------------------------------------------------------- FEBRUARY 28,
1991 1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total accounts outstanding............... 85,418 88,751 88,977 83,945 80,182 76,112
Accounts repossessed..................... 2,224 2,379 2,180 1,963 1,914 1,676
Accounts repossessed as a percent of
total number of accounts............... 2.6% 2.7% 2.5% 2.3% 2.4% 2.2%
</TABLE>
The Mortgage Collateral does not include any real estate which the Servicer
had repossessed as of the Cut-Off Date. As of the Cut-Off Date, approximately
[ ]% of the Accounts, with an Economic Balance of $[ ], were in foreclosure.
Additionally, as of the Cut-Off Date, the obligors on approximately [ ]% of
the Accounts comprising the Mortgage Collateral, with an Economic Balance of
$[ ], were in bankruptcy or similar proceedings. Certain of these obligors
nevertheless are making payments on the Accounts. As of the Cut-Off Date, the
obligors on approximately [ ]% of the Accounts comprising the Mortgage
Collateral, with an Economic Balance of $[ ], were not in foreclosure or
bankruptcy, but were over 120 days delinquent.
RECOVERIES
Generally, repossessed homes are remarketed by field collection personnel of
Jim Walter Homes with assistance from its sales network for new homes.
Typically, the homes are resold with little or no rehabilitation of the
properties and, accordingly, cash expenditures are small. The majority of homes,
including the land on which such homes are located, are resold for a small down
payment and a new account. All other repossessed homes are sold for cash.
The Subservicing Agreement will require Jim Walter Homes to continue to
perform remarketing services as it has in the past. In certain jurisdictions in
which repossessed homes may be located, local laws require that persons selling
real property be licensed real estate agents or brokers, unless such persons are
selling real estate which they (or their employers) own. The field collection
personnel of Jim Walter Homes are generally not licensed real estate agents or
brokers. It is therefore necessary, with respect to repossessed homes located in
such jurisdictions, for title to such repossessed homes to be taken, in whole or
in part, in the name of Jim Walter Homes (rather than in the name of the Issuer)
pending disposition. Upon disposition, the Trust will receive the cash proceeds,
if any, and the new Accounts originated, in connection with resales of
repossessed properties securing defaulted Accounts. In the event repossessed
property is sold at a loss, such loss will be reflected in the accounting
records of the Issuer. Depending on the age of the repossessed Account and other
factors, the amount of a recovery (i.e., the amount of the new Account plus
cash, if any) as a percentage of the Economic Balance will vary. The number of
homes held as real estate owned is set forth in the following aging summary for
the past six fiscal years and the nine months ended February 28, 1997.
21
<PAGE>
REAL ESTATE OWNED
<TABLE>
<CAPTION>
MAY 31,
---------------------------------------------------------------- FEBRUARY 28,
1991 1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate Owned as a Percent of Accounts
Outstanding
0-3 Months..................................... 0.11% 0.12% 0.06% 0.07% 0.05% 0.09%
4-6 Months..................................... 0.04 0.03 0.01 0.01 0.01 0.02
More than 6 Months............................. 0.09 0.05 0.02 0.02 0.01 0.01
--- --- --- --- --- --- ---
Total Real Estate Owned.................. 0.24% 0.20% 0.09% 0.10% 0.07% 0.12%
--- --- --- --- --- --- ---
--- --- --- --- --- --- ---
</TABLE>
TIME TO RECOVERY
The elapsed time between the initial delinquency of an account and the date
the related home is resold can be divided into three stages: (i) delinquency as
to monthly payment period, (ii) repossession period and (iii) real estate owned
period. An account generally will be no more than three months delinquent before
the Servicer commences foreclosure proceedings. If the Servicer anticipates that
a payment will not be forthcoming, it may commence foreclosure proceedings when
an account has been delinquent as little as two months. The Servicer estimates
that approximately 25% of all repossessed homes are voluntarily surrendered
during the delinquency period and, accordingly, avoid the repossession period,
and it estimates that, although the time to recovery can vary considerably, the
average time following initial delinquency until recovery is approximately ten
months.
Since no party is required to advance required payments on delinquent
Accounts, any such delinquencies that exist at the end of a Collection Period
immediately preceding any Payment Date will reduce the amount of Available Funds
for the related Payment Date. See "RISK FACTORS--Limited Assets,"
"--Overcollateralization," "--Subordination," and "--Prepayment Considerations."
THE MORTGAGE COLLATERAL
The Mortgage Collateral which will secure the Notes consists of 9,220
Accounts, which comprise 12.5% of the accounts owned directly or indirectly by
the Depositor on the Cut-Off Date. The Mortgage Collateral had an aggregate
Economic Balance of approximately $462,332,407 as of the Cut-Off Date.
Set forth below is a description of additional characteristics of the
Accounts as of the Cut-Off Date. Such information does not reflect changes that
may have occurred to the Accounts subsequent to the Cut-Off Date.
22
<PAGE>
REMAINING YEARS TO MATURITY OF ACCOUNTS
COMPRISING THE MORTGAGE COLLATERAL
<TABLE>
<CAPTION>
0-15 16-20 21-25 26-30
--- ----- ----- -----
<S> <C> <C> <C> <C>
Number of Accounts...........................................................
Average Economic Balance.....................................................
Weighted Average Remaining
Term (months) (1)............................................................
Weighted Average
Effective Financing Rate.....................................................
Current Economic Balance.....................................................
Original Economic Balance (2)................................................
<CAPTION>
TOTAL
-----
<S> <C>
Number of Accounts...........................................................
Average Economic Balance.....................................................
Weighted Average Remaining
Term (months) (1)............................................................
Weighted Average
Effective Financing Rate.....................................................
Current Economic Balance.....................................................
Original Economic Balance (2)................................................
</TABLE>
- ------------------------
(1) The remaining term of an Account is based on the original term of the
Account less the number of months elapsed since the first payment due date.
(2) The original Economic Balance for an Account is equal to the original Gross
Receivable Amount less total original finance charges.
EFFECTIVE FINANCING RATE AND YEAR OF ORIGINATION
The Effective Financing Rates borne by [ ]% of the Accounts range from
[ ]% to [ ]%. The weighted average Effective Financing Rate for the Accounts
as of the Cut-Off Date is [ ]%. All of the Accounts were originated from [ ]
through [ ], except for Accounts that represent resales of repossessed houses
that initially secured accounts originated in such period.
TOTAL ACCOUNTS COMPRISING THE MORTGAGE COLLATERAL
As of the Cut-Off Date, [ ] Accounts having an Economic Balance of $[ ]
are secured by homes representing new sales, and [ ]Accounts having an
Economic Balance of $[ ] are secured by homes that have been repossessed and
resold.
23
<PAGE>
The following table sets forth at the Cut-Off Date the years of calculated
scheduled final payment for the Accounts comprising the Mortgage Collateral:
CALCULATED SCHEDULED FINAL PAYMENT(1)
<TABLE>
<CAPTION>
NUMBER OF ECONOMIC
ACCOUNTS BALANCE
-------------------------- ------------------------
NUMBER PERCENT AMOUNT PERCENT
----------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Calendar Year of Calculated Scheduled Final Payment (1):
1997-1998...............................................................
1999-2000...............................................................
2001-2002...............................................................
2003-2004...............................................................
2005-2006...............................................................
2007-2008...............................................................
2009-2010...............................................................
2011-2012...............................................................
2013-2014...............................................................
2015-2016...............................................................
2017-2018...............................................................
2019-2020...............................................................
2021-2022...............................................................
2023-2024...............................................................
2025-2026...............................................................
2027-2028...............................................................
-- --
----------- ---------
Total (2).............................................................
-- --
-- --
----------- ---------
----------- ---------
Weighted Average Period to Calculated Scheduled Final Payment: [ ] years.
</TABLE>
- ------------------------
(1) Calculated Scheduled Final Payment is determined by adding the original term
of an Account to the first payment due date and subtracting one month.
(2) Percentages may not add to 100% due to rounding.
24
<PAGE>
The following two tables set forth the outstanding Economic Balance and the
original Economic Balance of the Accounts comprising the Mortgage Collateral at
the Cut-Off Date:
OUTSTANDING ECONOMIC BALANCE
<TABLE>
<CAPTION>
NUMBER OUTSTANDING
OF ACCOUNTS ECONOMIC BALANCE
------------------------ ------------------------
<S> <C> <C> <C> <C>
NUMBER PERCENT AMOUNT PERCENT
--------- ------------- --------- -------------
Outstanding Economic Balance:
$10,000 and less.......................................................
$10,001 to $20,000.....................................................
$20,001 to $30,000.....................................................
$30,001 to $40,000.....................................................
$40,001 to $50,000.....................................................
$50,001 to $60,000.....................................................
above $60,000..........................................................
-- --
--------- ---------
Total (1)............................................................
-- --
-- --
--------- ---------
--------- ---------
</TABLE>
Average outstanding Economic Balance: $[ ].
- ------------------------
(1) Percentages may not add to 100% due to rounding.
ORIGINAL ECONOMIC BALANCE
<TABLE>
<CAPTION>
NUMBER ORIGINAL
OF ACCOUNTS ECONOMIC BALANCE
------------------------ ------------------------
<S> <C> <C> <C> <C>
NUMBER PERCENT AMOUNT PERCENT
--------- ------------- --------- -------------
Original Economic Balance:
$10,000 and less.......................................................
$10,001 to $20,000.....................................................
$20,001 to $30,000.....................................................
$30,001 to $40,000.....................................................
$40,001 to $50,000.....................................................
$50,001 to $60,000.....................................................
above $60,000..........................................................
-- --
--------- ---------
Total (1)..........................................................
-- --
-- --
--------- ---------
--------- ---------
</TABLE>
Average Original Economic Balance: $[ ].
- ------------------------
(1) The original Economic Balance for an Account is equal to the original Gross
Receivable Amount less total original finance charges.
25
<PAGE>
The following table sets forth the geographical distribution of the Accounts
comprising the Mortgage Collateral by state at the Cut-Off Date.
GEOGRAPHICAL DISTRIBUTION
<TABLE>
<CAPTION>
% OF AGGREGATE
ECONOMIC
% OF TOTAL AGGREGATE BALANCE
NUMBER OF NUMBER OF ECONOMIC OF ALL
STATE ACCOUNTS ACCOUNTS BALANCE ACCOUNTS
- -------------------------------------------------------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Alabama.......................................................
Arizona.......................................................
Arkansas......................................................
Florida.......................................................
Georgia.......................................................
Illinois......................................................
Indiana.......................................................
Kansas........................................................
Kentucky......................................................
Louisiana.....................................................
Maryland......................................................
Mississippi...................................................
Missouri......................................................
New Mexico....................................................
North Carolina................................................
Ohio..........................................................
Oklahoma......................................................
Pennsylvania..................................................
Tennessee.....................................................
Texas.........................................................
Virginia......................................................
West Virginia.................................................
----------- ----------- ----------- ------
Total.........................................................
----------- ----------- ----------- ------
----------- ----------- ----------- ------
</TABLE>
- ------------------------
(1) Percentages may not add to 100% due to rounding.
CERTAIN LEGAL ASPECTS OF THE ACCOUNTS
AND RELATED MATTERS
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon creditors providing mortgage financing.
These laws include, without limitation, the Truth-in-Lending Act, the Equal
Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit
Reporting Act, the Fair Debt Collection Practices Act, the Federal Reserve
Board's Regulations "B" and "Z" and the Uniform Consumer Credit Code (the
"UCCC"). These requirements can impose specific statutory liabilities upon
creditors who fail to comply with their provisions. In some cases, such
liabilities may affect the ability of an assignee (such as the Trust and the
Indenture Trustee) to enforce installment contracts and promissory notes such as
the Accounts.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule"), the provisions of which are generally duplicated by the UCCC,
has the effect of subjecting not only a seller
26
<PAGE>
(and certain related creditors and their assignees) in a consumer credit
transaction but also any assignee of the seller, to all claims and defenses
which the customer could assert against the seller. Because liability under the
FTC Rule is limited to the amounts paid by such customer under the contract, the
holder of the contract may be unable to collect any remaining balance due
thereunder. The Accounts are subject to the requirements of the FTC Rule.
Accordingly, the Issuer, as holder of the Accounts will be subject to any claims
or defenses that the obligor of the related Account may assert against Jim
Walter Homes under the building or sale contract related to such Account. If a
customer successfully asserts any such claim or defense, the value of such
Account could be adversely affected.
The installment contracts utilized by Jim Walter Homes contain provisions
obligating the obligor to pay late charges if payments are not made in a timely
manner. In certain cases, laws of certain states may specifically limit the
amount of late charges that may be collected or prohibit the imposition of late
charges. Late charges will be retained by the Servicer as additional servicing
compensation, and the inability of the Servicer to collect these amounts will
not affect payments to Noteholders.
MORTGAGES, DEEDS OF TRUST AND MECHANIC'S LIEN CONTRACTS
The following discussion contains summaries of certain legal aspects of the
mortgages, deeds of trust, deeds to secure debt and mechanic's lien contracts
(collectively, "Security Instruments") which are general in nature. Because such
legal aspects are governed by applicable state law (which laws may differ
substantially) the summaries do not purport to be complete or to reflect the
laws of any particular state or to encompass the laws of all states in which the
security for the Accounts is situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing such
Accounts.
The Security Instruments generally will be either mortgages or deeds of
trust depending upon the prevailing practice in the state in which the property
securing the related Account is located. A mortgage creates a lien upon the real
property encumbered by the mortgage. There are two parties to a mortgage, the
mortgagor, who is the obligor and homeowner, and the mortgagee, who provides
financing. Generally, the mortgagor delivers to the mortgagee a note and the
mortgage. The lien created by a mortgage is not prior to liens for real estate
taxes and assessments or to certain tax liens (see "--Anti-Deficiency
Legislation and Other Limitations on Creditors"), nor is it prior to certain
other liens which in most jurisdictions are given priority by statute. Priority
between mortgages depends on their terms and generally on the order in which
they are filed with a state or county recording office.
Although a deed of trust is similar to a mortgage, a deed of trust formally
has three parties: the obligor-homeowner called the trustor (similar to a
mortgagor), a creditor (similar to a mortgagee) called the beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the obligor
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. The
deed of trust may, by state law, be subordinated to real estate taxes and
assessments and certain other liens which are given priority by statute. It also
may be subordinated to certain tax liens (see "--Anti-Deficiency Legislation and
Other Limitations on Creditors").
In the State of Texas, indebtedness incurred for the purchase of real
property is typically secured by a deed of trust and indebtedness incurred for
the purpose of making improvements on real property is secured by a mechanic's
lien contract, both with power of sale. In all material respects, the mechanic's
lien contract has the same effect as a deed of trust.
FORECLOSURE AND OTHER REMEDIES
The laws of foreclosure vary from state to state. Foreclosure of a mortgage
generally is accomplished by judicial action. The action is initiated by the
service of legal pleadings upon all parties having an interest in the real
property. Delays in completion of the foreclosure may occasionally result from
difficulties experienced in locating necessary party defendants. Judicial
foreclosure proceedings are often not contested by any of the parties defendant.
If a mortgagee's right of foreclosure is contested, the legal
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proceedings necessary to resolve the issue can be time consuming. If the court
finds for a mortgagee, it generally issues a judgment of foreclosure and
appoints a referee or other court officer to conduct the sale of the property.
Foreclosure of either a deed of trust or a mechanic's lien contract
generally is accomplished by a non-judicial trustee's sale under a specific
provision in the deed of trust which authorizes the trustee to sell the property
upon any default by the obligor under the terms of the deed of trust or the note
secured thereby. In some states, the trustee must record a notice of default and
send a copy to the obligor and to any person who has recorded a request for a
copy of notice of default and notice of sale. In addition, the trustee must
provide notice in some states to any other individual having an interest in the
real property, including any junior lienholder. In some states, the obligor has
the right to reinstate the obligation at any time following default until
shortly before the trustee's sale. In general, the obligor, or any other person
having a junior encumbrance on the real estate, may, during a reinstatement
period, cure the default by paying the entire amount in arrears plus the costs
and expenses incurred in enforcing the obligation. Generally, state law controls
the amount of foreclosure expenses and costs, including attorneys' fees, which
may be recovered by a creditor. If the deed of trust or mechanic's lien
contract, as the case may be, is not reinstated, a notice of sale must be posted
in a public place and, in most states, published for a specific period of time
in one or more newspapers. In addition, some state laws require that a copy of
the notice of sale be posted on the property and sent to all parties having an
interest in the real property.
In the case of foreclosure under a mortgage, deed of trust or mechanic's
lien contract, the sale by the referee or other designated officer or by the
trustee is at a public sale. However, because of the difficulty a potential
buyer at the sale would have in determining the exact status of title and
because the physical condition of the property may have deteriorated during the
foreclosure proceedings, it is uncommon for a third party to purchase the
property at the foreclosure sale. Instead, it is common for the creditor, or an
affiliate of the creditor, to purchase the property from the trustee or referee
for an amount equal to the unpaid principal amount of note secured by the
mortgage, deed of trust or mechanic's lien contract, accrued and unpaid interest
and the costs and expenses of foreclosure. Thereafter, subject to the right of
the obligor in some states to remain in possession during the redemption period,
the creditor will assume the burdens of ownership, including obtaining insurance
and making such repairs at its own expense as are necessary to render the
property suitable for resale. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the creditor's investment in
the property.
RIGHTS OF REDEMPTION
In some states, after the sale of real property pursuant to a deed of trust
or foreclosure of a mortgage, the obligor and foreclosed junior lienors are
given a statutory period in which to redeem the property from the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
unpaid balance of the cash price, earned finance charges and costs and expenses
of foreclosure. In other states, redemption may be authorized if the former
customer pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the creditor to sell the foreclosed
property. The right of redemption could defeat the title of any purchaser from
the creditor subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
creditor to retain the property and to pay the expenses of ownership until the
redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON CREDITORS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the obligor following foreclosure or sale under a
mortgage or a deed of trust. A deficiency judgment is a personal judgment
against the obligor equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
creditor. In some states, statutes require the beneficiary or mortgagee to
exhaust the
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security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the obligor.
Finally, other statutory provisions limit any deficiency judgment against the
obligor following a judicial sale to the excess of the outstanding debt over the
fair market value of the property at the time of the sale. The purpose of these
statutes is generally to prevent a beneficiary or mortgagee from obtaining a
large deficiency judgment against the obligor as a result of low or no bids at
the judicial sale.
Numerous other statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage creditor to realize upon collateral and/or
enforce a deficiency judgment. For example, under federal bankruptcy law,
virtually all actions (including foreclosure actions and deficiency judgment
proceedings) are automatically stayed upon the filing of a bankruptcy petition,
and often no mortgage payments are made during the course of the bankruptcy
proceeding. In a case under the bankruptcy laws, the secured creditor is
precluded from foreclosing without authorization from the bankruptcy court. In
addition, with respect to federal bankruptcy laws, a court with federal
bankruptcy jurisdiction may permit an obligor through his or her chapter 11 or
chapter 13 rehabilitative plan to cure a monetary default in respect of a
Security Instrument on such obligor's residence by paying arrearages within a
reasonable time period and reinstating the original Security Instrument payment
schedule even though the creditor accelerated the outstanding indebtedness and a
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the obligor's
petition. Some courts with federal bankruptcy jurisdiction have approved plans,
based on the particular facts of the reorganization case, that enabled an
obligor to cure a payment default by paying arrearages over a number of years.
In addition, the laws of various states provide for moratoria on the payment of
principal of, and interest on, outstanding indebtedness by obligors meeting
certain qualifications.
Courts with federal bankruptcy jurisdiction also have indicated that the
terms of a mortgage or a deed of trust secured by property not consisting solely
of the obligor's principal residence may be modified. These courts have
suggested that such modifications may include reducing the amount of each
monthly payment, reducing the rate of interest or finance charge, altering the
repayment schedule and reducing the creditor's security interest to the value of
the residence, thus rendering the creditor a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
indebtedness. Some courts have permitted such modifications when the mortgage or
deed of trust is secured both by the obligor's principal residence and by
personal property.
The Code provides priority to certain tax liens over the liens of a Security
Instrument. In addition, substantive requirements are imposed upon creditors in
connection with the origination of Security Instruments by numerous federal and
some state consumer protection laws. These laws include the federal
Truth-in-Lending Act, Equal Credit Opportunity Act, Fair Credit Billing Act,
Fair Credit Reporting Act and related statutes. These federal laws and state
laws impose specific statutory liabilities upon creditors who originate Security
Instruments and who fail to comply with the provisions of such laws. In some
cases, this liability may affect assignees of the Security Instruments,
including the Issuer and the Indenture Trustee. See "--Consumer Protection Laws"
above.
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a homeowner under an Account who enters the military
service after the origination of such homeowner's Account (including a homeowner
who is a member of the National Guard or is in reserve status at the time of the
origination of the Account and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such
homeowner's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that similar actions could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of finance charges on certain of the Accounts. In addition, the Relief
Act imposes limitations which would impair the ability of the Servicer to
foreclose on an affected Account during the homeowner's period of active duty
status. Thus, in the event that such an Account goes into default, there may be
delays and losses occasioned by the inability to realize upon the related
Mortgaged Property in a timely fashion.
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ENFORCEABILITY OF CERTAIN PROVISIONS
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the obligor from the
legal effect of his defaults under the mortgage or deed of trust. Examples of
judicial remedies that have been fashioned include judicial requirements that
the creditor undertake affirmative and extensive actions to determine the causes
for the obligor's default and the likelihood that the obligor will be able to
cure the default. In some cases, courts have substituted their judgment for the
creditors' judgment and have required that creditors reinstate mortgages or
deeds of trust or recast payment schedules in order to accommodate obligors who
are suffering from temporary financial disability. In other cases, courts have
limited the right of creditors to foreclose if the default under the mortgage
instrument is not a monetary default, such as when the obligor fails adequately
to maintain the property or the obligor executes a second mortgage or deed of
trust affecting the property.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property that
is the subject of a clean-up action by the state on account of hazardous wastes
or hazardous substances released or disposed of on the property. Such a lien
will generally have priority over all subsequent liens on the property and, in
certain of these states, will have priority over prior recorded liens including
the lien of a mortgage or deed of trust. In addition, under federal
environmental legislation and possibly under state law in a number of states, a
secured party which takes a deed in lieu of foreclosure or acquires a mortgaged
property at a foreclosure sale may, in certain limited circumstances, be liable
as an "owner or operator" for the costs of cleaning up a contaminated site.
Although such costs could be substantial, it is unclear whether they would be
imposed on a secured party (such as the Trust). In the event that title to a
Mortgaged Property securing an Account was acquired by the Issuer and cleanup
costs were incurred in respect of the Mortgaged Property, the Noteholders would
be adversely affected if such costs were required to be paid by the Issuer.
However, recent amendments to federal environmental legislation provide for
a "secured creditor exemption" which defines and specifies the range of
permissible actions that may be undertaken by a secured party holding security
in a contaminated facility. In addition, under the amendments, a secured party
continues to be protected from liability as an "owner or operator" after
foreclosure as long as it seeks to divest itself of the facility at the earliest
practicable commercially reasonable time on commercially reasonable terms,
taking into account market conditions and legal and regulatory requirements. The
"secured creditor exemption," however, does not necessarily affect the potential
for liability in actions under other federal or state laws which may impose
liability on "owners or operators" but do not incorporate the "secured creditor
exemption."
SECURITY
MORTGAGE COLLATERAL
GENERAL. The Notes will be secured by assignments to the Indenture Trustee
of Collateral consisting of (i) the Mortgage Collateral, (ii) the payments
received thereon after the Cut-Off Date, (iii) the net reinvestment income of
such payments and (iv) the Servicing Agreement and the Purchase and Sale
Agreement. See "DESCRIPTION OF THE NOTES--Interest and Principal Payments."
ACCOUNTS. In order to enable the Indenture Trustee to obtain a security
interest in the mortgage, deed of trust or other security instrument, as the
case may be, and other documents and instruments underlying each Account
comprising the Mortgage Collateral, upon receipt of such documents and
instruments from the Depositor after the issuance of the Notes, the Indenture
requires the Issuer to: (i) endorse each customer's promissory note in blank and
deliver such note to be held by the Indenture Trustee until such time as such
customer's Account is paid in full or becomes subject to foreclosure
proceedings; (ii) prepare assignments of mortgages, mechanic's lien contracts or
deeds of trust, as the case
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may be, in recordable form, which collaterally assign the Issuer's interest in
the mortgages, mechanic's lien contracts or deeds of trust to the Indenture
Trustee; and (iii) record such assignments in the local real estate records
where the real property is located. See "RISK FACTORS--Security Interest;
Mortgage Collateral."
INSURANCE PROCEEDS. The Issuer will assign to the Indenture Trustee, as
additional security for the Notes, all payments due under the standard hazard
insurance policies (the "Insurance Policies") insuring the relevant Mortgaged
Property with respect to each of the Accounts comprising the Mortgage
Collateral. The Insurance Policies will not cover all risks and do not cover any
risks under certain circumstances. The terms of each Account comprising the
Mortgage Collateral require the customer to maintain an Insurance Policy
covering the related mortgaged property. The terms of the Servicing Agreement
require the Servicer either to cause such Insurance Policy to be maintained in
full force and effect, or to obtain an insurance policy against certain losses
with respect to each such Account. All proceeds of any Insurance Policy
collected by the Servicer (less amounts to be applied to the restoration or
repair of the mortgaged property) will be deposited in the Collection Account.
Insurance proceeds designated for repair or restoration of a Mortgaged Property
will be deposited in a servicing account established in accordance with the
terms of the Servicing Agreement. See "THE SERVICING AGREEMENT--Insurance;
Taxes."
At the time of entering into a Retail Contract or Texas Contract, Jim Walter
Homes offers each customer the opportunity to select Best Insurors, Inc.
("Best"), a licensed Florida insurance agency and a wholly-owned subsidiary of
Walter Industries, to provide the Insurance Policy required to be maintained by
such customer under the Retail Contract or Texas Contract. As of the Cut-Off
Date, approximately [ ]% of the Mortgaged Properties have Insurance Policies
issued by Best.
Any losses incurred with respect to Accounts comprising the Mortgage
Collateral due to uninsured risks (including earthquakes, mudflows and floods)
or insufficient hazard insurance proceeds will result in a loss which, to the
extent that the overcollateralization existing at the time of such loss is not
sufficient to cover such loss, will result in the reduction of the principal
balance of one or more Classes of Notes without a payment in respect of
principal thereon. See "RISK FACTORS--Subordination."
INVESTMENT OF FUNDS. Subject to certain limitations set forth in the
Indenture, prior to a default or an Event of Default under the Indenture, funds
in the Collection Account will be invested by the Indenture Trustee, as directed
by the Issuer, in certain eligible investments which may include, among other
investments, obligations of the United States or any agency thereof backed by
the full faith and credit of the United States, certain obligations issued or
fully guaranteed by the Federal Home Loan Mortgage Corporation or the Federal
National Mortgage Association, certificates of deposit, time deposits and
bankers' acceptances that are obligations of eligible depository institutions,
certain repurchase agreements entered into with eligible depository
institutions, commercial paper or other debt securities issued by corporations
meeting certain credit rating standards and other investments acceptable to the
Rating Agencies ("Eligible Investments"). If a default or an Event of Default
under the Indenture occurs and is continuing, the Issuer shall no longer have
the ability to direct the investment of funds in the Collection Account. See
"THE INDENTURE--Events of Default."
Funds in the Collection Account may be invested only in Eligible Investments
so that all investments will mature on or before the next Payment Date. Any
income or other gain from Eligible Investments will be credited to, and any loss
resulting from such investments will be charged to, the Collection Account.
COLLECTION ACCOUNT
Prior to the Closing Date, the Collection Account will be established with,
and in the name of, the Indenture Trustee. On the Closing Date, the Issuer will
deposit cash in an amount equal to all payments (including prepayments) received
on the Accounts comprising the Mortgage Collateral since the Cut-Off Date and up
to the date that is five business days prior to the Closing Date. Thereafter,
all payments (including payments received since and including the date that is
five business days prior to the Closing
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Date) received in respect of the Accounts will be deposited in the Collection
Account on a weekly basis (which will include the deposit on the last business
day of each Collection Period), in accordance with information provided by the
Servicer. The Indenture Trustee will transfer amounts in the Holding Account
into the Collection Account. Prior to any such deposit, payments received in
respect of the Accounts will be held by the Servicer in the Holding Account. See
"THE SERVICING AGREEMENT--Collection of Payments." The foregoing amounts
deposited into the Collection Account, together with the reinvestment income
thereon and less Issuer Expenses, will be available to make payments on the
Notes.
CERTAIN CONTRACTUAL RIGHTS
The Issuer will assign to the Indenture Trustee as security for the Notes
all of its right, title and interest in, to and under the Purchase and Sale
Agreement and the Servicing Agreement and the rights to certain servicing
software. See "THE PURCHASE AND SALE AGREEMENT."
DESCRIPTION OF THE NOTES
The following summaries of certain provisions of the Notes do not purport to
be complete and are subject to, and are qualified in their entirety by reference
to, the Indenture.
AVAILABLE FUNDS
"Available Funds" in respect of a Payment Date are funds equal to the sum of
(i) collections on the Accounts during the Collection Period immediately
preceding such Payment Date that are on deposit in the Collection Account as of
the close of business on the last business day of such Collection Period and
(ii) any net reinvestment income earned on funds described in clause (i) above,
during the Reinvestment Period. Available Funds will be net of Issuer Expenses
paid. "Issuer Expenses" are all of the Issuer's expenses (other than amounts due
on the Notes), including, without limitation, the fees and expenses of the Owner
Trustee, the Indenture Trustee, the fee of the Servicer and any taxes payable by
the Issuer. See "THE TRUST AGREEMENT," THE INDENTURE--The Indenture Trustee" and
"THE SERVICING AGREEMENT--Servicing Fee." The "Remaining Available Funds" for a
Payment Date are the Available Funds for such Payment Date reduced by the amount
of interest due on the Notes on such Payment Date.
INTEREST AND PRINCIPAL PAYMENTS
Interest on each Class of the Notes will be payable from Available Funds on
each Payment Date in an amount up to the Interest Accrual Amount of such Class.
The "Interest Accrual Amount" of any Class for any Payment Date is equal to
interest accrued on the unpaid principal balance of such Class (after giving
effect to payments and allocations of losses on the preceding Payment Date, if
any) during the Interest Accrual Period ending on the day prior to the Payment
Date, at the Note Rate for such Class. The "Note Rate" of the Class A-1, Class
A-2, Class A-3 and Class A-4 Notes is [ ]%, [ ]%, [ ]% and [ ]%,
respectively.
On any Payment Date, if Available Funds (less any interest paid to the prior
Classes of Notes, on such Payment Date) are less than the Interest Accrual
Amount for a Class of Notes, there will exist a shortfall in interest paid to
such Class of Notes (as to each, a "Class Interest Shortfall"). Class Interest
Shortfalls will be added to the amount of interest payable to the holders of
such Class on subsequent Payment Dates, subject to the availability of funds,
and interest will accrue on the amount of any Class Interest Shortfalls.
Interest will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
On each Payment Date, interest and principal payments on the Notes will be
made from Available Funds in the following order of priority (the "Available
Funds Allocation"):
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FIRST, to the holders of the Class A-1 Notes, in an amount up to the
Interest Accrual Amount thereof;
SECOND, to the holders of the Class A-1 Notes, in an amount up to all
unreimbursed Class Interest Shortfalls related thereto, together with
accrued interest thereon;
THIRD, to the holders of the Class A-2 Notes, in an amount up to the
Interest Accrual Amount thereof;
FOURTH, to the holders of the Class A-2 Notes, in an amount up to all
unreimbursed Class Interest Shortfalls related thereto, together with
accrued interest thereon;
FIFTH, to the holders of the Class A-3 Notes, in an amount up to the
Interest Accrual Amount thereof;
SIXTH, to the holders of the Class A-3 Notes, in an amount up to all
unreimbursed Class Interest Shortfalls related thereto, together with
accrued interest thereon;
SEVENTH, to the holders of the Class A-4 Notes, in an amount up to the
Interest Accrual Amount thereof;
EIGHTH, to the holders of the Class A-4 Notes, in an amount up to all
unreimbursed Class Interest Shortfalls related thereto, together with
accrued interest thereon;
NINTH, to the holders of the Class A-1 Notes, in an amount up to the
Class A-1 Optimal Principal Amount;
TENTH, to the holders of the Class A-1 Notes, in an amount up to the
amount of any unreimbursed Realized Loss Allocation Amounts previously
allocated thereto;
ELEVENTH, to the holders of the Class A-2 Notes, in an amount up to the
Class A-2 Optimal Principal Amount;
TWELFTH, to the holders of the Class A-2 Notes, in an amount up to the
amount of any unreimbursed Realized Loss Allocation Amounts previously
allocated thereto;
THIRTEENTH, to the holders of the Class A-3 Notes, in an amount up to
the Class A-3 Optimal Principal Amount;
FOURTEENTH, to the holders of the Class A-3 Notes, in an amount up to
the amount of any unreimbursed Realized Loss Allocation Amounts previously
allocated thereto;
FIFTEENTH, to the holders of the Class A-4 Notes, in an amount up to the
Class A-4 Optimal Principal Amount; and
SIXTEENTH, to the holders of the Class A-4 Notes, in an amount up to the
amount of any unreimbursed Realized Loss Allocation Amounts previously
allocated thereto.
The "Class A-1 Optimal Principal Amount" is equal to [ ]%(1) of the
Optimal Principal Amount.
The "Class A-2 Optimal Principal Amount" is equal to [ ]%(1) of the
Optimal Principal Amount.
The "Class A-3 Optimal Principal Amount" is equal to [ ]%(1) of the
Optimal Principal Amount.
The "Class A-4 Optimal Principal Amount" is equal to [ ]%(1) of the
Optimal Principal Amount.
The "Optimal Principal Amount" is equal to (A) on any Payment Date (i) on or
prior to the Target Overcollateralization Date or (ii) after the Target
Overcollateralization Date and on which there exists an uncured Trigger Event,
the amount by which the outstanding principal balance of all Classes of Notes
- ------------------------
(1) Pro rata percentage based on original principal balance.
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exceeds the Projected Aggregate Principal Balance of all Classes of Notes; and
(B) on any Payment Date after the Target Overcollateralization Date on which
there does not exist an uncured Trigger Event, the amount which, when paid as
principal on the Notes, will result in achieving or maintaining the Target
Overcollateralization Level. In no event will the Optimal Principal Amount for
any Payment Date exceed the Remaining Available Funds for such Payment Date or
the outstanding principal amount of the Notes.
A Trigger Event which constitutes an Event of Default may be cured only if
the Indenture Trustee has not accelerated the Notes. On the Maturity Date, the
entire principal amount of the Notes will be due to the extent not previously
paid.
The "Target Overcollateralization Date" is the later of (i) the Payment Date
occurring in [ ] and (ii) the Payment Date on which the
Overcollateralization Amount is equal to or greater than the Minimum Target
Overcollateralization Amount for such Payment Date.
The "Minimum Target Overcollateralization Amount" for any Payment Date, is
an amount equal to the greater of (i) the product of (x) [ ]% and (y) the
Aggregate Economic Balance of the Accounts as of the first day of the month
preceding the month of such Payment Date and (ii) $[ ].
The "Overcollateralization Amount" as of any Payment Date, is an amount
equal to (i) the Aggregate Economic Balance of the Accounts as of the first day
of the month preceding the month of such Payment Date, less (ii) the outstanding
principal balance of all Classes of Notes, after giving effect to payments and
the allocation of losses thereon on such Payment Date.
The "Projected Aggregate Principal Balance" of the Notes on any Payment
Date, will equal the aggregate outstanding principal balance of the Notes prior
to payments and allocations of losses on such Payment Date minus the sum of the
Remaining Available Funds for such Payment Date and the Realized Loss Allocation
Amount for such Payment Date.
The "Overcollateralization Percentage" will be a fraction, expressed as a
percentage, the numerator of which is equal to the excess of (i) the Aggregate
Economic Balance of the Accounts as of the first day of the month preceding the
month in which the Target Overcollateralization Date occurs over (ii) the
aggregate outstanding principal balance of all Classes of Notes (following
payments and allocations of losses on the Target Overcollateralization Date) and
the denominator of which is the Aggregate Economic Balance of the Accounts as of
the first day of the month preceding the month in which the Target
Overcollateralization Date occurs.
The "Target Overcollateralization Level" as of any Payment Date, is the
level of overcollateralization that would exist if the Overcollateralization
Amount were equal to the greater of (i) the product of (x) the
Overcollateralization Percentage as of the Target Overcollateralization Date and
(y) the Aggregate Economic Balance of the Accounts as of the first day of the
month preceding the month of such Payment Date and (ii) the Minimum Target
Overcollateralization Amount.
Following the Target Overcollateralization Date, unless there exists an
uncured Trigger Event, the portion, if any, of the Available Funds remaining
after the Available Funds Allocation, will be released to the Issuer, free of
the lien of the Indenture, and will no longer be available to make payments on
the Notes. Such funds will then be distributed to the owner of the beneficial
interest in the Issuer, which will initially be Mid-State.
ALLOCATION OF LOSSES
As of each Payment Date, the Indenture Trustee will calculate the "Realized
Loss Allocation Amount," which will be equal to the excess, if any, of (i) the
aggregate outstanding principal amount of the Notes (before giving effect to
payments on such Payment Date) minus the Remaining Available Funds for such
Payment Date over (ii) the Aggregate Economic Balance of the Accounts
immediately following the Collection Period related to such Payment Date. The
Realized Loss Allocation Amount will be allocated
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prior to payments of principal on any Payment Date, to the Classes of Notes
sequentially in reverse numerical order, until the principal balance of each
such Class is reduced to zero, prior to the allocation of any Realized Loss
Allocation Amount to any more senior Class of Notes.
REDEMPTION OF THE NOTES
All (but not less than all) of the outstanding Notes may be redeemed on any
Payment Date at the option of the Issuer, at 100% of the unpaid principal amount
of the Notes plus accrued interest, if, after giving effect to the payment of
principal to be made on such Payment Date on the basis of Remaining Available
Funds, the aggregate principal amount of each Class of Notes outstanding is less
than or equal to 10% of the original aggregate principal amount of such Class of
Notes.
WEIGHTED AVERAGE LIFE OF THE NOTES
The following information is given solely to illustrate the effect of
prepayments in respect of the Accounts on the weighted average life of each
Class of Notes and is not a prediction of the prepayment rate, the repossession
rate or the effects of repossessions that might actually be experienced in
respect of the Accounts.
The weighted average life of each Class of Notes refers to the average
amount of time that will elapse from the date of its issuance until each dollar
of principal of such Class of Notes will be repaid to the investor. The weighted
average life of the Notes will be influenced by, among other factors, the rate
at which collections are made on the Accounts. Payments on the Accounts may be
in the form of scheduled payments or prepayments (for this purpose, the term
"prepayments" includes prepayments in full and receipt of proceeds from
Insurance Policies that are not applied to the restoration of the home). It is
expected that, consistent with Mid-State's current servicing procedures,
repossessed homes will, in general, be sold in exchange for a new Account
together with a small amount of cash. Consequently, liquidations of Accounts due
to repossessions are not expected to generate much, if any, cash proceeds.
Because of the initial overcollateralization, the likelihood of prepayments
on the Accounts and the application of the Remaining Available Funds to pay
principal of the Notes in accordance with the Available Funds Allocation, it is
expected that each Class of Notes could be fully paid significantly earlier than
the Maturity Date. On the other hand, because no party is required to advance
delinquent payments on the accounts, there will be no cash flow in respect of
Accounts secured by repossessed properties until a new Account is generated upon
the sale, if any, of the related repossessed property; and such cash flow would
normally be in a lesser amount. There can be no assurance that any of the
foregoing events will occur or as to the timing of the occurrence of such
events.
The weighted average life of each Class of Notes as computed herein and the
other information in the tables below assume that: (i) all of the Accounts
constitute a single fully-amortizing fixed-rate account that: (a) bears a
finance rate at a fixed rate equal to the weighted average Effective Financing
Rate for the Accounts as of the Cut-Off Date; (b) has an outstanding Economic
Balance equal to the aggregate of the Economic Balances of all Accounts as of
the Cut-Off Date; (c) matures in the month of the weighted average stated
maturity date of the Accounts as of the Cut-Off Date; and (d) provides for fixed
level monthly payments; (ii) Issuer Expenses consist only of the servicing fees;
(iii) no Event of Default under the Indenture occurs and no Trigger Event
occurs; (iv) there are no delinquent monthly payments, no repossessions of
houses and no resales thereof for new Accounts; (v) the Issuer does not redeem
the Notes as provided under "Redemption of Notes" above; and (vi) the Notes are
issued on [April 30, 1997] and are assumed to bear interest at the applicable
interest rates set forth herein. No representation is made that the Accounts
will not experience delinquencies or losses or that resales of repossessed
houses will not occur and new Accounts will not be generated.
Prepayments on Accounts that are not due to repossessions are commonly
measured relative to a prepayment standard or model. The model used in this
Prospectus, the conditional prepayment rate
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("CPR"), represents an assumed annual rate of prepayments relative to the
outstanding Economic Balance of the Accounts at the beginning of an Interest
Accrual Period. The CPR is expressed as an annual rate, which is applied monthly
as a percentage of the Accounts outstanding at the beginning of each month
reduced by scheduled payments due on the Accounts. As used in the tables below,
"[ ]% CPR" assumes prepayments at an annual rate of [ ]%; "[ ]% CPR"
assumes prepayments at an annual rate of [ ]%; and so on.
Since the tables below were prepared on the basis of the assumptions
specified above, there are discrepancies between the characteristics of the
actual Accounts and the characteristics of the Accounts assumed in preparing the
tables, and discrepancies between the actual Issuer Expenses and the Issuer
Expenses assumed in preparing the tables. Any such discrepancy may have an
effect upon the percentages of the remaining principal amount of each Class of
Notes outstanding and weighted average lives of such Notes set forth in each
table. In addition, since the actual Accounts have characteristics which differ
from those assumed in preparing the tables, the payments of principal on each
Class of Notes may be made earlier or later than as indicated in the tables. The
tables below were also prepared on the basis of the assumptions that there are
no delinquencies or losses in respect of the Accounts and that there are no
resales of repossessed houses that generate new accounts. In the actual
servicing of the Accounts, it is expected that there will be delinquencies,
losses, resales of repossessed houses and new Accounts generated. In general,
repossessed houses will be sold for a new Account with little or no cash
downpayment, and there will be some period of time between the repossession of
the house and the origination of the new Account (which may have a lower
Economic Balance), during which period no collections are received in respect of
the repossessed house. Such discrepancies may have an effect on the weighted
average life of each Class of Notes and the percentages of the remaining
principal amount of such Notes set forth in each table.
It is not likely that the Accounts will prepay at any constant level of CPR
to maturity or that all the Accounts will prepay at the same rate. In addition,
the diverse remaining terms to maturity of the Accounts (which include recently
originated Accounts) could produce slower or faster payments of principal than
indicated in the table at the various levels of CPR specified even if the
weighted average remaining term to scheduled maturity of the Accounts is [ ]
years.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated repayment rates, repossession
rates and principal amounts of new Accounts assumed to be generated in respect
of repossessions under a variety of their own assumptions as to the matters set
forth above.
There is no assurance that prepayments of the Accounts will conform to any
level of CPR set forth herein or any other level of CPR. The rates of
prepayments on the Accounts are influenced by a variety of economic, geographic,
social and other factors. In general, however, if prevailing interest rates
fall, and particularly if they fall significantly below the Effective Financing
Rates of the Accounts, the rate of repayment on such Accounts is likely to
increase. Conversely, if interest rates rise, and particularly if they rise
significantly above the Effective Financing Rates of the Accounts, the rate of
repayment would be expected to decrease. Other factors affecting prepayment of
Accounts include changes in the homeowner's housing needs, job transfers,
unemployment and the homeowner's net equity in the properties. The CPR does not
purport to be either an historical description of the voluntary prepayment
experience of the Accounts or a prediction of the anticipated amount of
prepayments of the Accounts.
Based on the assumptions described above, the following tables indicate the
resulting weighted average life of each Class of Notes and set forth the
percentage of the original principal amount of each Class of Notes that would be
outstanding immediately prior to giving effect to the payment due on each of the
dates shown at the indicated percentages of CPR.
36
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL AMOUNT OF
THE CLASS A-1 NOTES OUTSTANDING AT THE RESPECTIVE LEVELS OF CPR
<TABLE>
<CAPTION>
PAYMENT DATE [ ]% CPR [ ]% CPR [ ]% CPR [ ]% CPR [ ]% CPR
- ------------------------------------------ --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
[ ]/97..................................
1/1/98....................................
1/1/99....................................
1/1/00....................................
1/1/01....................................
1/1/02....................................
1/1/03....................................
1/1/04....................................
1/1/05....................................
1/1/06....................................
1/1/07....................................
1/1/08....................................
1/1/09....................................
1/1/10....................................
1/1/11....................................
1/1/12....................................
1/1/13....................................
1/1/14....................................
1/1/15....................................
1/1/16....................................
1/1/17....................................
1/1/18....................................
1/1/19....................................
Weighted Average Life
(Years) (1).............................
Duration (Years) (2)......................
Principal Payment Window
(Months) (3)............................
Expected Final Maturity...................
</TABLE>
- ------------------------
(1) The weighted average life of a Note is determined by (i) multiplying the
amount of each principal payment by the number of years from the date of
issuance to the related principal payment date, (ii) summing the results and
(iii) dividing the sum by the total principal paid on the Note.
(2) Modified Duration assuming an example yield of [ ]%.
(3) The number of months from [ ] 1997 to the month in which the
final payment of principal would be made.
* Indicates an amount greater than zero but less than 0.5% of the original
principal amount.
37
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL AMOUNT OF
THE CLASS A-2 NOTES OUTSTANDING AT THE RESPECTIVE LEVELS OF CPR
<TABLE>
<CAPTION>
PAYMENT DATE [ ]% CPR [ ]% CPR [ ]% CPR [ ]% CPR [ ]% CPR
- ------------------------------------------ --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
[ ]/97...................................
1/1/98....................................
1/1/99....................................
1/1/00....................................
1/1/01....................................
1/1/02....................................
1/1/03....................................
1/1/04....................................
1/1/05....................................
1/1/06....................................
1/1/07....................................
1/1/08....................................
1/1/09....................................
1/1/10....................................
1/1/11....................................
1/1/12....................................
1/1/13....................................
1/1/14....................................
1/1/15....................................
1/1/16....................................
1/1/17....................................
1/1/18....................................
1/1/19....................................
Weighted Average Life
(Years) (1).............................
Duration (Years) (2)......................
Principal Payment Window
(Months) (3)............................
Expected Final Maturity...................
</TABLE>
- ------------------------
(1) The weighted average life of a Note is determined by (i) multiplying the
amount of each principal payment by the number of years from the date of
issuance to the related principal payment date, (ii) summing the results and
(iii) dividing the sum by the total principal paid on the Note.
(2) Modified Duration assuming an example yield of [ ]%.
(3) The number of months from [ ] 1997 to the month in which the final
payment of principal would be made.
* Indicates an amount greater than zero but less than 0.5% of the original
principal amount.
38
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL AMOUNT OF
THE CLASS A-3 NOTES OUTSTANDING AT THE RESPECTIVE LEVELS OF CPR
<TABLE>
<CAPTION>
PAYMENT DATE [ ]% CPR [ ]% CPR [ ]% CPR [ ]% CPR [ ]% CPR
- ------------------------------------------ --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
[ ]/97...................................
1/1/98....................................
1/1/99....................................
1/1/00....................................
1/1/01....................................
1/1/02....................................
1/1/03....................................
1/1/04....................................
1/1/05....................................
1/1/06....................................
1/1/07....................................
1/1/08....................................
1/1/09....................................
1/1/10....................................
1/1/11....................................
1/1/12....................................
1/1/13....................................
1/1/14....................................
1/1/15....................................
1/1/16....................................
1/1/17....................................
1/1/18....................................
1/1/19....................................
Weighted Average Life
(Years) (1).............................
Duration (Years) (2)......................
Principal Payment Window
(Months) (3)............................
Expected Final Maturity...................
</TABLE>
- ------------------------
(1) The weighted average life of a Note is determined by (i) multiplying the
amount of each principal payment by the number of years from the date of
issuance to the related principal payment date, (ii) summing the results and
(iii) dividing the sum by the total principal paid on the Note.
(2) Modified Duration assuming an example yield of [ ]%.
(3) The number of months from [ ] 1997 to the month in which the final
payment of principal would be made.
* Indicates an amount greater than zero but less than 0.5% of the original
principal amount.
39
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL AMOUNT OF
THE CLASS A-4 NOTES OUTSTANDING AT THE RESPECTIVE LEVELS OF CPR
<TABLE>
<CAPTION>
PAYMENT DATE [ ]% CPR [ ]% CPR [ ]% CPR [ ]% CPR [ ]% CPR
- ------------------------------------------ --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
[ ]/97..................................
1/1/98....................................
1/1/99....................................
1/1/00....................................
1/1/01....................................
1/1/02....................................
1/1/03....................................
1/1/04....................................
1/1/05....................................
1/1/06....................................
1/1/07....................................
1/1/08....................................
1/1/09....................................
1/1/10....................................
1/1/11....................................
1/1/12....................................
1/1/13....................................
1/1/14....................................
1/1/15....................................
1/1/16....................................
1/1/17....................................
1/1/18....................................
1/1/19....................................
Weighted Average Life
(Years) (1).............................
Duration (Years) (2)......................
Principal Payment Window
(Months) (3)............................
Expected Final Maturity...................
</TABLE>
- ------------------------
(1) The weighted average life of a Note is determined by (i) multiplying the
amount of each principal payment by the number of years from the date of
issuance to the related principal payment date, (ii) summing the results and
(iii) dividing the sum by the total principal paid on the Note.
(2) Modified Duration assuming an example yield of [ ]%.
(3) The number of months from [ ] 1997 to the month in which the
final payment of principal would be made.
* Indicates an amount greater than zero but less than 0.5% of the original
principal amount.
REGISTRATION OF NOTES
The Notes will initially be registered in the name of Cede & Co. ("Cede"),
the nominee of the Depository Trust Company ("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 Uniform Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the 1934 Act. DTC accepts securities for deposit
from its participating
40
<PAGE>
organizations ("Participants") and facilitates the clearance and settlement of
securities transactions between Participants in such securities through
electronic book-entry changes in accounts of Participants, thereby eliminating
the need for physical movement of Notes. Participants include securities brokers
and dealers, banks and trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system is also 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").
Note owners who are not Participants but desire to purchase, sell or
otherwise transfer ownership of the Notes may do so only through Participants
and indirect participants (unless and until Definitive Notes, as defined below,
are issued). In addition, Note owners will receive all payments of principal of
and interest on the Notes from the Indenture Trustee through DTC and
Participants. Note owners will not receive or be entitled to receive Notes
representing their respective interests in the Notes, except under the limited
circumstances described below.
Unless and until Definitive Notes (as defined below) are issued, it is
anticipated that the only "Noteholder" of the Notes will be Cede, as nominee of
DTC. Note owners will not be Noteholders as that term is used in the Indenture.
Note owners are only permitted to exercise the rights of Noteholders indirectly
through Participants and DTC.
While the Notes are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Notes and is
required to receive and transmit payments of principal of, and interest on, the
Notes. Unless and until Definitive Notes are issued, Note owners who are not
Participants may transfer ownership of Notes only through Participants by
instructing such Participants to transfer Notes, by book-entry transfer, through
DTC for the account of the purchasers of such Notes, which account is maintained
with their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Notes will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited.
The Notes will be issued in registered form to Note owners, or their
nominees, rather than to DTC (such Notes being referred to herein as "Definitive
Notes"), only if (i) DTC or the Issuer advises the Indenture Trustee in writing
that DTC is no longer willing or able to discharge properly its responsibilities
as nominee and depository with respect to the Notes and the Issuer or the
Trustee is unable to locate a qualified successor, (ii) the Issuer, at its sole
option elects to terminate the book-entry system through DTC, or (iii) after the
occurrence of an Event of Default, DTC, at the direction of Note owners having a
majority in percentage interests of the Note owners together, advises the
Indenture Trustee in writing that the continuation of a book-entry system
through DTC (or a successor thereto) to the exclusion of any physical notes
being issued to Note owners is no longer in the best interest of Note owners.
Upon issuance of Definitive Notes to Note owners, such Notes will be
transferable directly (and not exclusively on a book-entry basis) and registered
holders will deal directly with the Indenture Trustee with respect to transfers,
notices and payments.
DTC has advised the Issuer and the Indenture Trustee that, unless and until
Definitive Notes are issued, DTC will take any action permitted to be taken by a
Noteholder under the Notes only at the direction of one or more Participants to
whose DTC account the Notes are credited. DTC has advised the Issuer that DTC
will take such action with respect to the Notes only at the direction of and on
behalf of the related Participants, with respect to such Notes. DTC may take
actions, at the direction of the related Participants, with respect to some
Notes which conflict with the actions taken with respect to other Notes.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of indirect participants, the ability of a Note owner to pledge its Notes
to persons or entities that do not participate in the DTC system, or to
otherwise act with respect to such Notes, may be limited due to the lack of a
physical
41
<PAGE>
certificate for such Notes. In addition, under a book-entry format, Note owners
may experience delays in their receipt of payments, since payments will be made
by the Indenture Trustee, to Cede, as nominee for DTC.
Neither the Issuer, the Depositor nor the Indenture Trustee will have any
responsibility for any aspect of the records relating to, or payments made on
account of, beneficial ownership interests of the Notes held by Cede, as nominee
for DTC, or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests. In the event of the insolvency of DTC, a
Participant or an indirect participant in whose name Notes are registered, the
ability of the owners of such Notes to obtain timely payment and, if the limits
of applicable insurance coverage by the Securities Investor Protection
Corporation are exceeded or if such coverage is otherwise unavailable, ultimate
payment of amounts paid on such Notes may be impaired.
LEGAL INVESTMENT CONSIDERATIONS
The Notes will not constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984, as amended. As a result,
the appropriate characterization of the Notes under various legal investment
restrictions, and thus the ability of investors subject to these restrictions to
purchase the Notes, is subject to significant interpretive uncertainties.
No representation is made as to the proper characterization of any Class of
Notes for legal investment or other purposes, or as to the ability of particular
investors to purchase the Notes under applicable legal investment or other
restrictions. All institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Notes constitute legal investments
for them or are subject to investment, capital or other restrictions.
ERISA CONSIDERATIONS
The Issuer, the Depositor and Walter Industries, an affiliate of the
Depositor, may each be considered a "party in interest" within the meaning of
ERISA, or a "disqualified person" within the meaning of the Code, with respect
to many employee benefit plans or retirement arrangements which are subject to
ERISA or Section 4975 of the Code (collectively, the "Plans"). While Mid-State
has no present intention to transfer the beneficial interest in the Issuer to
any person other than an affiliate of Mid-State (including a trust beneficially
owned by Mid-State or an affiliate), any transferee of such beneficial interest
(including a transferee that is not such an affiliate) may be such a "party in
interest" or "disqualified person." Prohibited transactions within the meaning
of ERISA and the Code may arise if the Notes are acquired by a Plan with respect
to which Walter Industries is a service provider or other category of "party in
interest" or "disqualified person," unless such Notes are acquired pursuant to
an exemption for transactions effected on behalf of such Plan by a "qualified
professional asset manager" or pursuant to any other available exemption.
A possible violation of the prohibited transaction rules also could occur if
a Plan purchased Notes pursuant to this offering if the Issuer, any Underwriter,
or any of their employees, affiliates or financial consultants (i) manage any
part of the Plan's investment portfolio on a discretionary basis, or (ii)
regularly provide advice pursuant to an agreement or understanding, written or
unwritten, with the individual, employer or trustee with discretion over the
assets of such Plan that such advice concerning investment matters will be used
as a primary basis for the Plan's investment decisions. Accordingly, the Issuer,
any Underwriter, Mid-State and their respective affiliates will not, and no Plan
should, allow the purchase of Notes with assets of any Plan if the Issuer, any
Underwriter, Mid-State or any of their respective employees, affiliates or
financial consultants provide with respect to the assets to be used to acquire
such Notes the management services or advice described in the previous sentence.
42
<PAGE>
On November 13, 1986, the Department of Labor issued a final regulation
concerning the definition of what constitutes the assets of an ERISA-Covered
Plan (Reg. Section 2510.3-101, 51 Fed. Reg. 41262) (the "Final Regulation").
Under the Final Regulation, which became effective on March 13, 1987, the assets
and properties of corporations, trusts, and certain other entities in which a
Plan makes an equity investment could be deemed to be assets of the investing
plan in certain circumstances. [Brown & Wood LLP], counsel for the Underwriters
and special counsel for the Issuer as to ERISA matters, is of the opinion that
the Notes will be considered debt instruments rather than equity interests of
the Issuer for ERISA purposes. Counsel's opinion on this issue is not binding on
the Department of Labor or a court reviewing such issue.
If the underlying assets of the Trust (as opposed to the Notes alone) were
to be deemed to be "plan assets" under ERISA, (a) the prudence and other
fiduciary responsibility standards of Part 4 of Subtitle B of Title I of ERISA,
applicable to investments made by Plans and their fiduciaries, would extend to
investments made by the Trust; and (b) certain transactions in which the Trust
might seek to engage could constitute "prohibited transactions" under ERISA and
the Code.
Any Plan fiduciary considering whether to purchase any Notes on behalf of a
Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment.
43
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of certain of the anticipated material federal income
tax consequences of the purchase, ownership and disposition of the Notes is
based on the advice of Brown & Wood LLP, special federal income tax counsel to
the Issuer and counsel to the Underwriters, in reliance on laws, regulations,
rulings and decisions now in effect or (with respect to regulations) proposed,
all of which are subject to change either prospectively or retroactively. This
summary does not address the federal income tax consequences of an investment in
the Notes applicable to all categories of investors, some of which may be
subject to special rules. Prospective investors should consult their own tax
advisors regarding the federal, state, local and any other tax consequences to
them of the purchase, ownership and disposition of the Notes. Unless stated
otherwise, for purposes of the following summary, references to "Noteholder" and
"holder" mean the beneficial owner of a Note.
GENERAL
Brown & Wood LLP, counsel for the Underwriters and special federal income
tax counsel to the Issuer, has advised the Issuer that in its opinion the Notes
will be treated for federal income tax purposes as indebtedness and not as an
ownership interest in the Accounts nor as an equity interest in the Issuer or a
separate association taxable as a corporation. Brown & Wood LLP has further
advised the Issuer that in its opinion, under current law, the Trust will not be
treated as a taxable mortgage pool ("TMP") as defined in Code Section 7701(i).
Based on the foregoing, for federal income tax purposes, (i) Notes held by a
thrift institution taxed as a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v); (ii) interest on Notes held by a real
estate investment trust will not be treated as "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Code Section 856(c)(3)(B); (iii) Notes held by a real estate
investment trust will not constitute "real estate assets" or "Government
securities" within the meaning of Code Section 856(c)(5)(A); and (iv) Notes held
by a regulated investment company will not constitute "Government securities"
within the meaning of Code Section 851(b)(4)(A)(i).
ORIGINAL ISSUE DISCOUNT AND PREMIUM
The Notes may be issued with "original issue discount" within the meaning of
Section 1273(a) of the Code. Generally, such original issue discount, if any,
will equal the difference between the "stated redemption price at maturity" of
the Notes and their "issue price." Holders of any Notes issued with original
issue discount generally must include such original issue discount in gross
income for federal income tax purposes as it accrues, in accordance with a
constant interest method based on the compounding of interest, in advance of
receipt of the cash attributable to such income.
Based on Code Sections 1271 through 1273 and Section 1275, Treasury
Regulations under such Code Sections issued on January 27, 1994, as amended on
June 14, 1996 (the "OID Regulations") and certain provisions of the Tax Reform
Act of 1986 (the "1986 Act"), the Depositor anticipates that the amount of
original issue discount required to be included in a Noteholder's income in any
taxable year will be computed as described below. The OID Regulations require
that the amount and rate of accrual of original issue discount be calculated
based on a reasonable assumed prepayment rate for the collateral supporting a
debt instrument ("Prepayment Assumption") and prescribes a method for adjusting
the amount and rate of accrual of such discount where the actual prepayment rate
differs from the Prepayment Assumption. The Prepayment Assumption will include a
reasonable assumed prepayment rate for the Accounts. The OID Regulations provide
that the Prepayment Assumption be the prepayment assumption that is used in
determining the initial offering price of such Notes, and which is not an
unreasonable assumption. The Prepayment Assumption determined by the Depositor
for the purposes of determining the amount and rate of accrual of original issue
discount is set forth in this Prospectus. No representation
44
<PAGE>
is made that the Accounts will prepay at the Prepayment Assumption or at any
other rate. The Prepayment Assumption used to price the Notes will be based in
part on an assumed level of cash recoveries on repossessed properties and also
on an assumed default rate on the Accounts. It is unclear under the 1986 Act and
the OID Regulations whether an assumption as to cash recoveries on repossessed
properties or an assumption as to a default rate on the Accounts will be
acceptable. Moreover, it is not clear whether an assumption as to the expected
timing of payments on an equity interest in a Trust is permissible. The
Depositor intends, however, to use such assumptions for purposes of computing
original issue discount on the Notes unless regulations are issued that prohibit
the use of such assumptions. There can be no assurance, however, that the
Internal Revenue Service (the "IRS") will agree with the positions taken by the
Depositor and any challenge by the IRS could result in holders being required to
include income in different amounts or at different times from those described
below.
In general, each Note will be treated as a single installment obligation
issued with an amount of original issue discount equal to the excess of its
"stated redemption price at maturity" over its "issue price." The "issue price"
of the Notes is the price at which a substantial amount of the Notes are first
sold to the public (excluding bond houses, brokers, underwriters or wholesalers)
regardless of the price paid by subsequent buyers. Generally, the stated
redemption price at maturity of a Note is its stated principal amount. Under a
DE MINIMIS rule contained in the Code, original issue discount will be
considered to be zero, however, if it equals less than 0.25% of the stated
redemption price at maturity of a Note multiplied by its weighted average
maturity. Weighted average maturity is computed, for this purpose, as the sum of
the amounts determined by multiplying (i) the number of full years from the
issue date (rounding down for partial years) until each payment included in the
stated redemption price at maturity is scheduled to be made under the Prepayment
Assumption, by (ii) a fraction, the numerator of which is the amount of each
such payment and the denominator of which is the Note's stated redemption price
at maturity.
Generally, a Noteholder must include in gross income in each taxable year,
the "daily portion," as determined below, of the original issue discount that
accrues on a Note for each day during the taxable year that the Noteholder holds
such Note, including the purchase date but excluding the disposition date. In
the case of an original holder of a Note, a calculation will be made of the
portion of the original issue discount that accrues during each successive
period (an "accrual period") that either begins or ends on the day in the
calendar year corresponding to a Payment Date and begins on the day after the
end of the immediately preceding accrual period (or on the issue date in the
case of the first accrual period). This will be done, in the case of each full
accrual period, by (a) adding (i) the present value at the end of the accrual
period (determined by using as a discount factor the original yield to maturity
of the Note as calculated under the Prepayment Assumption), and (ii) any
principal payments received during such accrual period and (b) subtracting from
the total the "adjusted issue price" of the Note at the beginning of such
accrual period. The "adjusted issue price" of a Note at the beginning of the
first accrual period is its issue price; the "adjusted issue price" of a Note 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
original issue discount allocable to that accrual period and reduced by the
amount of any principal payment made at the end of or during that accrual
period. The original issue discount accrued during an accrual period will then
be divided by the number of days in the period to determine the daily portion of
original issue discount for each day in the accrual period. With respect to an
initial accrual period shorter than a full accrual period, the daily portions of
original issue discount must be determined according to an appropriate
allocation under a reasonable method set forth under the OID Regulations,
provided that such method is consistent with the method used to determine yield
on the Notes. The calculation of original issue discount as described above will
cause the accrual of original issue discount to either increase or decrease (but
never below zero) in a given accrual period to reflect the fact that prepayments
are occurring faster or slower than under the Prepayment Assumption.
A subsequent purchaser of a Note issued with original issue discount who
purchases the Note at a cost less than the remaining stated redemption price at
maturity but more than its adjusted issue price (i.e., at
45
<PAGE>
an "acquisition premium"), also will be required to include in gross income the
sum of the daily portions of original issue discount on the Note. In computing
the daily portions of original issue discount for such a purchaser, however, the
daily portion is reduced by the amount that would be the daily portion for such
day (computed in accordance with the rules set forth above) multiplied by a
fraction, the numerator of which is the amount, if any, by which the price paid
by such holder for that Note exceeds the following amount: (a) the sum of the
issue price plus the aggregate amount of original issue discount that would have
been includable in the gross income of an original Noteholder (who purchased the
Note at its issue price), (b) less any prior payments included in the stated
redemption price at maturity, and the denominator of which is the sum of the
daily portions for that Note for all days beginning on the date after the
purchase date and ending on the maturity date computed under the Prepayment
Assumption.
A purchaser of a Note who purchases the Note at a cost greater than its
remaining stated redemption price at maturity will be considered to have
purchased the Note at a premium, and may elect to amortize such premium under a
constant yield method. The Code provides that amortizable bond premium will be
treated as an offset to interest income rather than as a deductible interest
expense.
The OID Regulations permit a Noteholder to elect to accrue all interest,
discount (including DE MINIMIS market or original issue discount) and premium on
the Notes in income as interest, based on a constant yield method. If such an
election were to be made with respect to a Note with market discount, the
Noteholder 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 Noteholder acquires during the year of the election or
thereafter. Similarly, a Noteholder that makes this election for a Note 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 Noteholder owns or acquires. The election to accrue interest, discount
and premium on a constant yield method with respect to a Note is irrevocable
without the consent of the IRS.
MARKET DISCOUNT
A purchaser of a Note also may be subject to the market discount provisions
of Code Sections 1276 through 1278. Under these provisions and the rules set
forth in the OID Regulations with respect to original issue discount, "market
discount" equals the excess, if any, of (i) the Note's stated principal amount
or, in the case of a Note with original issue discount, the adjusted issue price
(determined for this purpose as if the purchaser had purchased such Note from an
original holder) over (ii) the price paid by the purchaser for such Note. Under
a DE MINIMIS rule contained in the Code, market discount with respect to a Note
will be considered to be zero if the amount allocable to the Note is less than
0.25% of the stated redemption price at maturity of such Note multiplied by the
number of complete years to maturity of the Note remaining after the date of
purchase. If market discount on a Note is considered to be zero under this rule,
the actual amount of market discount must be allocated to the remaining
principal payments on the Note and gain equal to such allocated amount will be
recognized when the corresponding principal payment is made. Investors should
consult their own advisors regarding the application of the market discount
rules and advisability of making any of the elections allowed under Code
Sections 1276 through 1278.
The 1986 Act provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount Note
acquired by the taxpayer after the date of enactment of the Act 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 Note is to be reduced by the amount so treated as ordinary
income. This rule will not apply, however, if the Noteholder elects to include
market discount in income currently as it accrues on all market discount
obligations acquired by such Noteholder in the taxable year and thereafter.
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The 1986 Act also grants authority to the Treasury Department 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.
Until such time as regulations are issued by the Treasury, certain rules
described in the legislative history accompanying the 1986 Act will apply. Under
those rules, the holder of a market discount Note may elect to accrue market
discount either on the basis of a constant interest rate (taking into account
the Prepayment Assumption) or according to one of the following methods. For
Notes issued with original issue discount, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount, multiplied by (ii) a fraction, the numerator of which is the
original issue discount accruing during the period and the denominator of which
is the total remaining original issue discount at the beginning of the period.
For Notes issued without original issue discount, the amount of market discount
that accrues during a period is equal to the product of (i) the total remaining
market discount, multiplied by (ii) a fraction, the numerator of which is the
amount of stated interest paid during the accrual period and the denominator of
which is the total amount of stated interest remaining to be paid at the
beginning of the period. For purposes of calculating market discount under any
of the methods in the case of instruments (such as the Notes) which provide for
payments which may be accelerated by reason of prepayments of other obligations
securing such instruments, the Prepayment Assumption will apply. Regulations are
to provide similar rules for computing the accrual of amortizable note premium
on instruments payable in more than one principal installment.
A holder of a Note who acquired such Note at a market discount also may be
required to defer, until the maturity date of such Note or its earlier
disposition in a taxable transaction, the deduction of a portion of the amount
of interest that the holder paid or accrued during the taxable year on
indebtedness incurred or maintained to purchase or carry the Note in excess of
the aggregate amount of interest (including original issue discount) includable
in such holder's gross income for the taxable year with respect to such Note.
The amount of such net interest expense deferred in a taxable year may not
exceed the amount of market discount accrued on the Note for the days during the
taxable year on which the holder held the Note and, in general, would be
deductible when such market discount is includable in income. The amount of any
remaining deferred deduction is to be taken into account in the taxable year in
which the Note matures or is disposed of in a taxable transaction. In the case
of a disposition in which gain or loss is not recognized, in whole or in part,
any remaining deferred deduction will be allowed to the extent gain is
recognized on the disposition. The deferral rule does not apply if the
Noteholder elects to include such market discount in income currently as it
accrues on all market discount obligations acquired by such Noteholder in that
taxable year and thereafter.
Because the regulations described above have not been issued, it is
impossible to predict what effect those regulations might have on the tax
treatment of a Note purchased at a discount or premium in the secondary market.
SALE OR REDEMPTION OF NOTES
If a Note is sold or redeemed, the seller will recognize gain or loss equal
to the difference between the amount realized on the sale or redemption and the
seller's adjusted basis in the Note. Such adjusted basis generally will equal
the cost of the Note to the seller, increased by any original issue discount and
market discount included in the seller's gross income with respect to the Note,
and reduced by payments included in the stated redemption price at maturity
previously received by the seller and by any amortized premium. Similarly, a
holder who receives a payment which is part of the stated redemption price at
maturity of a Note will recognize gain equal to the excess, if any, of the
amount of the payment over such holder's adjusted basis in the Note. A holder of
a Note who receives a final payment which is less than such holder's adjusted
basis in the Note will generally recognize a loss. In general, such gain or loss
will be a capital gain or loss, provided that the Note is held as a "capital
asset" (generally, property held for investment) within the meaning of Code
Section 1221.
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FOREIGN INVESTORS
Generally, payments of interest (including any payment with respect to
accrued original issue discount) on the Notes to a Noteholder who is a
non-United States person ("foreign person") not engaged in a trade or business
within the United States, will not be subject to Federal income or withholding
tax if (i) such Noteholder does not actually or constructively own 10 percent or
more of the combined voting power of all classes of equity in Mid-State or any
parent corporation thereof, (ii) such Noteholder is not a controlled foreign
corporation (within the meaning of Code Section 957) related to Mid-State or any
parent corporation thereof and (iii) such Noteholder complies with certain
identification requirements (including delivery of a statement, signed by the
Noteholder under penalty of perjury, certifying that such Noteholder is a
foreign person and providing the name and address of such Noteholder). As used
herein, the term "foreign person" means a person that is, for United States
Federal income tax purposes, someone 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 of any political
subdivision thereof, (iii) an estate whose income is subject to United States
federal income tax regardless of its source or (iv) a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust.
If a tax is withheld by the withholding agent, the Noteholder would be
entitled to a refund of such tax if such Noteholder can prove it is a foreign
person and it is not a 10 percent shareholder of Mid-State or any parent
corporation thereof, or a controlled foreign corporation related to Mid-State or
any parent corporation thereof. A Noteholder may be required to file a U.S.
Federal income tax return to obtain a refund. Foreign investors should consult
their tax advisors regarding the potential imposition of the 30 percent
withholding tax.
BACKUP WITHHOLDING
Federal income tax laws provide for "backup withholding" of tax at a rate of
31% in certain circumstances on "reportable payments," which include payments of
principal, interest and original issue discount (determined in any case as if
the Noteholder were the original holder of the Note), but not market discount,
on a Note and of the proceeds of the disposition of a Note. Persons subject to
the requirement of backup withholding include, in certain circumstances, the
Depositor, the Issuer, the paying agent of the Issuer, a person who collects a
payment of interest or original issue discount as a custodian or nominee on
behalf of the Noteholder and a "broker" (as defined in applicable Treasury
regulations) through which the Noteholder receives the proceeds of the
retirement or other disposition of a Note. Backup withholding applies only if
the Noteholder, among other things, (1) fails to furnish a social security
number or other taxpayer identification number to the person subject to the
requirement of backup withholding, (2) furnishes an incorrect taxpayer
identification number to such person, (3) fails to report properly interest or
dividends or (4) under certain circumstances, fails to provide to such person a
certified statement, signed under penalty of perjury, that the taxpayer
identification number furnished is the correct number and that such Noteholder
is not subject to backup withholding.
Backup withholding will not apply, however, with respect to certain payments
made to Noteholders, including payments to certain exempt recipients (such as
tax-exempt organizations) and to certain foreign persons (as discussed under
"Foreign Investors" above). Noteholders should consult their tax advisors
regarding their qualification for exemption from backup withholding and the
procedure for obtaining such an exemption.
The amount of any "reportable payments" made by the Issuer during each
calendar year and the amount of tax withheld, if any, with respect to payments
on the Notes will be reported to the Noteholders and to the IRS.
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TAXABLE MORTGAGE POOLS
Under Code section 7701(i), an entity substantially all the assets of which
consist of mortgage loans and which does not elect REMIC status may be
classified as a taxable mortgage pool only if it is "the obligor under debt
obligations with two or more maturities." On August 4, 1995 the IRS issued
Treasury regulations under Section 7701(i) (the "TMP Regulations"). Because the
Notes will pay principal PRO RATA in the absence of losses on the Accounts and
will have the same Maturity Dates, the Trust will not be classified as a TMP.
THE INDENTURE
The following summaries describe certain provisions of the Indenture not
described elsewhere in this Prospectus. The summaries do not purport to be
complete and are qualified in their entirety by reference to the provisions of
the Indenture. Where particular provisions or terms used in the Indenture are
referred to, the actual provisions (including definitions of terms) are
incorporated by reference as part of such summaries. The Notes will be secured
under the Indenture.
NEGATIVE COVENANTS
The Issuer will not, among other things, engage in any business or activity
other than in connection with, or relating to, the issuance of Notes and the
purchase of the Accounts or the preservation of the Trust and the release of
assets therefrom pursuant to the Indenture and the Trust Agreement. See "THE
ISSUER."
REVIEW OF ACCOUNT DOCUMENTS
Within 90 days after the Closing Date, the Indenture Trustee will review the
Mortgage Collateral documents with respect to each Account that is part of the
Mortgage Collateral to determine that all documents required to be delivered
have been delivered, that they have been executed as required and that they
relate to the Accounts listed on the Schedule of Accounts attached to the
Indenture. Upon discovery that any Mortgage Collateral document is missing or
defective in a materially adverse manner, the Indenture Trustee will notify the
Servicer and the Issuer. If such defect or omission materially and adversely
affects the interests of the Noteholders in and to such Account, the Indenture
and the Servicing Agreement require the Issuer or the Servicer to use its best
efforts to cure such defect or omission, but there will be no obligation on the
part of the Issuer to release or substitute for such Account.
REPRESENTATIONS AND WARRANTIES
In the Indenture the Issuer will make representations and warranties with
respect to each Account that constitutes part of the Mortgage Collateral to the
effect that as of the Closing Date:
(a) the information set forth with respect to such Account in the
Schedule of Accounts attached to the Indenture is true and correct as of the
date as of which such information is given;
(b) the related building or installment sale contract, as the case may
be, has been duly executed by the parties thereto and the duties to be
performed thereunder prior to the date the first payment in connection with
such contract is due have been performed;
(c) the Mortgage Collateral documents have been duly executed by the
Account obligor and, to the extent required under local law for recordation
or enforcement, properly acknowledged;
(d) the mortgages have been properly recorded as required by law and
such documents constitute a valid first priority lien upon and secure title
to the property described therein, which in each case, is a single family
detached dwelling, and such Mortgage Collateral documents are enforceable in
accordance with their respective terms except as enforceability thereof may
be limited
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by bankruptcy, insolvency, moratorium and other laws affecting creditors'
rights generally and by general principles of equity (whether applied in a
proceeding in law or at equity);
(e) the Issuer is the sole owner of each Account that is part of the
Mortgage Collateral and has good title to such Account and full right and
authority to grant a lien or security interest on such Account to the
Indenture Trustee;
(f) all costs, fees, intangible, documentary, recording taxes and
expenses incurred in making, closing and recording such Account and the
related mortgage and in connection with the issuance of the Notes, have been
paid;
(g) no part of the property purporting to secure any such Account has
been, or shall have been, released from the lien or security title of the
related mortgage, deed of trust, mechanic's lien contract or other security
agreement except for property securing Accounts which have prepaid in full
between the Cut-Off Date and the date that is five business days prior to
the Closing Date which amounts shall be deposited in the Collection Account
on or before the Closing Date;
(h) except to the extent permitted by the Servicing Agreement, no term
or provision of any Account that is part of the Mortgage Collateral has been
or will be altered, changed or modified in any way by the Servicer or the
Issuer without the consent of the Indenture Trustee;
(i) Mid-State and the Issuer acquired title to the Accounts in good
faith, for value and without notice of any adverse claim;
(j) the promissory note or installment contract with respect to each
Account evidences a homeowner's obligation to pay the Gross Receivable
Amount of the related Account with fully amortizing level monthly payments.
Each promissory note or installment contract has an original term to
maturity not in excess of 30 years; substantially all of the promissory
notes or installment contracts with respect to each Account that have a
balance greater than zero were originated from December 1994 through
February 1997 with the exception of promissory notes or installment
contracts which represent subsequent resales of repossessed houses that
secured promissory notes or installment contracts originated during such
period;
(k) except as disclosed in the Indenture, there is no right of
rescission, setoff, defense or counterclaim to the promissory note,
installment contract, mortgage, mechanic's lien contract or other security
agreement with respect to any Account, including both the obligation of the
Account obligor to pay the unpaid balance of the cash price or finance
charge on such promissory note or installment contract and the defense of
usury; furthermore, neither the operation of any of the terms of the
promissory note, installment contract, mortgage, mechanic's lien contract or
other security agreement with respect to any Account nor the exercise of any
right thereunder will render such promissory note, installment contract,
mortgage, mechanic's lien contract or other security agreement
unenforceable, in whole or in part, or subject such promissory note or
mortgage to any right of rescission, setoff, counterclaim or defense,
including the defense of usury, and no such right of rescission, setoff,
counterclaim or defense has been asserted with respect thereto;
(l) as of the Closing Date, there are no mechanics' liens or claims for
work, labor or material (and to the best of the Issuer's knowledge, no
rights or claims are outstanding that under law could give rise to such
lien) affecting any mortgaged property which are or may be a lien prior to,
or equal with, the lien of the mortgage, mechanic's lien contract or other
security agreement thereon;
(m) except as disclosed in the Indenture, the promissory note or
installment contract with respect to each Account at origination complied in
all material respects with applicable local, state and federal laws,
including, without limitation, usury, equal credit opportunity,
truth-in-lending and disclosure laws, and consummation of the transactions
contemplated hereby will not involve the violation of any such laws;
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(n) as of the Closing Date, with respect to each deed of trust with
respect to any Account, a trustee, duly qualified under applicable law to
serve as such, is properly designated, serving and named in such deed of
trust; and
(o) there has been no fraud, dishonesty, misrepresentation or negligence
on the part of the originator or Account obligor in connection with the
origination of the promissory note or installment contract with respect to
any Account or in connection with the sale of the related Account.
Upon discovery by either the Indenture Trustee, the Issuer or the Servicer
of any breach of a representation or warranty which materially and adversely
affects the interest of the Noteholders, the party discovering such breach will
notify the Indenture Trustee. The Indenture requires the Issuer to use its best
efforts to eliminate or otherwise cure the circumstances or conditions in
respect of which such representation or warranty was incorrect as of the time
made within 60 days of such notice to the Indenture Trustee, but does not
require release or substitution of Collateral.
MODIFICATION OF INDENTURE
With the consent of the holders of Notes evidencing not less than 50% of the
Voting Rights of each Class of Notes adversely affected, the Indenture Trustee
and the Issuer may execute a supplemental indenture to add provisions to, or
change in any manner or eliminate provisions of, the Indenture or modify (except
as provided below) in any manner the rights of the holders of the Notes.
Without the consent of the holders of each outstanding Note affected
thereby, no supplemental indenture shall (a) change the Maturity Date, or the
Payment Date for any installment of interest on, any Note or reduce the
principal amount thereof, the interest rate thereon or the redemption price with
respect thereto, or change the earliest date on which any Note may be redeemed
or any place of payment where, or the coin or currency in which, any Note or any
interest thereon is payable or impair the right to institute suit for the
enforcement of certain provisions of the Indenture regarding payment, (b) reduce
the percentage in principal amount of the then outstanding Notes, the consent of
the holders of which is required for any supplemental indenture, or the consent
of the holders of which is required for any waiver of compliance with certain
provisions of the Indenture, or of certain defaults thereunder and their
consequences as provided for in the Indenture, (c) modify the provisions of the
Indenture relating to the sale of property subject to the lien under the
Indenture or specifying the circumstances under which such a supplemental
indenture may not change the provisions of the Indenture without the consent of
the holders of each outstanding Note affected thereby, as applicable, (d) modify
or alter the provisions of the Indenture regarding the voting of Notes held by
the Issuer or an affiliate of the Issuer, (e) permit the creation of any lien
ranking prior to or on a parity with the lien of the Indenture with respect to
any part of the property subject to the lien under the Indenture or terminate
the lien of the Indenture on any property at any time subject thereto or deprive
the holder of any Note of the security afforded by the lien of the Indenture or
(f) modify any of the provisions of the Indenture in such manner as to affect
the calculation of the principal and interest payable on any Note.
VOTING
The voting rights assigned to each Class of Notes (the "Voting Rights") will
be a fraction, expressed as a percentage, the numerator of which is equal to the
aggregate outstanding principal amount of such Class of Notes and the
denominator of which is equal to the aggregate outstanding principal amount of
all Classes of Notes.
EVENTS OF DEFAULT
An Event of Default with respect to the Notes is defined in the Indenture
as: (a) a Trigger Event shall have occurred and exists on or after [ ] 1, 20[ ],
or (b) one or more of the following events occur: (i) a
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default in the payment of any amount due under the Notes by the Maturity Date;
(ii) a default in the payment when due of any interest on any Class of Notes and
the expiration of a 30-day grace period; (iii) a default in the observance of
certain negative covenants in the Indenture; (iv) a default in the observance of
any other covenant in the Indenture and the continuation of any such default for
a period of thirty days after notice to the Issuer by the Indenture Trustee or
to the Issuer and the Indenture Trustee by the holders of Notes entitled to at
least 40% of the Voting Rights, such written notice specifying the Event of
Default and stating that such notice is a "Notice of Default;" or (v) certain
events of bankruptcy or insolvency with respect to the Issuer.
A "Trigger Event" under the Indenture includes the occurrence of any of the
following events:
(i) the Issuer fails to make a payment due under the Indenture and
such failure continues for two business days;
(ii) the Servicer fails to make a required payment or deposit due
under the Servicing Agreement and such failure continues for
four business days;
(iii) an Event of Default (as defined in the Servicing Agreement)
occurring by reason of (i) the Servicer's failure to perform
any covenants or agreements of the Servicer contained in the
Servicing Agreement; (ii) certain events of insolvency in
respect of the Servicer; or (iii) any representation or
warranty made by the Servicer pursuant to the Servicing
Agreement proves to be incorrect;
(iv) a breach of any covenant of the Servicer in the Servicing
Agreement which may have a materially adverse effect on the
Servicer or its performance under the Servicing Agreement that
is not cured within 60 days after the Servicer becomes aware
thereof or after notice thereof from any Person;
(v) any representation or warranty by Mid-State in the Purchase and
Sale Agreement, or any representation or warranty by the Issuer
in the Indenture, is incorrect and such breach may have a
materially adverse effect on the Issuer or the Noteholders and
is not cured within 60 days after notice thereof from the
Indenture Trustee;
(vi) the Purchase and Sale Agreement, the Servicing Agreement or the
Indenture ceases to be in full force and effect; or
(vii) the lien of the Indenture ceases to be effective or ceases to
be of a first priority.
RIGHTS UPON EVENT OF DEFAULT
The Indenture provides that the Indenture Trustee may exercise remedies on
behalf of the Noteholders only if an Event of Default has occurred and is
continuing. The Indenture Trustee shall proceed, in its own name, subject to the
Indenture, to protect and enforce its rights and the rights of the Noteholders
by such remedies provided for in the Indenture as the Indenture Trustee shall
deem most effectual to protect and enforce such rights.
If an Event of Default should occur and be continuing, the Indenture Trustee
or the holders of Notes entitled to at least 40% of the Voting Rights of any
Class of Notes, may declare the principal of the Notes to be immediately due and
payable. Such declaration may under certain circumstances be rescinded and
annulled by the holders of a majority in principal amount of the Notes then
outstanding. If, following an Event of Default, the Notes have been declared to
be due and payable, the Indenture Trustee, if certain conditions specified in
the Indenture are satisfied, and if the Indenture Trustee has not been otherwise
directed by the holders of all of the Notes, may refrain from selling the
Accounts and continue to apply all amounts received on the Accounts to payments
due on the Notes in accordance with their terms, notwithstanding the
acceleration of the maturity of the Notes. If, however, the Indenture Trustee
determines that anticipated collections on the Accounts would be insufficient to
pay the Notes in
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accordance with their terms, the Accounts may be sold by the Indenture Trustee
with the consent or at the direction of the holders of Notes evidencing at least
66 2/3% of the Voting Rights.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, if an Event of Default shall occur and be continuing, the
Indenture Trustee shall be under no obligation to exercise any of the rights or
powers under the Indenture at the request or direction of any of the holders of
Notes, unless such holders have offered to the Indenture Trustee security or
indemnity satisfactory to it against loss, liability or expense incurred in
compliance with such request. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the holders of a majority in
principal amount of the then outstanding Notes shall have the right to direct
the time, method and place of conducting any proceeding or any remedy available
to the Indenture Trustee or exercising any trust or power conferred on the
Indenture Trustee, and the holders of a majority in principal amount of the
Notes then outstanding may, in certain cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
in respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of the holder of each outstanding Note affected
thereby. See "DESCRIPTION OF THE NOTES--Registration of the Notes."
LIMITATIONS ON SUITS
No holder of any Note will have the right to institute any proceedings,
judicial or otherwise, with respect to the Indenture, or for the appointment of
a receiver or trustee, or for any other remedy under the Indenture, unless (a)
such holder previously has given to the Indenture Trustee written notice of a
continuing Event of Default, (b) the holders of Notes entitled to not less than
40% of the Voting Rights of a Class of Notes have made written request of the
Indenture Trustee to institute such proceedings in its own name as Indenture
Trustee and have offered the Indenture Trustee reasonable indemnity against the
costs, expenses and liabilities to be incurred in compliance with such request,
(c) the Indenture Trustee has for 60 days after its receipt of such notice
neglected or refused to institute any such proceeding and (d) no direction
inconsistent with such written request has been given to the Indenture Trustee
during such 60-day period by the holders of a majority in principal amount of
the then outstanding Notes.
ISSUER'S ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Indenture Trustee a
written statement as to the fulfillment of its obligations under the Indenture.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged in respect of the Accounts upon the
delivery to the Indenture Trustee for cancellation of all the Notes or, with
certain limitations, upon deposit with the Indenture Trustee of funds sufficient
for the payment in full of all the Notes.
THE INDENTURE TRUSTEE
First Union National Bank of Florida, a national banking association, will
be the Indenture Trustee under the Indenture.
THE SERVICING AGREEMENT
GENERAL
The Accounts will be serviced by the Servicer under the Servicing Agreement
between the Servicer and the Issuer, which will be assigned to the Indenture
Trustee as additional security for the Notes. The following summaries do not
purport to be complete and are subject to, and qualified in their entirety by
reference to, the provisions of the Servicing Agreement and the Indenture, and
where particular provisions
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or terms used in the Servicing Agreement or the Indenture are referred to, the
actual provisions (including definitions of terms) are incorporated by reference
as part of such summaries. The offices of the Servicer are located at 1500 North
Dale Mabry Highway, Tampa, Florida 33607. The Servicer, as Depositor, will be
the settlor and initially the sole beneficiary of the Issuer. The Servicer will
perform the services described below and set forth in the Servicing Agreement.
COLLECTION OF PAYMENTS
The Servicer will service the Accounts and will provide certain accounting
and reporting services with respect to the Accounts. The Servicer will be
obligated to service the Accounts generally in accordance with certain specific
standards set forth in the Servicing Agreement and otherwise in accordance with
reasonable and prudent servicing standards that are employed by a prudent
servicer with respect to the servicing of accounts held in its own portfolio and
in accordance with the Servicer's past practices. Although the Servicer will be
responsible for servicing the Accounts, the Servicer will enter into a
subservicing agreement with Jim Walter Homes pursuant to which Jim Walter Homes
will perform certain day-to-day servicing functions, such as following up on
delinquent accounts and initiating foreclosure proceedings, in accordance with
the standards and provisions of the Servicing Agreement.
Generally, all payments received on the Mortgage Collateral will be
deposited on a daily basis in a holding account (the "Holding Account")
established with and in the name of the Servicer, prior to the Closing Date. The
Servicer will transfer the payments attributable to the Mortgage Collateral, net
of the applicable servicing fee and other permitted deductions, into the
Collection Account.
The Servicer will perform certain monitoring and reporting functions for the
Indenture Trustee, including the preparation and delivery of monthly reports to
the Indenture Trustee covering the current payments and prepayments in full
received with respect to the Accounts and reports covering defaulted Accounts.
SERVICING FEE
The servicing fee will be calculated and paid monthly based upon the number
of Accounts being serviced as of the end of the preceding month. No such fee
will be paid, however, on Accounts that have resulted in repossession. The
servicing fee will be calculated at $25 per Account outstanding per month. The
servicing fee will be paid to the Servicer out of the Holding Account upon
submission of a withdrawal request in accordance with the Servicing Agreement.
In addition to the servicing fee, the Servicer will receive all assumption fees,
late payment charges, interest on taxes and insurance paid on behalf of the
Accounts and similar charges, to the extent such fees and expenses are collected
from obligors.
Out of its servicing fee, the Servicer is obligated to pay normal expenses
and disbursements incurred in connection with servicing the Accounts, including
the fees and disbursements of its independent accountants and expenses incurred
in connection with reports to the Indenture Trustee. Fees and expenses incurred
in connection with realization upon defaulted Accounts are reimbursable from the
Holding Account.
INSURANCE; TAXES
The Servicer will not be required to maintain escrow accounts for collection
of taxes or premiums on Insurance Policies on the Accounts. The terms of each
Account require the obligor to maintain a standard Insurance Policy covering the
property underlying such Account. The standard Insurance Policy is generally in
the form of the fire insurance policy with extended coverage that is customary
in the state in which the Mortgaged Property is located. Such standard forms
vary from state to state but generally cover damage by fire, lightning and
windstorm, subject to certain conditions and exclusions. Other causes of damage
(including without limitation floods and earth movements) are not covered. The
Servicing Agreement requires the Servicer to cause such a policy to be
maintained in full force and effect or to
54
<PAGE>
maintain a blanket insurance policy insuring against hazard and certain other
losses with respect to each such Account. The Servicer or Jim Walter Homes, as
subservicer, will be required to monitor the customer's payment of insurance and
taxes. If such payments are not made, the Servicer will be required to make such
payments and will not be reimbursed for such payments except to the extent such
amounts are collected from the obligor, from a subservicer or to the extent
recoverable as liquidation expenses.
If the Servicer obtains an Insurance Policy on behalf of an obligor, it
normally does so through an insurance agency that is an affiliate of the
Servicer, and the reinsurer, if any, of such Insurance Policy is an affiliate of
the Servicer.
REALIZATION UPON DEFAULTED ACCOUNTS
The Servicer will foreclose upon or otherwise comparably convert the
ownership of the property securing any Account that comes into default and as to
which no satisfactory arrangements can be made for collection of delinquent
amounts. In connection with such foreclosure or other conversion, the Servicer
will follow such practices and procedures specified in the Servicing Agreement
as are consistent with its customary servicing procedures. In this regard, the
Servicer may sell the property at a foreclosure or a trustee's sale. Generally,
however, it is expected that the property will be resold primarily in exchange
for a new account and such account will be an Account securing the Notes.
If any property securing a defaulted Account is damaged and the proceeds, if
any, from the related Insurance Policy maintained by the customer or from any
temporary insurance policy obtained by the Servicer are insufficient to restore
the damaged property completely, the Servicer will not be required to expend its
own funds to restore the damaged property unless it determines (i) that such
restoration is likely to increase the liquidation proceeds of the related
Account and (ii) that it will recover such expenses through liquidation or
insurance proceeds.
RESIGNATION
The Servicer may not resign from its obligations and duties under the
Servicing Agreement unless it determines that its duties thereunder are no
longer permissible by reason of a change in applicable law. No such resignation
will be effective until a successor servicer has assumed the Servicer's
obligations and duties under the Servicing Agreement. Such a successor servicer
must be satisfactory to the Issuer and the Indenture Trustee in the exercise of
their reasonable discretion. The Servicer may, however, enter into subservicing
agreements with any person similar to the one to be entered into with Jim Walter
Homes to perform any of its obligations under the Servicing Agreement, but the
Servicer will remain fully liable for performance of all obligations under the
Servicing Agreement.
ANNUAL ACCOUNTANTS' REPORT
The Servicer is required to cause a firm of independent certified public
accountants to furnish to the Issuer and the Indenture Trustee, on or before 120
days after the end of each of its fiscal years beginning with the fiscal year
ending May 31, 1998, a statement to the effect that such firm (a) has examined
the Servicer's financial statements for the preceding fiscal year and has issued
an opinion thereon, (b) has examined certain documents and records relating to
the servicing of the Accounts during the preceding fiscal year in accordance
with the Uniform Single Audit Program for Mortgage Bankers, with such
modifications to such review as, in the judgment of such firm, are appropriate
for a review of accounts similar to the Accounts, (c) has made its examination
under clause (a) above in accordance with generally accepted auditing standards
and (d) has found that its examination disclosed no material exceptions relating
to the Accounts or has set forth such exceptions.
55
<PAGE>
EVENTS OF DEFAULT
Events of Default under the Servicing Agreement will include: (a) any
failure to deposit into the Holding Account any required payment within two
Business Days after it is required to be deposited; (b) any failure by the
Servicer duly to observe or perform any other of its covenants or agreements in
the Servicing Agreement which continues unremedied for 30 days after the giving
of written notice of such failure by the Indenture Trustee or the holders of
Notes representing a majority in principal amount of the then outstanding Notes;
(c) certain events of bankruptcy, insolvency, receivership or reorganization of
the Servicer, any subservicer or any affiliate of either; (d) any
representation, warranty or statement of the Servicer made in the Servicing
Agreement or any other certificate delivered in connection with the issuance of
the Notes being materially incorrect as of the time such representation,
warranty or statement was made, which defect has not been cured within 30 days
after the Servicer received notice of the defect; and (e) any failure of the
Servicer to deliver to the Indenture Trustee a weekly report covering transfers
from the Holding Account to the Collection Account in the absence of force
majeure.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under the Servicing Agreement remains
unremedied, the Issuer or the Indenture Trustee (in each case subject to the
provisions of the Indenture) or, with the consent of the Indenture Trustee,
holders of Notes entitled to more than 50% of the Voting Rights of each Class of
Notes may terminate all of the rights and obligations of the Servicer under the
Servicing Agreement. Upon such termination, the Issuer will be obligated to
obtain a substitute servicer satisfactory to the Indenture Trustee. If the
Issuer fails to appoint a servicer satisfactory to the Indenture Trustee, the
Indenture Trustee may appoint or petition, in a court of competent jurisdiction,
for the appointment of a servicer to act as successor to the Servicer under the
Servicing Agreement. Pending the appointment of a successor Servicer, the
Indenture Trustee will be obligated to act as Servicer. (If First Union National
Bank of Florida, as Indenture Trustee, were to become Servicer, it is expected
to engage an affiliate as subservicer.) The Indenture Trustee and such successor
may agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the Servicer under the Servicing Agreement. No
termination of the Servicer shall be effective until the new servicer enters
into a servicing agreement with the Issuer and the Indenture Trustee.
TERMINATION AND REPLACEMENT OF SERVICER
If a Trigger Event occurs, the Indenture Trustee will have the option to,
but is not obligated to: (i) terminate the rights of the Servicer under the
Servicing Agreement and appoint a new Servicer thereunder; (ii) compel the
transfer of the software used by the Servicer to service the Accounts; (iii)
direct the homeowners under the Accounts to make payments directly to the
successor Servicer; and/or (iv) avail itself of any other remedies under the
Servicing Agreement or the Indenture. In addition, the occurrence of a Trigger
Event would affect the application of Remaining Available Funds to the payment
of principal of the Notes under the Indenture as described under "Description of
the Notes--Interest and Principal Payments."
AMENDMENTS
The Servicing Agreement may be amended by the Issuer and Mid-State with the
consent of the Indenture Trustee and the holders of Notes entitled to more than
50% of the Voting Rights of each Class of affected Notes, for the purpose of
adding any provisions to, or modifying or eliminating any provisions of, the
Servicing Agreement. However, amendments affecting amounts to be deposited in
the Holding Account or the Collection Account, altering the priorities with
which any allocation of funds shall be made under the Servicing Agreement,
creating liens on the collateral securing the payment of principal and interest
on the Notes or modifying certain specified provisions of the Servicing
Agreement may be approved only with the consent of the Indenture Trustee and all
holders of the Notes. The Servicing
56
<PAGE>
Agreement may also be amended without the consent of the Indenture Trustee or
any Noteholder if such amendment does not adversely affect in any material
respect the interests of any Noteholder.
THE TRUST AGREEMENT
Under the terms of the Trust Agreement, the Depositor will have conveyed to
the Owner Trustee a nominal amount of cash to establish the Trust, which will
act as Issuer. In exchange, the Depositor will have received certificates
evidencing beneficial ownership of the Issuer created under such agreement.
Subject to certain restrictions, the Depositor may sell or assign certificates
of beneficial ownership of the Issuer to another entity or entities.
The Trust Agreement will provide that the Issuer may not conduct any
activities other than those related to the issuance and sale of Notes, the
investment of certain funds in Eligible Investments, as defined in the
Indenture, and such other limited activities as may be required in connection
with reports and payments to holders of the Notes and the beneficial interest of
the Trust. Neither the Owner Trustee in its individual capacity nor the holders
of the beneficial interest of the Trust (the "Owners") are liable for payment of
principal of or interest on the Notes and each holder of Notes will be deemed to
have released the Owner Trustee and the Owners from any such liability. Upon the
payment in full of all outstanding Notes and the satisfaction and discharge of
the Indenture, the Owner Trustee will succeed to all the rights of the Indenture
Trustee, and the Owners will succeed to all the rights of the Noteholders, under
the Servicing Agreement, except as otherwise provided therein.
The Trust Agreement will provide that the Owner Trustee does not have the
power to commence a voluntary proceeding in bankruptcy with respect to the Trust
until at least 367 days after payment in full of all the Notes and the Owners
shall not direct the Owner Trustee to take any action that would violate such
provision.
The Trust Agreement will provide that the Owner Trustee is entitled to a fee
equal to [ ].
The Trust Agreement may, at the unanimous written request of the Owners, be
supplemented and amended by a written instrument signed by the Owner Trustee and
the Owners, with the written consent of the Indenture Trustee.
The Trust Agreement will provide that the Trust will terminate upon the
earlier to occur of (i) the final sale or disposition of the trust estate and
the distribution of all proceeds thereof to the Owners or (ii) 21 years less one
day following the death of the survivor of certain individuals described in the
Trust Agreement, but in no event later than [ ] 1, 2062.
THE PURCHASE AND SALE AGREEMENT
The Depositor will sell and assign to the Issuer all its right, title and
interest in the Mortgage Collateral pursuant to the Purchase and Sale Agreement.
Simultaneously, the Issuer will collaterally assign the Mortgage Collateral to
the Indenture Trustee as security for the Notes pursuant to the Indenture.
Neither the Servicer nor the Indenture Trustee will notify the customers of
the identity of the Indenture Trustee as the new secured party. Accordingly, the
sale and assignment of the Mortgage Collateral will be effective as against
creditors of the Depositor and Jim Walter Homes, but may not be effective
against bona fide purchasers for value, in certain states, of homes covered by
the Mortgage Collateral.
The Depositor will represent and warrant to the Issuer, with respect to the
Accounts sold pursuant to the Purchase and Sale Agreement, that as of the date
of execution thereof: (i) the related building or installment sale contract, as
the case may be, has been duly executed by the parties thereto and the duties to
be performed thereunder prior to the date the first payment in connection with
such contract is due shall have been performed by both parties thereto; (ii) the
promissory note shall have been duly executed
57
<PAGE>
by the customer with respect thereto and, to the extent required under local law
for recordation or enforcement, the mortgage, mechanic's lien contract or other
security agreement has been duly executed and properly acknowledged; (iii) the
Mortgage Collateral documents, other than the assignments thereof, shall have
been properly recorded as required by law; (iv) the mortgage, deed of trust,
mechanic's contract or other security agreement shall constitute a valid
first-priority lien upon and secure title to the property described therein, and
such mortgage, deed of trust, mechanic's lien contract or other security
agreement and the promissory note or installment sale contract secured thereby
shall be fully enforceable in accordance with their respective terms; (v) all
costs, fees, intangible and documentary recording taxes and expenses incurred in
making, closing, and recording each Account shall have been paid; and (vi) no
part of the mortgaged property securing any promissory note or installment sale
contract shall have been released from the lien or security title of the
mortgage, deed of trust, mechanic's lien contract or other security agreement
securing such promissory note or installment sale contract except for Account
notes which have been prepaid in full since the Cut-Off Date, which amounts will
be deposited in the Collection Account.
Within 60 days after the receipt of notice by the Issuer of a breach of any
representation or warranty which materially and adversely affects the interest
of the Noteholders, the Depositor will be required to use its best efforts to
eliminate or otherwise cure such breach. The Depositor will not have any
obligation under the Purchase and Sale Agreement to repurchase any Account.
58
<PAGE>
PLAN OF DISTRIBUTION
The Depositor, as sole beneficial owner of the Issuer, and Walter Industries
have entered into an Underwriting Agreement with Lehman Brothers Inc., as
representative of the several underwriters named therein (Lehman Brothers Inc.,
collectively with the other underwriters, the "Underwriters"). Subject to the
terms and conditions of the Underwriting Agreement, the Depositor has agreed to
cause the Issuer to sell to the Underwriters, and the Underwriters have agreed
to purchase, the respective principal amount of each Class of Notes set forth
opposite their names below.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
UNDERWRITERS NOTES NOTES NOTES NOTES
- ------------------------------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Lehman Brothers Inc...............................................
----------- ----------- ----------- -----------
Total.......................................................
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Under the terms of the Underwriting Agreement, the Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
Notes, if any of the Notes are purchased.
The Underwriters have advised the Depositor and the Issuer that they propose
to offer the Notes to the public at the prices set forth on the cover page
hereof, and to certain dealers at such prices less a concession not in excess of
[ %], [ %], [ %] and [ %] of the Class A-1 Notes, Class A-2 Notes, Class A-3
Notes and Class A-4 Notes, respectively. The Underwriters may allow and such
dealers may reallow a concession to certain other dealers not in excess of
[ %], [ %], [ %] and [ %] of the Class A-1 Notes, Class A-2 Notes, Class A-3
Notes and Class A-4 Notes, respectively. After the initial public offering, the
public offering prices and such concessions may be changed.
During and after the offering, the Underwriters may purchase and sell Notes
in the open market. These transactions may include overallotment and stabilizing
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Notes, which may be higher than the price that might
otherwise prevail in the open market. These transactions may be effected in the
over-the-counter market or otherwise, and these activities, if commenced, may be
discontinued at any time.
The Depositor and Walter Industries have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or contribute to payments the Underwriters
may be required to make in respect thereof.
LEGAL MATTERS
Certain legal matters will be passed upon for the Owner Trustee in its
individual capacity by [ ]; for the Depositor by Cadwalader, Wickersham &
Taft, New York, New York; for the Indenture Trustee by Morris, James, Hitchens
and Williams, Wilmington, Delaware; for the Issuer by Cadwalader, Wickersham &
Taft, New York, New York, as to the validity of the Notes and the enforceability
of the Indenture under New York law; by [ , Wilmington, Delaware], as to
matters of Delaware law; by Carlton Fields, as to matters of Florida law; by
Brown & Wood LLP, New York, New York, as to matters referred to under
59
<PAGE>
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES" [and as to certain ERISA matters
referred to under "ERISA CONSIDERATIONS"] and for the Underwriters by Brown &
Wood LLP.
FINANCIAL INFORMATION
As of the date of this Prospectus, the Issuer has been formed and the
Depositor has made a $100.00 capital contribution to the Issuer. See "THE
ISSUER." Because financial information concerning the Issuer would not be
meaningful, no financial information regarding the Issuer is provided.
NOTE RATINGS
It is a condition of issuance that the Class A-1 Notes be rated "Aaa" by
Moody's and "AAA" by Standard & Poor's; the Class A-2 Notes be rated at least
"Aa2" by Moody's and "AA" by Standard & Poor's; the Class A-3 Notes be rated at
least "A2" by Moody's and "A" by Standard & Poor's; and the Class A-4 Notes be
rated at least "Baa2" by Moody's and "BBB" by Standard & Poor's. Such ratings
will reflect only the views of Moody's and Standard & Poor's. The ratings of
Standard & Poor's address the likelihood of timely receipt of interest and the
ultimate receipt of principal at the maturity of the Notes. When rating
securities, Moody's and Standard & Poor's consider the transaction in its
entirety and rely on factors in addition to the amount and performance of the
collateral securing the debt. An explanation of the significance of such ratings
may be obtained from Moody's Investors Service, Inc., 99 Church Street, New
York, New York 10004, telephone (212) 553-0300 and Standard & Poor's Ratings
Services, 25 Broadway, New York, New York 10017, telephone (212) 208-8000. There
is no assurance that such ratings will continue for any period of time or that
they will not be revised or withdrawn entirely by either of such rating agencies
if, in its judgment, circumstances so warrant. A revision, withdrawal or
qualification of either of such ratings may have an adverse effect on the market
price of the Notes. A security rating is not a recommendation to buy, sell or
hold securities.
60
<PAGE>
INDEX TO PRINCIPAL DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERMS PAGE
- ------------------------------------------------------- ------
<S> <C>
1
1986 Act...............................................
A
account................................................
Accounts...............................................
accrual period.........................................
Aggregate Economic Balance.............................
Available Funds........................................
Available Funds Allocation.............................
C
Cede...................................................
Class..................................................
Class A-1 Optimal Principal Amount.....................
Class A-2 Optimal Principal Amount.....................
Class A-3 Optimal Principal Amount.....................
Class A-4 Optimal Principal Amount.....................
Class Interest Shortfall...............................
Closing Date...........................................
Code...................................................
Collateral.............................................
Collection Account.....................................
Collection Period......................................
Commission.............................................
CPR....................................................
Cut-Off Date...........................................
D
Definitive Notes.......................................
Depositor..............................................
DTC....................................................
E
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERMS PAGE
- ------------------------------------------------------- ------
<S> <C>
Economic Balance.......................................
EDGAR..................................................
Eligible Investments...................................
Enterprise.............................................
ERISA..................................................
Event of Default.......................................
Exchange Act...........................................
F
Final Regulation.......................................
foreign person.........................................
FTC Rule...............................................
G
Gross Receivable Amount................................
H
Holding Account........................................
I
Indenture..............................................
Indenture Trustee......................................
indirect participants..................................
Insurance Policies.....................................
Insurer................................................
Interest Accrual Amount................................
Interest Accrual Period................................
IRS....................................................
Issuer.................................................
Issuer Expenses........................................
L
Local Counsel..........................................
M
Maturity Date..........................................
Mechanic's Lien Contract...............................
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERMS PAGE
- ------------------------------------------------------- ------
<S> <C>
Mid-State..............................................
Moody's................................................
Mortgage Collateral....................................
Mortgaged Property.....................................
N
Note Rate..............................................
Notes..................................................
O
OID Regulations........................................
Optimal Principal Amount...............................
Overcollateralization Level............................
Owner Trustee..........................................
Owners.................................................
P
Participants...........................................
Payment Date...........................................
Plans..................................................
Prepayment Assumption..................................
prepayments............................................
Projected Aggregate Principal Balance..................
Purchase and Sale Agreement............................
R
Realized Loss Allocation Amount........................
Record Date............................................
Reinvestment Period....................................
Relief Act.............................................
Remaining Available Funds..............................
Retail Contracts.......................................
Rules..................................................
S
Sales Contract.........................................
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERMS PAGE
- ------------------------------------------------------- ------
<S> <C>
Security Instruments...................................
Servicer...............................................
Servicing Agreement....................................
Standard & Poor's......................................
Subordinated Class.....................................
Subservicing Agreement.................................
T
Target Overcollateralization Date......................
Texas Building Contract................................
Texas Contracts........................................
Texas Mortgages........................................
Texas Resale Mortgage..................................
Texas Sales Contract...................................
TMP....................................................
TMP Regulations........................................
Trigger Event..........................................
Trust..................................................
Trust Agreement........................................
Trust V Accounts.......................................
U
UCCC...................................................
Underwriters...........................................
V
Voting Rights..........................................
W
Walter Industries......................................
</TABLE>
64
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SECURITIES OFFERED HEREBY NOR AN OFFER OF SUCH
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.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information........................... 2
Incorporation of Certain Documents by
Reference..................................... 3
Reports to Noteholders.......................... 3
Transaction Summary............................. 4
Summary of Terms................................ 5
Risk Factors.................................... 10
The Depositor................................... 14
The Issuer...................................... 14
Use of Proceeds................................. 15
Discussion and Analysis of Issuer's Financial
Condition..................................... 15
The Accounts.................................... 15
The Mortgage Collateral......................... 22
Certain Legal Aspects of the Accounts and
Related Matters............................... 26
Security........................................ 30
Description of the Notes........................ 32
Legal Investment Considerations................. 42
ERISA Considerations............................ 42
Certain Federal Income Tax Consequences......... 44
The Indenture................................... 49
The Servicing Agreement......................... 53
The Trust Agreement............................. 57
The Purchase and Sale Agreement................. 57
Plan of Distribution............................ 59
Legal Matters................................... 59
Financial Information........................... 60
Note Ratings.................................... 60
Index to Principal Defined Terms................ 61
</TABLE>
------------------------
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS EFFECTING TRANSACTIONS IN
THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
$[ ]
MID-STATE TRUST VI
$[ ] [ ]% ASSET-BACKED NOTES, CLASS A-1
$[ ] [ ]% ASSET-BACKED NOTES, CLASS A-2
$[ ] [ ]% ASSET-BACKED NOTES, CLASS A-3
$[ ] [ ]% ASSET-BACKED NOTES, CLASS A-4
------------------------
MID-STATE HOMES, INC.
SERVICER
------------------
PROSPECTUS
[ ], 1997
------------------
LEHMAN BROTHERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 with the issuance and
distribution of the shares.)
<TABLE>
<S> <C>
SEC Filing Fee..................................................... $ 303.03
Trustee's Fees..................................................... *
Owner Trustee's Fees............................................... *
Legal Fees and Expenses............................................ *
Accounting Fees and Expenses....................................... *
Blue Sky and Legal Investment Fees and Expenses.................... *
Printing Fees and Expenses......................................... *
Rating Agency Fees and Expenses.................................... *
Miscellaneous...................................................... *
Total.......................................................... $ *
</TABLE>
- ------------------------
* Not determinable at this time.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The By-laws of Walter Industries, Inc. ("Walter Industries"), a Delaware
corporation and indirect owner of all of the issued and outstanding shares of
the capital stock of the Depositor, provide that, to the fullest extent
permitted by Delaware law, Walter Industries will indemnify any current or
former director or officer of Walter Industries and may, at the discretion of
the board of directors, indemnify any current or former employee or agent of
Walter Industries, against certain liabilities, including liabilities incurred
by reason of the fact that such person is or was serving, at the request of
Walter Industries, as a director, officer, partner, trustee, employee or agent
of another corporation or partnership, joint venture, trust or other enterprise.
To the extent that directors and officers of the Depositor serve or have
previously served as directors, officers, employees or agents of Walter
Industries, they are eligible for indemnification by Walter Industries against
liabilities in respect of actions taken in their capacities as directors or
officers of the Depositor.
The directors and officers of the Depositor are covered by a directors' and
officers' liability insurance policy maintained by Walter Industries for the
benefit of all of its subsidiaries.
ITEM 16. EXHIBITS.
(a) Financial Statements filed in the Prospectus: not applicable.
II-1
<PAGE>
(b) Exhibits
<TABLE>
<C> <S>
1. Form of Underwriting Agreement*
3.1 Form of Trust Agreement*
4.1 Form of Indenture (including forms of Notes)*
5.1 Opinion of Counsel to the Issuer as to the legality of the Notes*
8.1 Opinion of Special Federal Income Tax Counsel to the Issuer as to certain federal
income tax matters*
10.1 Form of Servicing Agreement*
10.2 Form of Purchase and Sale Agreement*
24.1 Consents of Counsel and Special Federal Income Tax Counsel to Issuer (included in
exhibits 5.1 and 8.1)*
25. Power of Attorney (included on page II-4 of this Registration Statement)
26.1 Statement of Eligibility and Qualification on Form T-1 of First Union National Bank of
Florida, as Trustee, under the Trust VI Indenture relating to the Trust VI Notes*
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned 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 this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Depositor pursuant to the provisions contained in Florida law, the Depositor's
Certificate of Incorporation and By-Laws or otherwise, the Depositor has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the reimbursement by the Depositor of expenses
incurred or paid by a director, officer or controlling person of the Depositor
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 Depositor will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in such Act and will be governed by the final adjudication
of such issue.
II-2
<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 Tampa, Florida on March 20, 1997.
MID-STATE HOMES, INC.
as depositor for Mid-State Trust VI
By: /s/ DEAN M. FJELSTUL
-----------------------------------------
Name: Dean M. Fjelstul
Title: VICE PRESIDENT
II-3
<PAGE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kenneth E. Hyatt, Richard E. Almy, Dean M.
Fjelstul and Joseph H. Kelly, Jr., and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for and in his name, place and stead, in any and all capacities
to sign any or all amendments (including post-effective amendments) to this
Registration Statement and any or all other documents in connection therewith,
and to file the same, with all exhibits thereto, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as might or could be done in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ KENNETH E. HYATT President, Principal
- ------------------------------ Executive Officer and March 20, 1997
Kenneth E. Hyatt Director
/s/ RICHARD E. ALMY
- ------------------------------ Director March 20, 1997
Richard E. Almy
/s/ DEAN M. FJELSTUL Vice President, Principal
- ------------------------------ Financial Officer and March 20, 1997
Dean M. Fjelstul Director
/s/ JOSEPH H. KELLY, JR.
- ------------------------------ Controller (Principal March 20, 1997
Joseph H. Kelly, Jr. Accounting Officer)
II-4
