<PAGE>
As filed with the Securities and Exchange Commission on July 3, 1997
Registration Nos. 333-26679 and 333-26679-01
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 1
to
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
------------------------
Education Loans Incorporated
(Exact name of registrant as specified in its charter)
South Dakota 45-0350016
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
Education Loans Incorporated
(Exact name of registrant as specified in its charter)
Delaware 91-1819974
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
105 First Avenue Southwest
Aberdeen, South Dakota 57401
(605) 622-4400
(Address, including zip code, and telephone number, including area code, of
registrants' principal executive offices)
A. Norgrin Sanderson
105 First Avenue Southwest
Aberdeen, South Dakota 57401
(605) 622-4400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
Timothy S. Hearn, Esq. David M. Reicher, Esq.
Dorsey & Whitney LLP Foley & Lardner
Pillsbury Center South Firstar Center
220 South Sixth Street 777 East Wisconsin Avenue
Minneapolis, Minnesota Milwaukee, Wisconsin 53202-5367
(612) 340-7802 (414) 297-5763
-------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
The Registrants hereby amend this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrants shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
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.
SUBJECT TO COMPLETION, DATED JULY __, 1997
PROSPECTUS
$_______,000
Education Loans Incorporated
----------------------------
STUDENT LOAN ASSET-BACKED NOTES, SERIES 1997-1
consisting of
$_______,000 Tax Exempt Auction Rate Student Loan Asset-Backed Notes, Senior
Series 1997-1A through E
$_______,000 Tax Exempt Fixed Rate Student Loan Asset-Backed Notes, Senior
Series 1997-1F
$______,000 Taxable Auction Rate Student Loan Asset-Backed Notes, Senior Series
1997-1G and H
$___________,000 Taxable LIBOR Rate Student Loan Asset-Backed Notes, Senior
Series 1997-1I and J
$______,000 Tax Exempt Fixed Rate Student Loan Asset-Backed Notes, Subordinate
Series 1997-1K
$______,000 Taxable LIBOR Rate Student Loan Asset-Backed Notes, Subordinate
Series 1997-1L
Education Loans Incorporated (formerly known as Student Loan Finance
Corporation), a South Dakota nonprofit corporation (the "Original Issuer"), is
offering $_______,000 aggregate principal amount of its Student Loan Asset-
Backed Notes, Series 1997-1 (the "Series 1997-1 Notes"). In connection with an
election to be made by the Original Issuer under Section 150(d)(3) of the
Internal Revenue Code of 1986, as amended, Education Loans Incorporated, a
separate, newly organized Delaware corporation (the "Corporation"), will,
immediately upon the issuance of the Series 1997-1 Notes, assume all of the
Original Issuer's liabilities and obligations with respect to the Notes, and the
Original Issuer will be released from all such liabilities and obligations. See
"The Original Issuer and the Corporation" herein.
(cover continued on next page)
Prospective investors in the Series 1997-1 Notes should consider the
discussion of certain material factors set forth under "Risk Factors" on page
[__] of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The Series 1997-1 Notes will represent limited obligations of the
Corporation, payable solely from the Trust Estate created under the Indenture
and described herein. The Series 1997-1 Notes are not insured or guaranteed by
any government agency or instrumentality, by any affiliate of the Corporation
(including the Original Issuer), by any insurance company or by any other person
or entity. The Holders will have recourse to the Trust Estate pursuant to the
Indenture, but will not have recourse to any other assets of the Corporation or
the Original Issuer. The Corporation, moreover, will have no significant assets
available to make payment on the Series 1997-1 Notes other than the Trust Estate
pledged as collateral for the Notes under the Indenture.
<TABLE>
<CAPTION>
=======================================================================================================
Proceeds to
Underwriting Original
Price to Public Fee (1) Issuer (2)
=======================================================================================================
<S> <C> <C> <C>
Tax Exempt Auction Rate Series 1997-1 Senior Notes..... % .___% .___%
- -------------------------------------------------------------------------------------------------------
Tax Exempt Fixed Rate Series 1997-1 Senior Notes....... % .___% .___%
- -------------------------------------------------------------------------------------------------------
Taxable Auction Rate Series 1997-1 Senior Notes........ % .___% .___%
- -------------------------------------------------------------------------------------------------------
Taxable LIBOR Rate Series 1997-1 Senior Notes.......... % .___% .___%
- -------------------------------------------------------------------------------------------------------
Tax Exempt Fixed Rate Series 1997-1 Subordinate Notes.. % .___% .___%
- -------------------------------------------------------------------------------------------------------
Taxable LIBOR Rate Series 1997-1 Subordinate Notes..... % .___% .___%
- -------------------------------------------------------------------------------------------------------
Total.................................................. $___________ $___________ $___________
======================================================================================================
</TABLE>
(1) SLFC has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
(2) Before deducting expenses payable by the Original Issuer, estimated to be
$__________.
The Series 1997-1 Notes are offered by the Underwriters subject to prior
sale, when, as and if issued to the Underwriters. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole or
in part. It is expected that delivery of the Series 1997-1 Notes will be made in
book-entry-only form through the Same Day Funds Settlement System of The
Depository Trust Company and also Cedel Bank, societe anonyme or the Euroclear
System on or about __________, 1997.
Smith Barney Inc.
FBS Investment Services, Inc. Dougherty Dawkins LLC
Miller & Schroeder Financial, Inc. Norwest Investment Services, Inc.
The date of this Prospectus is __________, 1997.
<PAGE>
The Series 1997-1 Notes are to be issued in twelve series designated as Tax
Exempt Auction Rate Student Loan Asset-Backed Notes, Senior Series 1997-1A
through 1997-1E (the "Tax Exempt Auction Rate Series 1997-1 Senior Notes"), Tax
Exempt Fixed Rate Student Loan Asset-Backed Notes, Senior Series 1997-1F (the
"Tax Exempt Fixed Rate Series 1997-1 Senior Notes"), Taxable Auction Rate
Student Loan Asset-Backed Notes, Senior Series 1997-1G and 1997-1H (the "Taxable
Auction Rate Series 1997-1 Senior Notes"), Taxable LIBOR Rate Student Loan
Asset-Backed Notes, Senior Series 1997-1I and 1997-1J (the "Taxable LIBOR Rate
Series 1997-1 Senior Notes"), Tax Exempt Fixed Rate Student Loan Asset-Backed
Notes, Subordinate Series 1997-1K (the "Tax Exempt Fixed Rate Series 1997-1
Subordinate Notes"), and Taxable LIBOR Rate Student Loan Asset-Backed Notes,
Subordinate Series 1997-1L (the "Taxable LIBOR Rate Series 1997-1 Subordinate
Notes"). See "Description of Series 1997-1 Notes" herein.
The rights of the Holders of Tax Exempt Fixed Rate Student Loan Asset-
Backed Notes, Subordinate Series 1997-1K and Taxable LIBOR Rate Student Loan
Asset-Backed Notes, Subordinate Series 1997-1L to receive payments with respect
to the Notes and to direct remedies upon default will be subordinated to such
rights of the Series 1997-1 Senior Noteholders and any Additional Senior
Obligations (as herein defined) to the extent described in this Prospectus. See
"Source of Payment and Security for the Notes --Priorities."
The Tax Exempt Auction Rate Series 1997-1 Senior Notes, the Tax Exempt
Fixed Rate Series 1997-1 Senior Notes, the Taxable Auction Rate Series 1997-1
Senior Notes, the Taxable LIBOR Rate Series 1997-1 Senior Notes, the Tax Exempt
Fixed Rate Series 1997-1 Subordinate Notes and the Taxable LIBOR Rate Series
1997-1 Subordinate Notes will be issued in the initial aggregate principal
amounts of $___________, $__________, $___________, $___________, $___________
and $__________, respectively. The Series 1997-1 Notes will be issued pursuant
to an Indenture of Trust dated as of ____________, 1997 (as amended and
supplemented from time to time, the "Indenture") from the Original Issuer to
First Bank National Association, as trustee (together with any successor and any
other corporation which may be substituted in its place pursuant to the
Indenture, the "Trustee"). The Series 1997-1 Notes will be payable from and
secured by: (i) Financed Student Loans (which are loans for post-secondary
education originated or acquired with moneys held under the Indenture) and
moneys due or paid thereunder after the applicable date of acquisition or
origination; (ii) funds on deposit in certain trust funds and accounts held
under the Indenture (including investment earnings thereon); and (iii) certain
related rights and property held in trust for the benefit of the Holders (as
more specifically described herein, the "Trust Estate"). See "Prospectus
Summary -- Trust Estate" and "Source of Payment and Security for the Notes --
General". At the time of acquisition or origination from moneys held under the
Indenture, Student Loans are required to meet certain eligibility criteria
described herein, and upon acquisition or origination such Student Loans are
referred to as Financed Eligible Loans. See "Glossary of Certain Defined Terms".
The initial Financed Eligible Loans have been acquired by the Original Issuer
pursuant to its programs of purchasing Student Loans from lenders. Additional
Financed Eligible Loans are expected to be originated or acquired by the Trustee
on behalf of the Corporation. The Corporation will contract with Student Loan
Finance Corporation, a newly organized South Dakota corporation ("SLFC"), to
provide origination, acquisition, administration and collection services with
respect to the Financed Student Loans and to perform certain of the
Corporation's obligations under the Indenture (referred to in such capacities as
the Servicer). See "The Servicer" and "Certain Relationships Among Financing
Participants" herein.
The Series 1997-1 Notes are subject to optional and special redemption and
prepayment as more fully described herein. See "Description of Series 1997-1
Notes" herein.
Interest on the Tax Exempt Auction Rate Series 1997-1 Senior Notes and the
Taxable Auction Rate Series 1997-1 Senior Notes (collectively, the "Auction Rate
Series 1997-1 Senior Notes") will accrue at the Initial Interest Rates described
herein during the respective Initial Interest Periods, being the periods from
the Date of Issuance
-2-
<PAGE>
through ___________, 1997 for the Series 1997-1A Notes, __________, 1997 for the
Series 1997-1B Notes, ______________, 1997 for the Series 1997-1C Notes,
_______________, 1997 for the Series 1997-1D Notes, _____________, 1997 for the
Series 1997-1E Notes, _______________, 1997 for the Series 1997-1G Notes and
_______________, 1997 for the Series 1997-1H Notes. Thereafter, interest on each
series of the Auction Rate Series 1997-1 Senior Notes will accrue at the Auction
Rate with respect thereto, determined from time to time pursuant to the
applicable Auction Procedures described herein. Interest on the Tax Exempt
Auction Rate Series 1997-1 Senior Notes will be paid on each June 1 and December
1, commencing December 1, 1997. Interest on the Taxable Auction Rate Series
1997-1 Senior Notes will be paid on the first Business Day following the
expiration of each respective Auction Period. The Auction Rate Series 1997-1
Senior Notes will mature June 1, 2020. See Appendix I - "Terms of the Tax Exempt
Auction Rate Series 1997-1 Senior Notes" and Appendix III -"Terms of the Taxable
Auction Rate Series 1997-1 Senior Notes."
The purpose of the Auction Procedures is to set the interest rates on the
Auction Rate Series 1997-1 Notes. By purchasing Auction Rate Series 1997-1
Senior Notes, whether in an Auction (as defined herein) or otherwise, each
purchaser will be deemed to have agreed: (i) to participate in Auctions on the
terms described herein, and (ii) so long as the beneficial ownership of the
Auction Rate Series 1997-1 Senior Notes is maintained in book-entry form, to
sell, transfer or otherwise dispose of the Auction Rate Series 1997-1 Senior
Notes only pursuant to a bid or a sell order in an Auction, or to or through a
specified broker-dealer (initially, Smith Barney Inc.); provided, that in the
case of any transfer other than one pursuant to an Auction, either the owner of
the Auction Rate Series 1997-1 Senior Notes so transferred, its participant or a
specified broker-dealer advises the Auction Agent (as defined herein) of such
transfer. As a result of the foregoing requirements, the Auction Rate Series
1997-1 Senior Notes will not be freely transferable, which may limit the
liquidity and marketability of Auction Rate Series 1997-1 Senior Notes and
therefore may not yield a Noteholder the best possible price for an Auction Rate
Series 1997-1 Senior Note. The ratings of the Auction Rate Series 1997-1 Senior
Notes by the Rating Agencies will not address the market liquidity of such
Notes. Broker-dealer fees (which are based on the Broker-Dealer Fee Rate
specified in the Indenture) are paid by the Auction Agent from moneys furnished
to it by the Corporation or the Trustee from amounts available therefor under
the Indenture. Noteholders do not pay additional fees and commissions in
disposing of Auction Rate Series 1997-1 Notes. See Appendix VII - "Auction of
the Auction Rate Series 1997-1 Senior Notes" herein.
The Tax Exempt Fixed Rate Series 1997-1 Senior Notes will mature on the
dates, and in the respective principal amounts, and will bear interest at the
respective rates per annum, set forth in the following table:
<TABLE>
<CAPTION>
Maturity Date Principal Amount Interest Rate
------------- ---------------- --------------
<S> <C> <C>
June 1, 2010 $ %
June 1, 2020
</TABLE>
Interest on the Tax Exempt Fixed Rate Series 1997-1 Senior Notes will be payable
on each June 1 and December 1, commencing December 1, 1997. See Appendix II -
"Terms of the Tax Exempt Fixed Rate Series 1997-1 Senior Notes."
Interest on each series of the Taxable LIBOR Rate Series 1997-1 Senior
Notes will be payable monthly on the first day of each month, commencing
__________, 1997. The Taxable LIBOR Rate Series 1997-1 Senior Note Interest Rate
with respect to each series of Taxable LIBOR Rate Series 1997-1 Senior Notes
will be determined by the Trustee monthly as described herein to equal the One-
Month LIBOR plus ____% per annum with respect to the Series 1997-1I Notes and
the One-Month LIBOR plus ____% per annum with respect to the Series 1997-1J
Notes. The Taxable LIBOR Rate Series 1997-1 Senior Notes will mature June 1,
2020. See Appendix IV - "Terms of the Taxable LIBOR Rate Series 1997-1 Senior
Notes."
-3-
<PAGE>
The Tax Exempt Fixed Rate Series 1997-1 Subordinate Notes will bear
interest at the rate of __% per annum, payable on each June 1 and December 1,
commencing December 1, 1997. The Tax Exempt Fixed Rate Series 1997-1 Subordinate
Notes will mature June 1, 2020. See Appendix V -"Terms of the Tax Exempt Fixed
Rate Series 1997-1 Subordinate Notes."
Interest on the Taxable LIBOR Rate Series 1997-1 Subordinate Notes will be
payable monthly on the first day of each month, commencing __________, 1997. The
Taxable LIBOR Rate Series 1997-1 Subordinate Note Interest Rate will be
determined by the Trustee from time to time as described herein to equal the
One-Month LIBOR plus __% per annum. The Taxable LIBOR Rate Series 1997-1
Subordinate Notes will mature June 1, 2020. See Appendix VI - "Terms of the
Taxable LIBOR Rate Series 1997-1 Subordinate Notes."
Principal payments on Financed Student Loans are not anticipated to be used
to retire principal of the Taxable Auction Rate Series 1997-1 Notes until all
Taxable LIBOR Rate Series 1997-1 Notes have been paid in full, and principal of
the Series 1997-1J Notes will not be paid from principal payments on Financed
Student Loans until the Series 1997-1I Notes have been paid in full.
The Indenture authorizes the issuance of other Notes ("Additional Notes")
in the future, which Additional Notes may be issued on a parity basis (as to
payment and security) with the Series 1997-1 Senior Notes or with the Series
1997-1 Subordinate Notes or on a subordinate basis to all such Notes. The Series
1997-1 Notes and any Additional Notes are collectively referred to herein as the
"Notes." Any Additional Notes will not be offered or sold pursuant to this
Prospectus.
In the opinion of Bond Counsel, under existing laws, regulations, rulings
and decisions, interest on the Tax Exempt Series 1997-1 Notes is not includable
in the gross income of the owners thereof for federal income tax purposes.
Interest on the Tax Exempt Series 1997-1 Notes is an item of tax preference
which is included in alternative minimum taxable income for purposes of the
federal alternative minimum tax applicable to all taxpayers, and is includable
in certain other taxes imposed upon corporations. For a more detailed
description of the tax status of the interest on the Tax Exempt Series 1997-1
Notes, Bond Counsel's opinion with respect thereto (including its reliance on
the Original Issuer's, SLFC's and the Corporation's compliance with covenants
made by them to satisfy certain requirements of the Internal Revenue Code of
1986, as amended) and certain income tax consequences of Tax Exempt Series 1997-
1 Note ownership, see "Tax Matters -- Tax Exempt Series 1997-1 Notes."
Neither the Original Issuer nor the Corporation has authorized any offer of
Series 1997-1 Notes to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995 (the "U.K. Regulations"). The
Series 1997-1 Notes may not lawfully be offered or sold to persons in the United
Kingdom except in circumstances which do not result in an offer to the public in
the United Kingdom within the meaning of the U.K. Regulations or otherwise are
in compliance with all applicable provisions of the U.K. Regulations.
Certain persons participating in this offering may engage in transactions
which stabilize, maintain or otherwise affect the price of the Series 1997-1
Notes, including over-allotment, stabilizing transactions, syndicate covering
transactions and penalty bids. See "Plan of Distribution" herein.
There is currently no secondary market for the Series 1997-1 Notes and
there is no assurance that one will develop. The Underwriters expect, but will
not be obligated, to make a market in the Series 1997-1 Notes. There is no
assurance that such a market will develop or, if such a market does develop,
that such market will continue. The Series 1997-1 Notes will not be listed on
any national securities exchange or quoted on any inter-dealer quotation
system.
-4-
<PAGE>
It is a condition of issuance of the Series 1997-1 Notes that Moody's
Investors Service, Inc. and Fitch Investors Service, L.P. (i) rate the Series
1997-1 Senior Notes in their respective highest rating categories, and (ii) rate
the Series 1997-1 Subordinate Notes at least "A". See "Ratings of the Series
1997-1 Notes."
Upon receipt of a request by an investor who has received an electronic
Prospectus from any Underwriter or a request by such investor's representative
within the period during which there is an obligation to deliver a Prospectus,
such Underwriter will promptly deliver, or cause to be delivered, without
charge, to such investor a paper copy of the Prospectus.
-5- (cover continued on next page)
<PAGE>
AVAILABLE INFORMATION
The Original Issuer and the Corporation have jointly filed a Registration
Statement under the Securities Act of 1933, as amended (the "1933 Act"), with
the Securities and Exchange Commission (the "Commission") with respect to the
Series 1997-1 Notes. The Registration Statement and amendments thereof and the
exhibits thereto, as well as certain reports referred to below under "Reports to
Noteholders" and other information, are available for inspection without charge
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th Floor, New
York, New York 10048; and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of the Registration Statement
and amendments thereof and exhibits thereto may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the Commission maintains a World Wide
Web site that contains reports, proxy and information statements and other
information regarding registrants, such as the Corporation, that file
electronically with the Commission at the following address:
(http://www.sec.gov).
REPORTS TO NOTEHOLDERS
Monthly unaudited reports concerning the Notes and the Trust Estate (the
"Monthly Servicing Reports"), prepared by the Servicer, will be provided to the
Noteholders as required by the Indenture. The Series 1997-1 Notes will be issued
in book-entry form and registered in the name of Cede & Co. ("Cede & Co."), the
nominee of The Depository Trust Company, New York, New York ("DTC"). Unless and
until definitive Notes are issued (which will occur under the limited
circumstances described herein) all Monthly Servicing Reports will be provided
to Cede & Co., as the sole Holder of the Notes. The receipt by a beneficial
owner of a Series 1997-1 Note of any Monthly Servicing Report will depend on
Cede & Co. forwarding such report to the appropriate Participant or Indirect
Participant of DTC, and such Participant or Indirect Participant then forwarding
such report to the beneficial owner. See "Description of Series 1997-1 Notes --
Book-Entry-Only System" herein. In addition, at the request of any beneficial
owner of Series 1997-1 Notes, the Trustee will mail Monthly Servicing Reports
directly to such beneficial owner. The Corporation will file with the Commission
such periodic reports as are required under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") and the rules and regulations of the Commission
thereunder, and will suspend the filing of such reports at its option if not so
required. In accordance with the Exchange Act and such rules and regulations,
the Corporation expects that its obligation to file such reports will be
terminated after June 30, 1998.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of the Original Issuer or the
Corporation with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act, subsequent to the date of this Prospectus and prior to the
termination of the offering of the Series 1997-1 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 herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute part of this Prospectus. The Corporation will provide without charge
to each person to whom a copy of this Prospectus is delivered, on the written or
oral request of any such person, a copy of any or all of the documents
incorporated herein by reference, except the exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to Education Loans Incorporated, 105
First Avenue Southwest, Aberdeen, South Dakota 57401, Attention: Vice President
Comptroller, telephone number (605) 622-4554.
-6-
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus. Capitalized terms
used herein and not defined shall have the respective meanings assigned to them
under "Glossary of Certain Defined Terms" beginning on page [__] of this
Prospectus.
Issuer The Series 1997-1 Notes will be issued by Education Loans
Incorporated, a South Dakota nonprofit corporation formerly
known as Student Loan Finance Corporation (the "Original
Issuer"). The Original Issuer is a corporation described in
Section 150(d) of the Code. Section 150(d) permits certain
nonprofit corporations (such as the Original Issuer) to
finance the acquisition of Student Loans made under the
Higher Education Act by issuing obligations, the interest on
which is not includable in the gross income of the owners
thereof for federal income tax purposes. In connection with
the Original Issuer's election under Section 150(d)(3) of
the Code to terminate its status as a corporation described
in Section 150(d) following the issuance of the Series 1997-
1 Notes, the Original Issuer will issue the Series 1997-1
Notes and then immediately transfer its interest in the
Trust Estate (see "Trust Estate" below) and be released from
all obligations with respect to the Notes and under the
Indenture.
The Original Issuer's interest in the Trust Estate will be
assigned to Education Loans Incorporated, a separate, newly
organized Delaware corporation (the "Corporation"), which
will assume all of the obligations of the Original Issuer
with respect to the Notes and under the Indenture. In
connection with this assignment and assumption, the
Corporation will not issue new Notes to the Holders of the
Series 1997-1 Notes in exchange for those issued by the
Original Issuer. Thus, the securities offered by this
Prospectus are obligations of the issuer under the
Indenture, which initially will be the Original Issuer but
immediately after the issuance thereof will be the
Corporation. Because all functions and obligations of the
issuer of the Series 1997-1 Notes under the Indenture will
immediately be assumed by the Corporation, discussions of
those functions and obligations in this Prospectus generally
refer to the Corporation, notwithstanding that the Series
1997-1 Notes will actually be issued by the Original Issuer.
Following the transfer described above, the Original Issuer
will change its name to Great Plains Education Foundation,
Inc. and continue to exist, though it will change its
purposes. Section 150(d)(3) of the Code requires, however,
that it continue to be an organization described in Section
501(c)(3) of the Code. It also will have no further
obligations or liabilities with respect to the Notes or
otherwise under the Indenture. See "The Original Issuer and
the Corporation" and "Certain Relationships Among Financing
Participants" herein.
Securities Offered The Series 1997-1 Notes are to be issued in twelve
series, designated as Tax Exempt Auction Rate Student Loan
Asset-Backed Notes, Senior Series 1997-1A through 1997-1E
(the "Tax Exempt Auction Rate Series 1997-1 Senior Notes"),
Tax Exempt Fixed Rate Student Loan Asset-Backed Notes,
Senior Series 1997-1F (the "Tax Exempt Fixed Rate Series
1997-1 Senior Notes"), Taxable Auction Rate Student Loan
Asset-Backed Notes, Senior Series 1997-1G and 1997-1H (the
"Taxable Auction Rate Series 1997-1 Senior Notes"), Taxable
LIBOR Rate Student Loan Asset-Backed Notes, Senior Series
1997-1I and 1997-1J (the "Taxable LIBOR Rate Series 1997-1
Senior Notes"), Tax Exempt Fixed Rate Student Loan Asset-
Backed Notes, Subordinate Series 1997-1K (the "Tax Exempt
Fixed Rate Series 1997-1 Subordinate Notes"), and Taxable
LIBOR Rate Student Loan Asset-Backed Notes, Subordinate
Series 1997-1L (the "Taxable LIBOR Rate Series
-7-
<PAGE>
1997-1 Subordinate Notes"). See "Description of Series
1997-1 Notes" herein. The original principal amounts of the
Tax Exempt Auction Rate Series 1997-1 Senior Notes, the Tax
Exempt Fixed Rate Series 1997-1 Senior Notes, the Taxable
Auction Rate Series 1997-1 Senior Notes, the Taxable LIBOR
Rate Series 1997-1 Senior Notes, the Tax Exempt Fixed Rate
Series 1997-1 Subordinate Notes and the Taxable LIBOR Rate
Series 1997-1 Subordinate Notes shall be $___________,
$____________, $____________ , $____________, $____________
and $____________, respectively. The Series 1997-1
Subordinate Notes are subordinated in certain respects to
the Series 1997-1 Senior Notes and any Additional Senior
Notes, as more fully described herein. The Series 1997-1
Notes will be issued pursuant to the Indenture as
hereinafter described.
Risk Factors There are material risks associated with an investment in
the Series 1997-1 Notes. See "Risk Factors".
Payment of Interest
on Series 1997-1
Notes
Tax Exempt The Tax Exempt Fixed Rate Series 1997-1 Senior Notes
Fixed Rate maturing on the dates set forth below will bear interest at
Series 1997-1 the respective rates per annum set forth below, payable on
Senior Notes each June 1 and December 1, commencing December 1, 1997, to
the Holders thereof as of the fifteenth day of the month
preceding the Interest Payment Date:
Maturity Date Interest Rate
------------- -------------
June 1, 2010 %
June 1, 2020
Tax Exempt The Series 1997-1A, 1997-1B, 1997-1C, 1997-1D and 1997-1E
Auction Notes will bear interest at initial rates of _____%,_____%,
Rate Series 1997-1 _____%, _____%, and _____% per annum, respectively, through
Senior Notes the respective Initial Auction Dates, which will be
__________, 1997 for the Series 1997-1A Notes, ___________,
1997 for the Series 1997-1B Notes, ___________, 1997 for the
Series 1997-1C Notes, ___________, 1997 for the Series 1997-
1D Notes, and ___________, 1997 for the Series 1997-1E
Notes.
After the Initial Interest Period for the Tax Exempt Auction
Rate Series 1997-1 Senior Notes of each series, each
Interest Period will initially consist of 35 days, subject
to adjustment as set forth in Appendix VII - "Auction of the
Auction Rate Series 1997-1 Senior Notes - Changes in Auction
Terms - Changes in Auction Period or Periods." The interest
rates for the Tax Exempt Auction Rate Series 1997-1 Senior
Notes will be reset at the Auction Rates pursuant to the
Auction Procedures described in Appendix VII -"Auction of
the Auction Rate Series 1997-1 Senior Notes - Auction
Procedures" (but in no event exceeding the Maximum Auction
Rate, as defined herein). See "Auction Procedures" below.
Interest on the Tax Exempt Auction Rate Series 1997-1 Senior
Notes will be payable on each June 1 and December 1,
commencing December 1, 1997, to the Holders thereof as of
the fifteenth day of the month preceding the Interest
Payment Date.
-8-
<PAGE>
Taxable Auction The Series 1997-1G and 1997-1H Notes will bear interest at
Rate Series 1997-1 initial rates of _____% and _____% per annum, respectively,
Senior Notes through the respective Initial Auction Dates, which will be
__________, 1997 for the Series 1997-1G Notes and _________,
1997 for the Series 1997-1H Notes.
After the Initial Interest Period for the Taxable Auction
Rate Series 1997-1 Senior Notes of each series, each
Interest Period will initially consist of 28 days, subject
to adjustment as set forth in Appendix VII - "Auction of the
Auction Rate Series 1997-1 Senior Notes - Changes in Auction
Terms - Changes in Auction Period or Periods". The interest
rates for the Taxable Auction Rate Series 1997-1 Senior
Notes will be reset at the Auction Rates pursuant to the
Auction Procedures described in Appendix VII - "Auction of
the Auction Rate Series 1997-1 Senior Notes - Auction
Procedures" (but in no event exceeding the Maximum Auction
Rate, as defined herein). See "Auction Procedures" below.
Interest on each series of Taxable Auction Rate Series 1997-
1 Senior Notes will be payable on the first Business Day
following the expiration of each Auction Period for such
series, to the Holders thereof as of the Business Day next
preceding each Auction Date.
Auction The following summarizes certain procedures that will be
Procedures used in determining the interest rates on the Auction Rate
Series 1997-1 Senior Notes. Appendix VII - "Auction of the
Auction Rate Series 1997-1 Senior Notes - Auction
Procedures" provides a more detailed description of these
procedures. Prospective investors in the Auction Rate Series
1997-1 Senior Notes should read carefully the following
summary, along with the more detailed description in
Appendix VII.
The interest rate on each series of Auction Rate Series
1997-1 Senior Notes will be determined periodically
(generally, for periods ranging from 7 days to one year, and
initially 28 days, in the case of the Taxable Auction Rate
Series 1997-1 Senior Notes, or 35 days, in the case of the
Tax Exempt Auction Rate Series 1997-1 Senior Notes) by means
of a "Dutch auction." In this Dutch auction, investors and
potential investors submit orders through an eligible
Broker-Dealer as to the principal amount of Auction Rate
Series 1997-1 Senior Notes such investors wish to buy, hold
or sell at various interest rates. The Broker-Dealers submit
their clients' orders to the Auction Agent, who processes
all orders submitted by all eligible Broker-Dealers and
determines the interest rate for the upcoming interest
period. The Broker-Dealers are notified by the Auction Agent
of the interest rate for the upcoming interest period and
are provided with settlement instructions relating to
purchases and sales of Auction Rate Series 1997-1 Senior
Notes.
Taxable LIBOR The Taxable LIBOR Rate Series 1997-1 Senior Note Interest
Rate Series 1997-1 Rate with respect to each series of Taxable LIBOR Rate
Senior Notes Series 1997-1 Senior Notes will be determined by the Trustee
monthly as described herein to equal the One-Month LIBOR
plus ____% per annum with respect to the Series 1997-1I
Notes and the One-Month LIBOR plus ____% per annum with
respect to the Series 1997-1J Notes. Interest on each series
of the Taxable LIBOR Rate Series 1997-1 Senior Notes will be
payable monthly on the first day of each month, commencing
__________, 1997, to the Holders thereof as of the last
Business Day preceding the Interest Payment Date. See
Appendix IV - "Terms of the Taxable LIBOR Rate Series 1997-1
Senior Notes."
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<PAGE>
Tax Exempt Fixed The Series 1997-1K Notes will bear interest at the rate of
Rate Series __% per annum, payable on each June 1 and December 1,
1997-1 commencing December 1, 1997, to the Holders thereof as of
Subordinate the fifteenth day of the month preceding the Interest
Notes Payment Date.
Taxable LIBOR The Taxable LIBOR Rate Series 1997-1 Subordinate Note
Rate Series Interest Rate will be determined by the Trustee monthly as
1997-1 described herein to equal the One-Month LIBOR plus __% per
Subordinate annum. Interest on the Taxable LIBOR Rate Series 1997-1
Notes Subordinate Notes will be payable monthly on the first day
of each month, commencing __________, 1997, to the Holders
thereof as of the last Business Day preceding the Interest
Payment Date. See Appendix VI - "Terms of the Taxable LIBOR
Rate Series 1997-1 Subordinate Notes."
Payment of
Principal on
Series 1997-1
Notes
Stated Maturity The Stated Maturity Dates and respective principal amounts
Dates of the Tax Exempt Fixed Rate Series 1997-1 Senior Notes are
as follows:
<TABLE>
<CAPTION>
Date Principal Amount
------------ -----------------
<S> <C> <C>
June 1, 2010 $___________
June 1, 2020 $___________
</TABLE>
The Stated Maturity Date of all other Series 1997-1 Notes
is June 1, 2020.
Optional At the Corporation's option, Auction Rate Series 1997-1
Redemption Senior Notes of any series may be redeemed on any Interest
Rate Adjustment Date for such series or on any regularly
scheduled Interest Payment Date for such series, in whole or
in part, at a Redemption Price of 100% of Principal Amount
of such Notes to be redeemed, plus accrued interest thereon
to the Redemption Date.
At the Corporation's option, Tax Exempt Fixed Rate Series
1997-1 Senior Notes and Tax Exempt Fixed Rate Series 1997-1
Subordinate Notes may be redeemed at any time on and after
December 1, 2007, in whole or in part, at the following
respective Redemption Prices (expressed as percentages of
Principal Amount) plus accrued interest thereon to the
Redemption Date:
<TABLE>
<CAPTION>
Redemption Period
(both dates inclusive) Redemption Price
---------------------- ----------------
<S> <C> <C>
December 1, 2007, through November 30, 2008 ___%
December 1, 2008, though November 30, 2009 ___%
December 1, 2009 and thereafter 100%
</TABLE>
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<PAGE>
Prepayment of Principal of the Taxable LIBOR Rate Series 1997-1 Notes
Taxable LIBOR Rate shall be prepaid on any Interest Payment Date from moneys
Series credited to the Retirement Account as hereinafter described.
1997-1 Notes The Corporation is required to direct the Trustee to
transfer to the Retirement Account from the Special
Redemption and Prepayment Account any moneys therein, up to
an amount equal to the Special Prepayment Amount, which the
Corporation has not determined are reasonably expected to be
required to be transferred to the Note Fund, the Rebate Fund
or the Reserve Fund prior to the next succeeding regularly
scheduled Interest Payment Date, provided no deficiencies
exist at the time of such transfer in the Note Fund, the
Rebate Fund or the Reserve Fund. See "Description of Flow of
Revenues in the Funds." Such prepayments of principal of
Taxable LIBOR Rate Series 1997-1 Notes shall, subject to the
Senior Asset Requirement, be allocated between the Taxable
LIBOR Rate Series 1997-1 Senior Notes and the Taxable LIBOR
Rate Series 1997-1 Subordinate Notes pro rata. Principal of
the Taxable LIBOR Rate Series 1997-1 Senior Notes so
allocated to be prepaid shall be applied to the Series 1997-
1I Notes so long as any such Notes remain Outstanding, and
thereafter to the Series 1997-1J Notes. Within a given
series of Taxable LIBOR Rate Series 1997-1 Notes, the
Principal Amount of such series to be prepaid shall be
allocated pro rata to the reduction of the Principal Amount
of all Notes of such series. The Senior Asset Requirement
requires the maintenance of certain ratios between the
Outstanding Principal Amounts of the Series 1997-1 Senior
Notes and the Series 1997-1 Subordinate Notes and the Value
of the assets of the Trust Estate following redemptions and
prepayments. See "Description of Series 1997-1 Notes --
Senior Asset Requirement."
The Special Prepayment Amount is an amount, as of the last
day of any month, equal to the excess, if any, of (1) the
sum of (a) all payments received with respect to principal
of Financed Student Loans credited to the Series 1997-1
Taxable Acquisition Account as of the Monthly Payment Date
for such month, plus (b) the amount of any Balances
theretofore transferred from the Series 1997-1 Taxable
Acquisition Account to the Retirement Account to redeem
Taxable Auction Rate Series 1997-1 Notes as described below
under "Redemption of Auction Rate Series 1997-1 Notes and
Fixed Rate Series 1997-1 Notes from Unused Proceeds," minus
(c) the principal component of the repurchase price of
Student Loans originally Financed from Balances in Series
1997-1 Taxable Acquisition Account which have been
repurchased from a Guarantee Agency upon rehabilitation of
such Student Loans pursuant to the Higher Education Act,
over (2) the sum of (a) the aggregate amount of all previous
prepayments of the Principal Amount of all Taxable LIBOR
Rate Series 1997-1 Notes, plus (b) the aggregate Principal
Amount of Taxable LIBOR Rate Series 1997-1 Notes to be
prepaid on the next regularly scheduled Interest Payment
Date from Balances then on hand in the Retirement Account.
Payments described in clause (1)(a) of the preceding
sentence include, without limitation, any prepayments by
borrowers from the proceeds of a consolidation loan made or
acquired by the Trustee on behalf of the Corporation or from
any other sources, but exclude, for this purpose, proceeds
of the sale or other disposition of Financed Student Loans
to any Person other than a Guarantee Agency, with respect to
Guarantee payments, or a Lender, with respect to the
repurchase of Financed Student Loans by such Lender pursuant
to its repurchase obligation under a Student Loan Purchase
Agreement.
In general, this prepayment provision is intended to require
the Corporation to prepay Taxable LIBOR Rate Series 1997-1
Notes in amounts related to the amount of principal payments
received with respect to Student Loans Financed with
proceeds of the Taxable Series 1997-1 Notes in the
Acquisition Fund. See Appendix X-- "Weighted Average Life of
the Taxable LIBOR Rate Series 1997-1 Notes" for a
description of the Corporation's projected schedule of such
prepayments. Because of the uncertainties
-11-
<PAGE>
relating to the timing of receipt of principal of Student
Loans expected to be Financed with proceeds of the Taxable
Series 1997-1 Notes, the actual level of prepayments
resulting therefrom cannot be definitively stated. See "Risk
Factors --Reinvestment Risk of Prepayment or Redemption of
Series 1997-1 Notes" and " -- Risk That the Average Life of
the Series 1997-1 Notes May Be Lengthened As a Result of
Extension of Payments on the Financed Student Loans".
Special
Redemption
Redemption of Tax Exempt Auction Rate Series 1997-1 Senior Notes of any
Tax Exempt series, Tax Exempt Fixed Rate Series 1997-1 Senior Notes and
Auction Tax Exempt Fixed Rate Series 1997-1 Subordinate Notes, may,
Rate Series 1997-1 at the Corporation's option, be redeemed, in whole or in
Senior part, at a Redemption Price of 100% of Principal Amount of
Notes, Tax such Notes to be redeemed, plus accrued interest thereon to
Exempt Fixed the Redemption Date, on any Interest Rate Adjustment Date
Rate Series 1997-1 for such series or on any regularly scheduled Interest
Senior Notes and Payment Date for such series occurring on or after ________
Tax Exempt Fixed 1, 199 , from amounts transferred to the Series 1997-1 Tax
Rate Series 1997-1 Exempt Retirement Sub-Account from the Series 1997-1 Tax
Subordinate Exempt Surplus Sub-Account and the Series 1997-1 Tax Exempt
Notes from Reserve Account. In general, such transfers are intended to
Excess Revenues allow the Corporation to redeem Tax Exempt Auction Rate
Series 1997-1 Notes, Tax Exempt Fixed Rate Series 1997-1
Senior Notes and Tax Exempt Fixed Rate Series 1997-1
Subordinate Notes to the extent that revenues allocable to
the Tax Exempt Series 1997-1 Notes under the Indenture
exceed scheduled debt service payments on the Tax Exempt
Series 1997-1 Notes, payments on other Indenture Obligations
and other expenses payable under the Indenture. See
"Description of Series 1997-1 Notes --Special Redemption --
From Moneys in the Surplus Account" and Appendix IX -
"Summary of the Indenture -- Funds and Accounts --Surplus
Fund" and " -- Reserve Fund".
Redemption of Taxable Auction Rate Series 1997-1 Senior Notes of any
Taxable Auction series may, at the Corporation's option, be redeemed, in
Rate Series 1997-1 whole or in part, at a Redemption Price of 100% of Principal
Notes from Excess Amount of such Notes to be redeemed, plus accrued interest
Revenues thereon to the Redemption Date, on any Interest Rate
Adjustment Date for such series or on any regularly
scheduled Interest Payment Date for such series occurring on
or after __________ 1, 199 , from amounts transferred to the
Series 1997-1 Taxable Retirement Sub-Account from the Series
1997-1 Taxable Surplus Sub-Account and the Series 1997-1
Taxable Reserve Account. In general, such transfers are
intended to allow the Corporation to redeem Taxable Auction
Rate Series 1997-1 Notes to the extent that revenues under
the Indenture allocable to Taxable Notes exceed scheduled
debt service payments on the Taxable Series 1997-1 Notes,
prepayments of Taxable LIBOR Rate Series 1997-1 Notes,
payments on other Indenture Obligations and other expenses
payable under the Indenture. Such revenues could result in
whole or in part from Student Loans acquired with, and from
investment earnings on, the proceeds of Additional Notes.
(Any Additional Notes will not be offered or sold pursuant
to this Prospectus.) See "Description of Series 1997-1
Notes -- Special Redemption -- From Moneys in the Surplus
Account" and Appendix IX - "Summary of the Indenture --
Funds and Accounts -- Surplus Fund" and "-- Reserve Fund."
Redemption of Taxable Auction Rate Series 1997-1 Senior Notes of any
Auction Rate series may, at the Corporation's option, be redeemed, in
Series 1997-1 whole or in part, at a Redemption Price of 100% of Principal
Amount of such Notes to be redeemed, plus accrued interest
to the Redemption Date, on
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<PAGE>
Notes and Tax any Interest Rate Adjustment Date for such series or on any
Exempt Fixed Rate regularly scheduled Interest Payment Date for such series,
Series 1997-1 from proceeds of the Series 1997-1 Notes in the Series
Notes from Unused 1997-1 Taxable Acquisition Account that have not been used
Proceeds to acquire Eligible Loans and from amounts in the Series
1997-1 Taxable Reserve Account. See "Description of Series
1997-1 Notes -- Special Redemption -- From Unused Proceeds"
and Appendix IX-"Summary of the Indenture -- Funds and
Accounts -- Acquisition Fund" and " -- Reserve Fund".
Tax Exempt Auction Rate Series 1997-1 Senior Notes of any
series may, at the Corporation's option, be redeemed, in
whole or in part, on any Interest Rate Adjustment Date for
such series or on any regularly scheduled Interest Payment
Date for such series, and (if no Tax Exempt Auction Rate
Series 1997-1 Notes remain Outstanding) Tax Exempt Fixed
Rate Series 1997-1 Notes may, at the Corporation's option,
be redeemed, in whole or in part, on any date, in each case
at a Redemption Price of 100% of Principal Amount of such
Notes to be redeemed, plus accrued interest thereon to the
Redemption Date, from proceeds of the Series 1997-1 Notes in
the Series 1997-1 Tax Exempt Acquisition Account that have
not been used to acquire Eligible Loans and from amounts in
the Series 1997-1 Tax Exempt Reserve Account. Such Series
1997-1 Notes shall be so redeemed on ________________,
unless the Trustee receives certain certifications from the
Corporation. See "Description of Series 1997-1 Notes --
Special Redemption -- From Unused Proceeds" and Appendix
IX - "Summary of the Indenture -- Funds and Accounts --
Acquisition Fund" and " -- Reserve Fund".
Redemption of The Series 1997-1 Notes may, at the Corporation's option, be
Series 1997-1 redeemed, in whole but not in part, at a Redemption Price of
Notes upon 100% of Principal Amount, plus accrued interest thereon to
Reduction of the Redemption Date, on any date when the remaining
Portfolio Balance aggregate outstanding principal balance of Student Loans
Financed with the proceeds of the Series 1997-1 Notes is
less than 10% of the amount deposited to the Acquisition
Fund on the Date of Issuance.
Date of Issuance __________________, 1997.
Denominations The Tax Exempt Auction Rate Series 1997-1 Senior Notes, the
Taxable Auction Rate Series 1997-1 Senior Notes, the Taxable
LIBOR Rate Series 1997-1 Senior Notes and the Taxable LIBOR
Rate Series 1997-1 Subordinate Notes will be issued in
denominations of $100,000 in original Principal Amount and
any multiple thereof. The Tax Exempt Fixed Rate Series 1997-
1 Senior Notes and the Tax Exempt Fixed Rate Series 1997-1
Subordinate Notes will be issued in denominations of $5,000
in original Principal Amount and any multiple thereof.
Indenture The Series 1997-1 Notes are being issued pursuant to the
Indenture (including the First Supplemental Indenture)
between the Original Issuer and the Trustee and are payable
solely from the funds and assets held thereunder. The
Original Issuer's rights under the Indenture will be
assigned to, and the Original Issuer's obligations under the
Indenture will be assumed by, the Corporation. The
Corporation expects to issue additional series of Notes in
the future which also will be secured by the Trust Estate.
The Series 1997-1 Senior Notes constitute "Senior Notes"
under the Indenture, secured on a basis which is on a parity
with any Additional Senior Notes and which is senior to the
Series 1997-1 Subordinate Notes and any Additional Notes
secured on a parity with or subordinate to the Series 1997-1
Subordinate Notes. The Series 1997-1 Subordinate
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<PAGE>
Notes constitute "Subordinate Notes" under the Indenture,
secured on a basis which is on a parity with any Additional
Subordinate Notes and which is subordinate to the Series
1997-1 Senior Notes and any Additional Senior Notes.
Additional Indenture Obligations (including Additional
Notes) secured on a parity with or on a basis subordinate to
the Series 1997-1 Senior Notes may be issued under the
Indenture. Such Additional Indenture Obligations may be
secured on a basis which is senior to or on a parity with
the Series 1997-1 Subordinate Notes. Any Additional Notes
will not be offered or sold pursuant to this Prospectus.
Trustee First Bank National Association, the headquarters of which
is located in Minneapolis, Minnesota. The Trustee, either
directly or through its affiliates, has entered into certain
transactions with and performed certain services for the
Original Issuer and anticipates entering into certain
transactions with and providing certain services for the
Corporation. See "Certain Relationships Among Financing
Participants" herein. The Higher Education Act provides that
only "eligible lenders" (defined to include banks and
certain other entities) may hold title to student loans made
under the Federal Family Education Loan Program. Because the
Corporation does not qualify as an "eligible lender," the
Trustee will hold title to all such Financed Student Loans
on behalf of the Corporation. The Trustee will agree under
the Indenture to maintain its status as an "eligible lender"
under the Higher Education Act.
Use of Proceeds The Original Issuer estimates that the proceeds from the
sale of the Series 1997-1 Notes will be applied as follows:
Deposit to Acquisition Fund:
Series 1997-1 Tax Exempt Acquisition Account $
---------
Series 1997-1 Taxable Acquisition Account
---------
Deposit to Reserve Fund
---------
Total $
---------
Approximately $___________ of the proceeds deposited to the
Series 1997-1 Tax Exempt Acquisition Account and
approximately $__________ of the proceeds deposited to the
Series 1997-1 Taxable Acquisition Account are expected to be
used on the Date of Issuance to refinance a portfolio of
Student Loans currently owned by the Original Issuer, which
Student Loans have been acquired by the Original Issuer
pursuant to its secondary market program or originated by
the Original Issuer. These Student Loans currently secure
outstanding obligations of the Original Issuer used to
acquire such Student Loans, which will be refunded from the
proceeds of the Series 1997-1 Notes. The remaining proceeds
deposited to the Series 1997-1 Tax Exempt Acquisition
Account are expected to be used to purchase Eligible Loans
from Lenders or to originate Eligible Loans on or before
_______________, ____. If such proceeds are not used to
purchase Eligible Loans on or before _____________, ____,
such proceeds may be transferred to the Retirement Account
and used to redeem Tax Exempt Series 1997-1 Notes. The
remaining proceeds deposited to the Series 1997-1 Taxable
Acquisition Account are expected to be used to purchase
Eligible Loans from lenders or to originate Eligible Loans
on or before ____________, _____. If such proceeds are not
used to purchase Eligible Loans on or before __________,
____, such proceeds may be transferred to the Retirement
Account and used to redeem Taxable Auction Rate Series 1997-
1 Senior Notes. See "Description of Series 1997-1 Notes -
Special Redemption and Prepayment - From Unused Proceeds"
herein.
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<PAGE>
Trust Estate The Trust Estate will consist of: (i) Financed Student
Loans, as described below, and moneys payable with respect
thereto after their respective dates of acquisition; (ii)
moneys and investment securities in the Funds and Accounts
held by the Trustee under the Indenture; (iii) rights of the
Corporation in and to the Servicing Agreement, the Student
Loan Purchase Agreements and the Guarantee Agreements, as
the same relate to Financed Student Loans, and (iv) the
rights of the Corporation under certain other related
contracts.
The Financed Financed Eligible Loans will initially consist solely of
Eligible Loans loans originated pursuant to the Federal Family Education
Loan Program as described herein under "Description of the
Federal Family Educational Loan Program" to students or
parents of students enrolled in qualified accredited
institutions of higher education. The Corporation expects
that of the Eligible Loans to be Financed on the Date of
Issuance with the proceeds of the Series 1997-1 Notes,
approximately 59.0% will be guaranteed by Education
Assistance Corporation ("EAC"), approximately 34.7% will be
guaranteed by Pennsylvania Higher Education Assistance
Agency ("PHEAA"), and the remainder will be guaranteed by
one of the following Guarantee Agencies: United Student Aid
Funds, Inc., the North Dakota Guaranteed Student Loan
Program, Northstar Guarantee Inc., Great Lakes Higher
Education Corporation, or Educational Credit Management
Corporation (formerly known as Transitional Guaranty Agency,
Inc.). The Corporation expects that California Student Aid
Commission also will be a Guarantee Agency for Eligible
Loans to be Financed following the Date of Issuance. Any
other state agency or private nonprofit institution or
organization which administers a Guarantee Program may also
be a Guarantee Agency of Eligible Loans to be Financed,
subject to meeting certain requirements of the Indenture.
See "Description of the Guarantee Agencies."
The Corporation may in the future acquire or originate (or
cause the Trustee to acquire or originate) Eligible Loans
under the Indenture which are not originated pursuant to the
Federal Family Education Loan Program.
Some Financed Eligible Loans will have been originated by
the Original Issuer or by the Trustee on behalf of the
Corporation. The remainder of the Financed Eligible Loans
will have been originated by independent third parties and
subsequently sold to the Original Issuer (before the Date of
Issuance) or to the Trustee on behalf of the Corporation
(after the Date of Issuance). The Financed Eligible Loans
included in the Trust Estate will vary from time to time and
are required to be Eligible Loans. Eligible Loans are (A)
Student Loans which: (1) have been or will be made to an
Eligible Borrower for post-secondary education, (2) are
guaranteed by a Guarantee Agency as to at least 98% of the
principal of and accrued interest on such Student Loans and
are covered by Federal Reimbursement Contracts providing,
among other things, for reimbursement to the Guarantee
Agency for losses incurred by it on defaulted Financed
Student Loans insured or guaranteed by the Guarantee Agency
to the extent provided in the Higher Education Act, (3) are
"eligible loans" as defined in Section 438 of the Higher
Education Act for purposes of receiving Special Allowance
Payments (other than Nonsubsidized Stafford Loans originally
financed by the Original Issuer), and (4) bear interest at
rates per annum not less than or in excess of the applicable
rates of interest provided by the Higher Education Act, or
such lesser rates as may be approved by the Rating Agencies;
or (B) other Student Loans if the Corporation shall have
received the necessary Rating Agency, Bond Counsel and other
approvals. See "Glossary of Certain Defined Terms." The
Corporation expects that most of the Eligible Loans to be
acquired with the proceeds of the Series 1997-1 Notes will
be those described in clause (A) above. Eligible Loans to be
Financed with the proceeds of the Tax Exempt Series 1997-1
Notes (or from Balances
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<PAGE>
in the Tax Exempt Series 1997-1 Surplus Subaccount) must be
made to an Eligible Borrower for the post-secondary
education of (a) a resident of the State of South Dakota
attending a post-secondary school located within or without
the State of South Dakota, or (b) a resident of a state
other than the State of South Dakota attending a post-
secondary school located within the State of South Dakota.
Although other types of Eligible Loans may be permitted to
be Financed under clause (B), in general, the descriptions
of Eligible Loans in this Prospectus relate to those
described in clause (A). The Corporation has no current
plans to acquire Eligible Loans described under clause (B)
and cannot predict what the terms of any such Eligible Loans
might be. However, a broad range of loans may qualify as
Eligible Loans under clause (B) upon receiving the necessary
approvals.
The Federal The Financed Student Loans will initially consist solely of,
Family and are expected at all times to consist primarily of,
Education Loan student loans originated pursuant to the Federal Family
Program Education Loan Program under the Higher Education Act.
Pursuant to the Federal Family Education Loan Program, each
such Financed Eligible Loan is guaranteed as to the payment
of at least 98% of principal and interest by a state or
private non-profit Guarantee Agency. The Guarantee Agencies
each have reinsurance contracts with the Secretary of the
United States Department of Education (the "Department of
Education"), pursuant to which the Department of Education
reimburses the Guarantee Agencies for such portions of
guarantee claims paid by the Guarantee Agencies as is
provided in the Higher Education Act. In addition, the
Department of Education is obligated to make certain
interest and other subsidy payments to the holders of such
Financed Eligible Loans. See "Description of the Federal
Family Educational Loan Program" for a more complete
description of the provisions of the Higher Education Act
that provide for such programs. The obligations of the
Guarantee Agencies to the holders of loans, such as the
Trustee, are payable from the general funds available to
each such Guarantee Agency, including reserve funds
maintained by the Guarantee Agencies as required by the
Higher Education Act. Certain delays in receiving
reimbursement could occur if a Guarantee Agency fails to
meet its obligations. In addition, failure to properly
originate or service an Eligible Loan can cause an Eligible
Loan to lose it guarantee and/or its eligibility for federal
interest payments and subsidies. See "Risk Factors -- Risk
That Failure to Comply with Student Loan Origination and
Servicing Procedures for Financed Student Loans May Result
in the Department of Education's Refusal to Make Certain
Payments to Guarantee Agencies and the Trustee and the
guarantee Agencies' Refusal to Make Guarantee Payments to
the Trustee" and " -- Risk That Financial Status of
Guarantee Agencies Will Affect Their Ability to Make
Guarantee Payments".
Student Loan The pool of Financed Student Loans included in the Trust
Portfolio Estate from time to time is sometimes referred to herein as
Characteristics the "Student Loan Portfolio." A description of the initial
Student Loan Portfolio expected to be Financed with the
proceeds of the Series 1997-1 Notes and pledged to the
Trustee on the Date of Issuance is included herein under
"Characteristics of the Initial Financed Eligible Loans."
The Corporation expects the Trustee to originate and acquire
additional Student Loans on behalf of the Corporation, and
Financed Student Loans may be sold and certain events may
occur with respect to individual Financed Student Loans.
Consequently, the Student Loan Portfolio characteristics are
expected to change during the period that the Series 1997-1
Notes are Outstanding. See "Risk Factors --Risk Resulting
From Future Funding of Student Loans, Changing
Characteristics of Financed Student Loans, Financed Eligible
Loans That are Not Made Under the Federal Family Education
Loan Program, Financed Student Loans
-16-
<PAGE>
That are Not Eligible Loans in the Surplus Account and Other
Changes in the Assets of the Trust Estate" and "-- Risk of
Reduction in Amounts Available to Pay Notes From Variability
of Actual Cash Flows and From Inability of Guarantee
Agencies to Make Guarantee Payments," "Description of the
Federal Family Education Loan Program," and "Certain
Characteristics of the Financed Eligible Loans".
Investment of The Corporation expects that the proceeds of the Series
Proceeds in 1997-1 Notes that are deposited into the Reserve Fund and,
Investment pending use to Finance additional Student Loans, proceeds
Agreements that are deposited into the Acquisition Fund and not used on
the Date of Issuance to acquire Eligible Loans will be
invested under a series of investment agreements. Each
investment agreement will require the financial institution
with which such proceeds are invested (each, an "Investment
Provider") to repay such proceeds when requested by the
Corporation or the Trustee (subject to such limitations as
may be provided therein), and to pay interest on such
invested proceeds periodically. Each Investment Provider
will be a party which meets the Rating Agencies' criteria
for creditworthiness or which has pledged collateral
satisfactory to the Rating Agencies to secure its repayment
obligations.
Servicer and the SLFC shall act as the Servicer and custodian of the Financed
SLFC Servicing Student Loans. See "The Servicer" and "Certain Relationships
Agreement Among Financing Participants".
The Corporation and the Trustee will enter into a Servicing
Agreement, dated as of _________ 1, 1997 (the "SLFC
Servicing Agreement"), with SLFC. Pursuant to the SLFC
Servicing Agreement, SLFC agrees to provide services to the
Corporation and the Trustee in connection with the
origination and acquisition of Student Loans to be Financed,
and to service the Financed Student Loans. SLFC is required
to perform all services under the SLFC Servicing Agreement
in compliance with the Higher Education Act, applicable
requirements of the Guarantee Agencies and all other
applicable federal, state and local laws and regulations.
SLFC may perform all or part of its origination,
acquisition, and servicing activities through a
subcontractor (for which SLFC will be responsible).
SLFC also agrees to perform various administrative and
management activities on behalf of the Corporation,
including duties of the Corporation under the Indenture. The
SLFC Servicing Agreement subjects SLFC to various
obligations relating to audits, examinations and
inspections.
SLFC is required to be paid a monthly fee for the
performance of its functions under the SLFC Servicing
Agreement (from funds available for such purpose under the
Indenture) in an amount each month equal to 0.104167% of the
outstanding principal balance of all Financed Student Loans
as of the last day of the immediately preceding month. Such
fee is subject to adjustment under certain circumstances.
See "The SLFC Servicing Agreement."
Lenders With the exception of certain Consolidation Loans that have
been originated by the Original Issuer and certain Eligible
Loans that may be originated by the Trustee on behalf of the
Corporation, the Student Loans expected to be Financed have
been or will be originated by banks, savings and loan
associations, credit unions and other financial institutions
that qualify as "eligible lenders" under the Higher
Education Act. The Lenders have sold or will sell the
Student Loans to be Financed to the Original Issuer, or to
the Trustee on behalf of the Corporation, pursuant to
Student Loan Purchase Agreements.
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Repurchases and Pursuant to each Student Loan Purchase Agreement, the
Exchanges of Lender will Loans be obligated to repurchase any Financed
Loans Eligible Loan if: (i) any representation or warranty made or
furnished by such Lender in or pursuant to the Student Loan
Purchase Agreement shall prove to have been materially
incorrect as to such Financed Eligible Loan; (ii) the
Department of Education or a Guarantee Agency, as the case
may be, refuses to honor all or part of a claim filed with
respect to a Financed Eligible Loan on account of any
circumstance or event that occurred prior to the sale of
such Financed Eligible Loan to the Original Issuer or to the
Trustee, on behalf of the Original Issuer or the
Corporation, as the case may be; or (iii) on account of any
wrongful or negligent act or omission of such Lender or its
servicing agent that occurred prior to the sale of a
Financed Eligible Loan, a valid defense that makes the
Financed Eligible Loan unenforceable is asserted by a maker
(or endorser, if any) of the Financed Eligible Loan with
respect to his or her obligation to pay all or any part of
the Financed Eligible Loan.
The Financed Student Loans owned by the Original Issuer as
of the Date of Issuance, together with the Original Issuer's
rights under the related Student Loan Purchase Agreements,
will be assigned by the Original Issuer and acquired by the
Trustee under the Indenture, without recourse or warranty.
Neither the Corporation, the Trustee, nor any other party
will have any recourse to the Original Issuer in the event
any Financed Student Loan should fail to qualify as an
Eligible Loan or in any other circumstance.
The Indenture permits the Corporation to exchange Financed
Student Loans for other Eligible Loans which evidence
additional obligations of borrowers whose Student Loans have
already been Financed.
Funds and Pursuant to the Indenture, there will be established the
Accounts Acquisition Fund, the Revenue Fund, the Note Fund, the
Administration Fund, the Reserve Fund, the Rebate Fund and
the Surplus Fund.
Acquisition Fund The Indenture establishes the Acquisition Fund, within which
will be established a Series 1997-1 Tax Exempt Acquisition
Account and a Series 1997-1 Taxable Acquisition Account.
With respect to each series of Notes, the Trustee shall
credit to the Acquisition Fund the amount, if any, specified
in the Supplemental Indenture providing for the issuance of
such series of Notes (which amount, with respect to the
Series 1997-1 Notes, is described below). The Trustee shall
also deposit in the Acquisition Fund: (i) any funds to be
transferred thereto from the Surplus Fund, and (ii) any
other amounts specified in a Supplemental Indenture.
Balances in the Acquisition Fund shall be used only for (a)
the purchase or origination of Eligible Loans, (b) the
redemption or purchase of Notes as provided in a
Supplemental Indenture providing for the issuance of such
series of Notes, (c) the payment of Debt Service on the
Senior Notes and Other Senior Obligations when due (upon
transfer to the Note Fund), (d) the payment of the purchase
price of any Senior Notes required to be purchased on a
Purchase Date or a Mandatory Tender Date (upon transfer to
the Note Fund), or (e) to cure deficiencies in the Rebate
Fund. The Trustee shall make payments to Lenders from the
Acquisition Fund for the acquisition of Eligible Loans (such
payments to be made from the Series 1997-1 Tax Exempt and
Taxable Acquisition Accounts at a purchase price not in
excess of 100% of the remaining unpaid principal amount of
such Eligible Loan, plus accrued noncapitalized borrower
interest thereon, if any, to the date of purchase,
reasonable transfer, origination or assignment fees, if
applicable, and a premium not to exceed certain limitations
set forth in the Indenture).
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The Trustee shall also make payments from the Acquisition
Fund for the origination of Eligible Loans.
The sum of $___________ will be deposited in the Series
1997-1 Tax Exempt and Taxable Acquisition Accounts on the
Date of Issuance of the Series 1997-1 Notes and
approximately $___________ of such amount will be used on
the Date of Issuance to refinance a portfolio of Eligible
Loans, which is described herein. See "Characteristics of
the Initial Financed Eligible Loans" herein. The remaining
proceeds deposited in the Series 1997-1 Accounts of the
Acquisition Fund on the Date of Issuance are expected to be
used to acquire additional Eligible Loans from Lenders or to
originate Eligible Loans on or before ________________,
____. Proceeds deposited in the Series 1997-1 Accounts of
the Acquisition Fund and not used to purchase Eligible Loans
may be transferred to the Retirement Account and used to
redeem Series 1997-1 Notes.
Revenue Fund The Indenture establishes the Revenue Fund, which is
comprised of two Accounts: the Repayment Account and the
Income Account. The Trustee shall credit to the Revenue
Fund: (i) all amounts received as interest, including
federal interest subsidy payments, and principal payments
with respect to Financed Student Loans, including all
Guarantee Payments and all Special Allowance Payments with
respect to Financed Student Loans (excluding any federal
interest subsidy payments and Special Allowance Payments
that accrued prior to the date on which such Student Loans
were Financed), (ii) unless otherwise provided in a
Supplemental Indenture, proceeds of the resale to a Lender
of any Financed Student Loans pursuant to such Lender's
repurchase obligation under the applicable Student Loan
Purchase Agreement, (iii) all amounts received as earnings
on or income from Investment Securities in the Acquisition
Fund, the Reserve Fund, the Administration Fund, the Surplus
Fund and the Note Fund, and (iv) all amounts to be
transferred to the Revenue Fund from the Rebate Fund. The
Trustee shall deposit and credit all such amounts received
as payments of principal of Financed Student Loans to the
Repayment Account, and all other such amounts shall be
credited by the Trustee to the Income Account. The Indenture
requires the Trustee to transfer moneys on a monthly basis
(after taking into account any periodic rebate fee payment
required to be made in respect of Student Loans Financed
under the Indenture), first from the Repayment Account and
then from the Income Account, to the following Funds and
Accounts in the following order: the Rebate Fund, the
Interest Account for the payment of Senior Obligations, the
Principal Account for the payment of Senior Obligations, the
Retirement Account for the redemption of Senior Notes, the
Interest Account for the payment of Subordinate Obligations,
the Principal Account for the payment of Subordinate
Obligations, the Retirement Account for the redemption of
Subordinate Notes, the Administration Fund (but only from
the Income Account), the Reserve Fund, the Principal Account
(relating to cumulative sinking fund installments with
respect to Subordinate Term Notes to be redeemed on a
Sinking Fund Payment Date), the Special Redemption and
Prepayment Account and the Surplus Account. In addition, any
amounts payable by a Swap Counterparty pursuant to a Swap
Agreement are required to be credited directly to the
Interest Account.
Note Fund The Indenture establishes the Note Fund, which is comprised
of three Accounts: the Interest Account, the Principal
Account and the Retirement Account. The Note Fund shall
be used only for the payment when due of principal of,
premium, if any, and interest on the Senior Notes and the
Subordinate Notes, the purchase price of Senior Notes and
Subordinate Notes to be purchased on a Purchase Date or
Mandatory Tender Date in accordance with the Indenture,
Other Indenture Obligations and Carry-Over Amounts
(including any accrued interest thereon) and to make
transfers to the credit of
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the Rebate Fund. The principal of and interest on the Class
C Notes are payable from the Surplus Fund.
Interest Account The Trustee shall deposit in the Interest Account (i) that
portion of the proceeds from the sale of Financed Student
Loans representing accrued interest and Special Allowance
Payments thereon, (ii) that portion of the proceeds from the
sale of the Corporation's bonds, notes or other evidences of
indebtedness, if any, to be used to pay interest on the
Senior Notes or the Subordinate Notes, (iii) all
Counterparty Swap Payments, (iv) all payments under any
Credit Enhancement Facilities to be used to pay interest on
(or the interest portion of the purchase price of) the Notes
and (v) all amounts required to be transferred thereto from
other Funds and Accounts, as described below.
To provide for the payment of each installment of interest
which falls due upon Senior Notes or Subordinate Notes on
each regularly scheduled Interest Payment Date and all
Corporation Swap Payments and fees to a Credit Facility
Provider payable on such Interest Payment Date, the Trustee
shall make deposits to the credit of the Interest Account on
each Monthly Payment Date (less certain credits against such
payments). If, on any Interest Payment Date (including a
Redemption Date or a date that Notes are to be purchased
that is not a regularly scheduled Interest Payment Date),
moneys in the Interest Account are insufficient to pay the
accrued interest due on the Senior Notes and Subordinate
Notes and all Corporation Swap Payments and fees to a Credit
Enhancement Facility Provider payable on such Interest
Payment Date or constituting a portion of the purchase price
of Notes to be so purchased, the Trustee shall deposit
immediately to the credit of the Interest Account an amount
equal to such deficiency by transfer from the following
Funds and Accounts, in the following order of priority: the
Revenue Fund, the Surplus Fund (other than that portion of
the Balance thereof consisting of Eligible Loans), the
Reserve Fund, the Administration Fund, the Surplus Fund
(including any portion of the Balance thereof consisting of
Eligible Loans), the Retirement Account, the Principal
Account and, as to Senior Notes and Other Senior Obligations
only, the Acquisition Fund (other than that portion of the
Balance thereof consisting of Student Loans); provided that
such transfers in respect of Subordinate Notes or Other
Subordinate Obligations shall be so made from the Principal
Account or the Retirement Account only if, and to the
extent, any amounts to be so transferred are in excess of
the requirements of such Accounts with respect to Senior
Obligations payable therefrom.
If, as of any regularly scheduled Interest Payment Date, any
Carry-Over Amount (including any accrued interest thereon)
is due and payable with respect to a series of Notes, as
provided in the related Supplemental Indenture, the Trustee
shall transfer to the Interest Account (to the extent
amounts are available therefor in the Surplus Account, after
taking into account all other amounts payable from the
Surplus Fund on such Interest Payment Date) an amount equal
to such Carry-Over Amount (including any accrued interest
thereon) so due and payable.
Balances in the Interest Account shall be transferred to the
credit of the Rebate Fund to the extent necessary, after
transfers thereto from the Revenue Fund, the Surplus Fund,
the Reserve Fund, the Administration Fund, the Retirement
Account and the Principal Account, to make any deposit to
the credit of the Rebate Fund required by the Indenture.
(See "Rebate Fund" below.)
Apart from transfers to the Rebate Fund and transfers to the
Principal Account as described under "Principal Account"
below, Balances in the Interest Account shall be applied,
first, to the payment of interest on all Senior Notes,
Corporation Swap Payments
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under Senior Swap Agreements and fees payable to Senior
Credit Enhancement Providers due on an Interest Payment
Date, and if such money (after the transfers hereinabove
described, including all amounts, to the extent necessary,
in the Principal Account) is less than such interest and
Other Senior Obligations on such Interest Payment Date, such
money shall be applied, pro rata, among such indebtedness
based upon such amounts then owing to Senior Beneficiaries
and to be paid from the Interest Account; second, to the
payment of interest on all Subordinate Notes, Corporation
Swap Payments under Subordinate Swap Agreements and fees
payable to Subordinate Credit Enhancement Providers due on
an Interest Payment Date, and if such money (after the
transfers hereinabove described, including all amounts, to
the extent necessary, in the Principal Account over and
above the amount on deposit therein to meet any accrued
obligations to pay principal of the Senior Notes or amounts,
other than fees, to Senior Credit Facility Providers) is
less than such interest and Other Subordinate Obligations on
such Interest Payment Date, such money shall be applied, pro
rata, among such indebtedness based upon such amounts then
owing to Subordinate Beneficiaries and to be paid from the
Interest Account; and third, to the payment of all Carry-
Over Amounts (including any accrued interest thereon) due
and payable on all series of Notes, and if such money is
less than such Carry-Over Amounts (including any accrued
interest thereon) on an Interest Payment Date, such money
shall be applied, pro rata, among such Carry-Over Amounts
(including any accrued interest thereon) based upon such
amounts then otherwise due and payable to Noteholders and to
be paid from the Interest Account.
Other Indenture Obligations payable from the Interest
Account would include reimbursement to any Credit Facility
Provider for interest paid on Senior Notes or Subordinate
Notes from amounts derived from the related Credit
Enhancement Facility, which reimbursement shall have the
same priority of payment from the Interest Account as the
interest so paid.
Principal Account The Trustee shall deposit to the credit of the Principal
Account: (i) that portion of the proceeds from the sale of
Financed Student Loans representing principal thereof, (ii)
that portion of the proceeds from the sale of the
Corporation's bonds, notes or other evidences of
indebtedness, if any, to be used to pay principal of the
Senior Notes and the Subordinate Notes, (iii) all payments
under any Credit Enhancement Facilities to be used to pay
principal of Senior Notes or Subordinate Notes or the
purchase price of Senior Notes or Subordinate Notes to be
purchased on a Purchase Date or Mandatory Tender Date, and
(iv) all amounts required to be transferred thereto from the
following Funds, in the following order of priority: (1) in
the case of payment of principal of Notes at Stated
Maturity, redemption of Senior Notes on a Sinking Fund
Payment Date or the purchase of Notes on a Purchase Date or
Mandatory Tender Date, the Revenue Fund, the Surplus Fund
(other than that portion of the Balance thereof consisting
of Eligible Loans), the Reserve Fund, the Administration
Fund and the Surplus Fund (including any portion of the
Balance thereof consisting of Eligible Loans), and (2) in
the case of redemption of Subordinate Notes on a Sinking
Fund Payment Date, the Revenue Fund and the Surplus Fund
(other than that portion of the Balance thereof consisting
of Eligible Loans); provided, however, that if principal is
payable on Senior Notes at the Stated Maturity thereof or
upon a Sinking Fund Payment Date therefor, or the purchase
price is payable on Senior Notes on a Purchase Date or
Mandatory Tender Date, and money credited to the Principal
Account, after the foregoing transfers, is insufficient to
pay such principal or purchase price, funds shall be
transferred, to the extent necessary, to the Principal
Account for this purpose, (i) from the Interest Account, but
only to the extent that the Balance in the Interest Account
exceeds any then accrued payments of interest on the Senior
Notes, Corporation Swap Payments under Senior Swap
Agreements and
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fees owing to Senior Credit Enhancement Providers and (ii)
thereafter from the Acquisition Fund (other than that
portion of the Balance thereof consisting of Student Loans).
To provide for the payment of principal due on the Stated
Maturity of Senior or Subordinate Serial Notes or on a
Sinking Fund Payment Date for Senior or Subordinate Term
Notes, the Trustee shall make deposits to the credit of the
Principal Account on each Monthly Payment Date from amounts
available therefor in the Revenue Fund and the other Funds
referred to above.
In the event that the Corporation is required to furnish
moneys to the Depositary to purchase Notes on a Purchase
Date or Mandatory Tender Date, the Trustee shall, subject to
the applicable provisions of the related Supplemental
Indenture, immediately deposit to the credit of the
Principal Account moneys sufficient to pay the purchase
price thereof.
Balances in the Principal Account shall be transferred to
the credit of the Rebate Fund to the extent necessary, after
transfers thereto from the Revenue Fund, the Surplus Fund,
the Reserve Fund, the Administration Fund and the Retirement
Account, to make any required deposit to the credit of the
Rebate Fund. (See "Rebate Fund" below.)
Balances to the credit of the Principal Account shall be
applied in the following order of priority: first, for
transfer to the Rebate Fund; second, to the Interest Account
to the extent required (see "Interest Account" above) for
the payment of interest on Senior Notes and Other Senior
Obligations payable therefrom; third, to the payment of
Senior Notes at their Stated Maturity or on their Sinking
Fund Payment Date and Other Senior Obligations payable
therefrom; fourth, to the payment of the purchase price of
Senior Notes on a Purchase Date or Mandatory Tender Date;
fifth, to the Interest Account to the extent required (see
"Interest Account" above) for the payment of interest on
Subordinate Notes and Other Subordinate Obligations payable
therefrom; sixth, to the payment of Subordinate Notes at
their Stated Maturity and Other Subordinate Obligations
payable therefrom; seventh, to the payment of the purchase
price of Subordinate Notes on a Purchase Date or Mandatory
Tender Date; and eighth, to the payment of Subordinate Term
Notes on a Sinking Fund Payment Date.
Other Indenture Obligations payable from the Principal
Account would include reimbursement to any Credit Facility
Provider for principal or the purchase price paid on Senior
Notes or Subordinate Notes from amounts derived from the
related Credit Enhancement Facility, which reimbursement
shall have the same priority of payment from the Principal
Account as the principal so paid.
Balances in the Principal Account may also be applied to the
purchase of Senior Notes or Subordinate Notes. Any such
purchase shall be limited to those Senior Notes or
Subordinate Notes whose Stated Maturity or Sinking Fund
Payment Date is the next succeeding Principal Payment
Date.
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<PAGE>
Retirement The Trustee shall deposit to the credit of the Retirement
Account Account (i) any amounts transferred thereto from the
Reserve Fund and the Surplus Fund, (ii) that portion of the
proceeds from the sale of the Corporation's bonds, notes or
other evidences of indebtedness, if any, to be used to pay
the principal or Redemption Price of Senior Notes or
Subordinate Notes on a date other than the Stated Maturity
thereof or a Sinking Fund Payment Date therefor, and (iii)
all payments under any Credit Enhancement Facilities to be
used to pay the Redemption Price of Notes payable from the
Retirement Account. All Senior Notes or Subordinate Notes
which are to be retired, or the principal of which is to be
prepaid, other than with moneys in the Principal Account
shall be retired or prepaid with moneys deposited to the
credit of the Retirement Account.
Balances in the Retirement Account shall be transferred to
the credit of the Rebate Fund to the extent necessary, after
transfers thereto from the Revenue Fund, the Surplus Fund,
the Reserve Fund and the Administration Fund, to make any
required deposit to the Rebate Fund. (See "Rebate Fund"
below.) After taking into account any such required
transfers to the Rebate Fund, Balances in the Retirement
Account shall be transferred to the credit of the Interest
Account to the extent required (see "Interest Account"
above) for the payment of interest on Notes and Other
Indenture Obligations payable therefrom.
Other Indenture Obligations payable from the Retirement
Account will include reimbursement to any Credit Facility
Provider for the Redemption Price paid on Senior Notes or
Subordinate Notes from amounts derived from the related
Credit Enhancement Facility, which reimbursement shall have
the same priority of payment from the Retirement Account as
the Redemption Price so paid.
Balances in the Retirement Account (other than any position
thereof to be applied to the mandatory prepayment of
principal of any Notes) may also be applied to the purchase
of Senior Notes or Subordinate Notes.
Administration With respect to each series of Notes, the Trustee shall,
Fund upon delivery thereof and from the proceeds thereof, credit
to the Administration Fund established under the Indenture
the amount, if any, specified in the Supplemental Indenture
providing for the issuance of such series of Notes. The
Trustee shall also credit to the Administration Fund all
amounts transferred thereto from the Revenue Fund and the
Surplus Account. Amounts in the Administration Fund shall be
used to pay Costs of Issuance, Administrative Expenses and
Note Fees or to reimburse another fund, account or other
source of the Corporation for the previous payment of Costs
of Issuance, Administrative Expenses or Note Fees.
Balances in the Administration Fund shall also be applied to
remedy deficiencies in the Rebate Fund and the Note Fund
after transfers thereto from the Revenue Fund, the Surplus
Fund (other than that portion of the Balance thereof
consisting of Eligible Loans) and the Reserve Fund.
Deposits to the credit of the Administration Fund shall be
made from the following sources in the following order of
priority: the Income Account after transfers therefrom to
the Rebate Fund, the Interest Account, the Principal Account
(other than with respect to the payment of sinking fund
installments for Subordinate Notes), and the Retirement
Account; and the Surplus Account after transfers therefrom
to the Rebate Fund, the Interest Account, the Principal
Account (other than with respect to the payment of sinking
fund installments for Subordinate Notes) and the Retirement
Account, provided that any
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such deposit from the Surplus Account shall only be made to
the extent that portion of the Balance thereof not
consisting of Eligible Loans is sufficient therefor.
Reserve Fund Immediately upon the delivery of any series of Senior Notes
or Subordinate Notes, and from the proceeds thereof or, at
the option of the Corporation, from any amounts to be
transferred thereto from the Surplus Fund, the Fund, the
Trustee shall credit to the Reserve Fund the amount, if any,
specified in the Supplemental Indenture providing for the
issuance of that series of Notes, such that, upon issuance
of such Notes, the Balance in the Reserve Fund shall not be
less than the Reserve Fund Requirement, which is an amount
initially equal to the greater of % of the aggregate
principal amount of all Notes then Outstanding or $ .
If on any Monthly Payment Date the Balance in the Reserve
Fund is less than the Reserve Fund Requirement, the Trustee
shall transfer and credit thereto an amount equal to the
deficiency from moneys available therefor in the following
Funds and Accounts in the following order of priority: the
Repayment Account, the Income Account and the Surplus Fund.
The balance in the Reserve Fund shall be used and applied
solely for (i) transfers to the Rebate Fund to the extent
necessary, after transfers thereto from the Reserve Fund and
the Surplus Fund (other than that portion f the Balance
thereof consisting of Eligible loans), to make any required
deposit to the Rebate Fund (see "Rebate Fund" below), and
(ii) after such transfer, if any, to be made pursuant to the
preceding clause (i) has been taken into account, the
payment when due of principal and interest on the Senior
Notes and the Subordinate Notes and any Other Indenture
obligations and the purchase price of Senior Notes and
Subordinate Notes on a Purchase Date or Mandatory Tender
Date, and the other purposes specified in the Indenture (see
"Note Fund" above).
Rebate Fund The Indenture establishes the Rebate Fund into which the
Trustee is required to make annual deposits from Balances in
the Revenue Fund, the Surplus Fund, the Reserve Fund, the
Administrative Fund, the Bond Fund and the Acquisition Fund,
in that order, equal to the amount computed under Section
148(f) of the Code as being subject to rebate to the United
States (the "Rebate Amount") and certain amounts
constituting Excess Earnings on the Financed Student Loans.
The Trustee is required to pay to the United States
Treasury, at least once every five years, an amount which
ensures that not less than 90% f the cumulative Rebate
Amount will have been paid to the United States Treasury.
The Trustee is required to consult with Bond Counsel and the
such action as may be required under the Code (which may
include forgiveness of principal of Financed Student Loans
or payments to the United States Treasury) with respect to
Excess Earnings. Under certain circumstances, including
delivery to the Trustee of favorable opinion of Bond
Counsel, certain amounts determined not to be subject to
rebate or their disposition may be transferred from the
Rebate Fund to the Income Account.
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Surplus Fund The Indenture establishes a Surplus Fund comprised of two
Accounts: the Special Redemption and Prepayment Account and
the Surplus Account. the Trustee shall deposit to the credit
of the Surplus Fund Balances in the Revenue Fund not
required for deposit to any other Fund or Account. Deposits
to the Surplus Fund from the Revenue Fund shall be credited
to the Special Redemption and Prepayment Account to the
extent the Balance thereof is less than the Special
Redemption and Prepayment Account Requirement for each
series of Notes, and otherwise to the Surplus Account.
Balances in the Surplus Fund shall be used first to make up
deficiencies in, or make required transfers to, the Rebate
Fund, the Note Fund, the Administration Fund and the Reserve
Fund. Balances in the Surplus Fund may also be applied, as
determined by the Corporation from time to time, to the
payment of principal of or interest on Class C Notes when
due or upon the redemption thereof at the option of the
Corporation, subject to meeting certain conditions described
in Appendix IX -- "Summary of the Indenture -- Funds and
Accounts -- Surplus Fund" are met.
If the Trustee shall have first certified that no
deficiencies exist in any of the Rebate Fund, the Note Fund,
the Reserve Fund or the Special Redemption Account, and
shall have received certain certifications from the
Corporation, Balances in the Surplus Account may be used to
redeem Notes (including Series 1997-1 Notes as described
under "Description of Series 1997-1 Notes -- Special
Redemption -- From Moneys in the Surplus Account") or to
purchase Notes, or may be: (a) used to acquire Student Loans
meeting the requirements of clauses (A) (1) and (2) or
clause (B) of the definition of "Eligible Loans" (see
"Glossary of Certain Defined Terms"); or (b) released from
the Indenture to be used for certain other authorized
purposes; provided, however, that the Indenture prohibits
the use of the Surplus Account to acquire Student Loans that
are not Eligible Loans and for the purposes specified in
clause (b) above unless, after taking into account any such
application (i) the Senior Percentage will be not less than
___%, and (ii) the Subordinate Percentage will be not less
than ___%; provided that such percentages may be lower upon
receipt of certain approvals from each Rating Agency and,
under certain circumstances, consent of Other Beneficiaries.
Balances in the Special Redemption and Prepayment Account
may be transferred to the credit of the Retirement Account
to redeem or prepay Senior Notes or Subordinate Notes as
provided in a Supplemental Indenture relating thereto
(provision for which, in the case of the Taxable LIBOR Rate
Series 1997-1 Notes has been made in the First Supplemental
Indenture and is described under "Payment of Taxable LIBOR
Rate Series 1997-1 Notes" above) or to the Acquisition Fund
for the acquisition or origination of Eligible Loans as
provided in the Indenture and as further authorized or
limited in a Supplemental Indenture. Balances in the Special
Redemption and Prepayment Account (other than any portion
thereof to be applied to the mandatory prepayment of
principal of any Notes) may also be transferred to the Note
Fund for the purchase of Notes.
Additional Parity The Corporation may, upon complying with the provisions of
Notes the Indenture, issue from time to time Additional Notes or
incur certain other Indenture Obligations secured by the
Trust Estate on a parity with or subordinate to the Senior
Notes. Any Additional Notes will not be offered or sold
pursuant to this Prospectus. See "Summary of the Indenture"
herein.
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Subordination The rights of the Series 1997-1 Subordinate Noteholders to
receive payments with respect to the Notes will be
subordinated to such rights of the Series 1997-1 Senior
Noteholders and any Additional Senior Obligations to the
extent described in this Prospectus. This subordination is
intended to enhance the likelihood of timely receipt by the
Series 1997-1 Senior Noteholders of the full amount of
scheduled payments of principal and interest due them. Thus,
payments of interest and principal on the Series 1997-1
Subordinate Notes will be made when due (on a parity basis
with any other Subordinate Obligations) only to the extent
there are sufficient monies available for such payment,
after making all payments due on such date with respect to
the Senior Obligations. So long as Senior Obligations remain
Outstanding under the Indenture, the failure to make
interest or principal payments on the Series 1997-1
Subordinate Notes will not constitute an Event of Default
under the Indenture. Payments of principal and interest on
the Series 1997-1 Subordinate Notes would be similarly
subordinated to Senior Obligations if the Notes were
accelerated because of an Event of Default.
The Series 1997-1 Subordinate Notes are also subordinated to
the Series 1997-1 Senior Notes and any Additional Senior
Obligations as to the direction of remedies upon default.
Federal Income In the opinion of Dorsey & Whitney LLP, the Series 1997-1
Tax Treatment of Notes will be treated as debt of the Original Issuer (and
Series 1997-1 upon the assumption of the Corporation of the Original
Notes Issuer's obligations under the Indenture, as debt of the
Corporation), rather than as an interest in the Financed
Student Loans and other Trust Estate assets, for federal
income tax purposes. As such, the owners of the Taxable
Series 1997-1 Notes will be required to include in income
interest on such Taxable Series 1997-1 Notes as paid or
accrued, in accordance with their respective accounting
methods and the provisions of the Code. See "Tax Matters--
Federal Income Tax Consequences''.
Exclusion of In the opinion of Dorsey & Whitney LLP, as Bond Counsel,
Interest on Tax under existing laws, regulations, rulings and decisions,
Exempt Series interest on the Tax Exempt Series 1997-1 Notes is not
1997-1 Notes includable in the gross income of the owners thereof for
from Gross Income federal income tax purposes. Interest on the Tax Exempt
Series 1997-1 Notes is an item of tax preference which is
included in alternative minimum taxable income for purposes
of the federal alternative minimum tax applicable to all
taxpayers, and is includable in certain other taxes imposed
upon corporations. For a more detailed description of the
tax status of the interest on the Tax Exempt Series 1997-1
Notes, Bond Counsel's opinion with respect thereto
(including its reliance on the Original Issuer's, SLFC's and
the Corporation compliance with covenants made by them to
satisfy certain requirements of the Code) and certain income
tax consequences of Tax Exempt Series 1997-1 Note ownership,
see "Tax Matters--Tax Exempt Series 1997-1 Notes."
ERISA The Series 1997-1 Notes are eligible for purchase by or on
Considerations behalf of employee benefit plans, retirement arrangements,
individual retirement accounts and Keogh Plans, subject to
certain considerations discussed under "ERISA
Considerations."
Ratings It is a condition to the issuance of the Series 1997-1
Senior Notes each be rated "AAA" by Fitch Investors Service,
L.P. and "Aaa" by Moody's Investors, Services, Inc., and
that the Series 1997-1 Subordinate Notes each be related no
less than "A" by Finch and "A" by Moody's. The ratings of
each series of Series 1997-1 Notes address the likelihood of
the timely payment of principal and interest on such Series
1997-1 Notes. The ratings do not address the market
liquidity of Series 1997-1 Notes or the likelihood of
prepayments of the Series 1997-1 Notes. A rating is not a
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recommended to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the
assigning Rating Agency. See "Ratings".
Registration of The Series 1997-1 Notes of each series initially will be
Notes represented by one or more certificates registered in the
name of Cede & Co., as a nominee of DTC. No person acquiring
an interest in such Notes will be entitled to definitive
certificate representing such person's interest, except in
the event that definitive securities are issued under the
limited circumstances described herein. See "Description of
Series 1997-1 Notes--Book-Entry-Only System".
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RISK FACTORS
Prospective investors should consider, among other things, the
following factors regarding the purchase of the Series 1997-1 Notes.
Risk Resulting From the Limited Recourse Nature of the Series 1997-1 Notes
and From Limited Assets of the Corporation Being Available for the Payment
of the Series 1997-1 Notes
The Corporation is a special purpose corporation and the Series 1997-1
Notes will represent obligations solely of the Corporation. The Series
1997-1 Notes are not insured or guaranteed by any government agency or
instrumentality, by any affiliate of the Corporation, by any insurance
company or by any other person or entity. The Corporation will have no
significant assets available to make payment on the Series 1997-1 Notes
other than the Trust Estate pledged as collateral for the Notes under the
Indenture. Moreover, the Series 1997-1 Notes are limited obligations of
the Corporation, payable solely from the Trust Estate and not from any
other assets which the Corporation may have or any other revenues to which
the Corporation may be entitled. The Trust Estate will not have, nor is it
expected to have, any significant assets or sources of funds other than the
Financed Student Loans, the Acquisition Fund, the Reserve Fund and the
other Funds and Accounts. Payments on the Series 1997-1 Notes will depend
solely on the amount and timing of payments and collections in respect of
the Financed Student Loans, investment earnings on the various Funds and
Accounts established pursuant to the Indenture, amounts on deposit in the
Reserve Fund and the other Funds and Accounts, and the payment priority of
the Series 1997-1 Notes, any Additional Notes to be issued in the future
and any credit enhancement obtained with respect to such Additional Notes.
(Any Additional Notes will not be offered or sold pursuant to this
Prospectus.) There will be no additional recourse to the Corporation or
any other person if such proceeds are insufficient. As a result,
Noteholders must depend on the cash flow with respect to the Financed
Student Loans and funds on deposit in the Acquisition Fund, the Reserve
Fund and the other Funds and Accounts for payment of principal of and
interest on the Series 1997-1 Notes.
Risk of Loss to Holders of the Series 1997-1 Subordinate Notes Resulting
From Subordination
Payments of principal of and interest on the Series 1997-1 Subordinate
Notes are subordinated in priority of payment to payments of principal of
and interest on the Series 1997-1 Senior Notes and any Additional Senior
Obligations that may be outstanding from time to time. See "Source of
Payment and Security for the Notes". The Series 1997-1 Subordinate Notes
are also subordinated to the Series 1997-1 Senior Notes and any Additional
Senior Obligations as to the direction of remedies upon an Event of
Default.
Risk That Failure to Comply with Student Loan Origination and Servicing
Procedures for Financed Student Loans May Result in the Department of
Education's Refusal to Make Certain Payments to Guarantee Agencies and the
Trustee and the Guarantee Agencies' Refusal to Make Guarantee Payments to
the Trustee
The Higher Education Act requires lenders and their agents making and
servicing student loans under the Federal Family Education Loan Program and
Guarantee Agencies guaranteeing such student loans to follow specified
procedures, including due diligence procedures, to ensure that such student
loans are properly originated, disbursed and collected. Certain of those
procedures, which are specifically set forth in the Higher Education Act,
are summarized herein. See "Description of Financed Eligible Loan Program"
and "Description of the Federal Family Education Loan Program." Generally,
those procedures require that completed loan applications be processed, a
determination of whether an applicant is an eligible borrower under the
Higher Education Act be made, the borrower's responsibilities under the
loan be explained to him or her, the promissory note evidencing the loan be
executed by the borrower and the loan proceeds be disbursed by the lender
in a specified manner. After the loan is made, the lender must establish
repayment terms with the borrower, properly administer deferments and
forbearances and credit the borrower for payments made. If a borrower
becomes delinquent in repaying a loan, a lender must perform certain
collection procedures (including numerous telephone calls and demand
letters, skip-
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tracing procedures, and requesting assistance from the applicable Guarantee
Agency) which vary depending upon the length of time a loan is delinquent.
The Corporation believes that the Original Issuer has followed these
procedures in its acquisition, servicing and collection of the Eligible
Loans to be Financed. In addition, SLFC will agree in the SLFC Servicing
Agreement to perform origination, servicing and collection procedures on
behalf of the Trustee and the Corporation in compliance with those
procedures. However, failure of the Original Issuer to have followed these
procedures with respect to the existing Student Loan Portfolio, failure of
SLFC or any successor Servicer to follow these procedures or failure of any
Lender or any other originator or Servicer of the Financed Student Loans to
have followed or to follow these procedures with respect to any Financed
Student Loans may result in the Department of Education's refusal to make
reinsurance payments to the Guarantee Agencies or to make Special Allowance
Payments or Interest Subsidy Payments to the Trustee with respect to such
Financed Student Loans or in the Guarantee Agencies' refusal to make
payments under their Guarantee Agreements with the Trustee ("Guarantee
Payments") with respect to such Financed Student Loans. Failure of the
Guarantee Agencies to receive reinsurance payments from the Department of
Education could adversely affect the Guarantee Agencies' ability or legal
obligation to make Guarantee Payments to the Trustee. Loss of any such
Guarantee Payments, Special Allowance Payments or Interest Subsidy Payments
with respect to Financed Student Loans could adversely affect the amount of
revenues under the Indenture and the Corporation's ability to pay principal
of and interest on the Series 1997-1 Notes. See "Description of the
Federal Family Education Loan Program."
Risk That No Recourse Exists Against the Original Issuer for Any Failures
to Comply with Origination and Servicing Procedures Relating to the
Financed Student Loans
The transfer of the original portfolio of Financed Student Loans from
the Original Issuer to the Trustee is without recourse. Neither the
Corporation nor the Trustee will have any right to resell the Financed
Student Loans to the Original Issuer or otherwise to make recourse to or
collect from the Original Issuer if such Financed Student Loans should fail
to meet the requirements of an Eligible Loan for any reason or if such
transfer should fail to provide the Trustee with good title to such
Financed Student Loans.
The failure of any Financed Student Loan to conform to all of the
requirements of the Higher Education Act or the Guarantee Agencies with
respect thereto could result in the loss of the Trustee's right to receive
Guarantee Payments, Special Allowance Payments, and/or Interest Subsidy
Payments with respect to such Financed Student Loan.
Risk That Changes in Law Could Adversely Affect the Federal Family
Education Loan Program and the Financed Student Loans
There can be no assurance that the Higher Education Act or other
relevant federal or state laws, rules and regulations and the programs
implemented thereunder will not be amended or modified in the future in a
manner that will adversely impact the programs described herein and the
loans made thereunder, including the Financed Student Loans or the
Guarantee Agencies. The Federal Family Education Loan Program has been the
subject of numerous amendments and proposed amendments to the Higher
Education Act, including amendments designed to reduce the federal budget
deficit. Amendments to the Higher Education Act in the past several years
have reduced the portion of loans covered by Guarantee Payments and the
portion of Guarantee Payments covered by reinsurance, reduced certain
administrative expense allowances paid by the Department of Education to
Guarantee Agencies, reduced the premiums and default collections that
Guarantee Agencies are entitled to receive and/or retain, and given the
Department of Education broad powers over Guarantee Agencies and their
reserves, including the authority to require a Guarantee Agency to pay a
portion or all reserve funds to the Department of Education in certain
circumstances.
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Several proposals have been made by Congress and the Administration to
amend the Higher Education Act, including proposals that would
significantly alter the Federal Family Education Loan Program and the roles
of its participants. It is impossible to predict whether any such
proposals will be adopted as legislation or, if so, what impact such
legislation may have on the Corporation's or Trustee's receipt of revenues
with respect to Financed Student Loans.
Risk That the Competing Federal Direct Student Loan Program May Result in
Higher Servicer Costs Because of Reduced Economies of Scale; a Smaller
Secondary Market and Reduced Value for Financed Student Loans; and Higher
Prepayments of Financed Student Loans Through Consolidations
The Higher Education Act provides for a Federal Direct Student Loan
Program. This program, established in academic year 1994-1995, has a
statutory target volume of 60% of student loan demand in academic year
1998-1999, which could result in reductions in the volume of loans made
under the Federal Family Education Loan Program. As the Federal Direct
Student Loan Program expands, the Servicer may experience increased costs
due to reduced economies of scale to the extent the volume of new loans
serviced by the Servicer is reduced. Such cost increases could affect the
ability of the Servicer to satisfy its obligations to service the Financed
Eligible Loans. Such volume reductions could also reduce revenues received
by the Guarantee Agencies available to pay claims on defaulted Eligible
Loans. Finally, the level of competition currently in existence in the
secondary market for loans made under the Federal Family Education Loan
Program could be reduced, resulting in fewer potential buyers of the
Eligible Loans and lower prices available in the secondary market for those
loans. Further, the Department of Education has implemented a direct
consolidation loan program, which program may further reduce the volume of
loans made under the Federal Family Education Loan Program and is expected
to result in prepayments of Financed Student Loans. See "Description of
the Federal Family Education Loan Program."
Risk Resulting From the Issuance of Additional Notes Without Noteholder
Consent
The Corporation may, from time to time pursuant to the provisions of
the Indenture, issue Additional Notes or incur other Indenture Obligations
secured by the Trust Estate on a parity with or subordinate to the Series
1997-1 Senior Notes and senior to, on a parity with or subordinate to the
Series 1997-1 Subordinate Notes, as determined by the Corporation, without
the consent or approval of the Holders of any Notes then Outstanding.
While the Indenture requires that the Corporation satisfy certain
conditions, including, but not limited to, the condition that the issuance
of the Additional Notes will not adversely affect the ratings on the then
outstanding Notes, if Additional Notes are issued and the Financed Student
Loans acquired with the proceeds of such Additional Notes do not produce
sufficient revenue to pay principal of and interest on those Additional
Notes, it may result in a delay in or reduction of payments on the Series
1997-1 Notes. Moreover, if Additional Notes are issued and an Event of
Default occurs with respect to such Additional Notes and such Event of
Default is not cured or waived, then all Notes which are then outstanding,
including the Series 1997-1 Notes, are subject to acceleration. Any
Additional Notes will not be offered or sold pursuant to this Prospectus.
This Prospectus relates only to the Series 1997-1 Notes. See "Additional
Notes" herein.
Risk That the Interest Rate on Financed Student Loans and Other Investments
May be Insufficient to Cover Interest on the Series 1997-1 Notes (Other
Than Tax Exempt Fixed Rate Series 1997-1 Senior Notes and Tax Exempt Fixed
Rate Series 1997-1 Subordinate Notes) Due to Rate-Index Difference
The interest rates with respect to the Series 1997-1 Notes (other than
the Tax Exempt Fixed Rate Series 1997-1 Senior Notes and the Tax Exempt
Fixed Rate Series 1997-1 Subordinate Notes) may fluctuate from one interest
period to another in response to changes in benchmark rates or general
market conditions. The Corporation can make no representation as to what
such rates may be in the future. The interest rates on each series of
Auction Rate Series 1997-1 Senior Notes will be based generally on the
outcome of each Auction of such series of Notes. The interest rates on
each series of Taxable LIBOR Rate Series 1997-1 Notes will be based
generally on One-Month LIBOR. The Financed Student Loans, however,
generally bear interest at an effective rate (taking into account any
Special Allowance Payments, the "Loan Rates") equal to the average bond
equivalent rates of weekly auctions of
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91-day Treasury bills for each quarter (the "91-day Treasury Bill Rate")
(or, in certain circumstances, 52-week Treasury bills) plus margins
specified for such Financed Student Loans. See "Description of the Federal
Family Education Loan Program -- Loan Terms -- Interest Rates" and
" -- Federal Special Allowance Payments." As a result of these differences
between the indices used to determine the Loan Rates and the interest rates
on the variable rate Series 1997-1 Notes, there could be periods of time
when the Loan Rates are inadequate to cover the interest on the Series
1997-1 Notes and expenses required under the Indenture. To the extent that
the Loan Rates decrease or do not increase as fast as the variable interest
rates with respect to the Taxable Series 1997-1 Notes, the interest rates
with respect to such Taxable Series 1997-1 Notes may be limited to the Net
Loan Rate or may be deferred to future periods. There can be no assurance
that sufficient funds will be available in future periods to make up for
any shortfalls in the current payments of interest on the Taxable Series
1997-1 Notes. Further, if there is a decline in the Loan Rates, the amount
of funds representing interest deposited into the Trust Estate may be
reduced and, even if there is a similar reduction in the variable interest
rates applicable to any series of Series 1997-1 Notes, there may not
necessarily be a similar reduction in the other amounts required to be
funded out of such funds (such as certain administrative expenses). In
addition, proceeds of the Series 1997-1 Notes in the Reserve Fund and the
Acquisition Fund will be invested under investment agreements at
fluctuating interest rates. Although the Corporation will structure such
investment agreements to minimize such risk, there can be no assurance that
the interest rates on such investment agreements will keep pace with the
fluctuating interest rates on the Series 1997-1 Notes.
Risk Resulting From Future Funding of Student Loans, Changing
Characteristics of Financed Student Loans, Financed Eligible Loans That are
Not Made Under the Federal Family Education Loan Program, Financed Student
Loans That are Not Eligible Loans in the Surplus Account and Other Changes
in the Assets of the Trust Estate
The initial Student Loan Portfolio to be Financed on the Date of
Issuance with a portion of the proceeds of the Series 1997-1 Notes is
described herein under "Characteristics of the Initial Financed Eligible
Loans." The investment agreements in which the remaining proceeds of the
Series 1997-1 Notes will be invested on the Date of Issuance are described
herein under "Application of Series 1997-1 Note Proceeds." After the Date
of Issuance, the Corporation intends to cause the Trustee to purchase
Financed Eligible Loans from Lenders and to originate Eligible Loans from
amounts initially deposited in the Acquisition Fund and invested pursuant
to such investment agreements. The actual characteristics of the Student
Loan Portfolio will change from time to time due to factors such as
adjustments made in the normal course of business, amendments to the Higher
Education Act, changes in the classifications of Eligible Loans, sales or
exchanges of Eligible Loans by the Trustee on behalf of the Corporation,
scheduled amortization, prepayment or the occurrence of delinquencies or
defaults. In addition, the Indenture allows the Corporation to apply
balances in the Surplus Account to the acquisition of Student Loans that do
not qualify as Eligible Loans. See Appendix IX - "Summary of the Indenture
- Funds and Accounts - Surplus Fund." Moreover, although all Financed
Eligible Loans will initially be loans made under the Federal Family
Education Loan Program, Eligible Loans that are not made under such program
may be Financed in the future and such other Eligible Loans may have
different features and be of lesser credit quality.
Risk of Reliance Upon Lenders' Representations and Warranties Relating to
Financed Student Loans Without Conducting Complete Individual Student Loan
Document Examinations
The Original Issuer has acquired the majority of the initial Student
Loan Portfolio, and the Corporation expects to cause the Trustee to acquire
additional Financed Eligible Loans, from Lenders pursuant to Student Loan
Purchase Agreements under which each Lender has agreed or will agree to
sell to the Original Issuer or to the Trustee, on behalf of the
Corporation, Eligible Loans which comply with certain representations and
warranties. The Student Loan Purchase Agreements provide for the
repurchase by the Lender of Financed Student Loans that do not comply with
such representations and warranties. However, neither the Original Issuer,
SLFC nor the Corporation has conducted or will conduct an examination of
documents relating to the Eligible Loans to be Financed of sufficient scope
to determine whether the Lenders who have sold such Eligible Loans to the
Original Issuer, or will sell such Eligible Loans to the Trustee on behalf
of the Corporation, have met or will have met all
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the conditions of the Higher Education Act necessary for such loans to
qualify for Guarantee Payments from the applicable Guarantee Agency.
Moreover, no assurance can be given that any Lender will honor, or be able
to honor, its obligations to sell Eligible Loans to the Trustee or to
repurchase non-conforming Student Loans, or that the Trustee would be able
to acquire Eligible Loans in an equivalent amount, with similar
characteristics or at comparable prices from other sources in the event
that any Lenders fail to sell Eligible Loans to the Trustee or are required
to repurchase Financed Student Loans.
Risk of the Inability of Lenders to Honor Their Obligations to Repurchase
Financed Student Loans
Under the circumstances set forth in the Student Loan Purchase
Agreements, a Lender may be obligated to repurchase Financed Student Loans
from the Trustee. If a Lender were to become insolvent or otherwise be
unable to repurchase such Financed Student Loans, it is unlikely that a
repurchase of such Financed Student Loan from the Trustee would occur. The
failure of such a Lender to repurchase a Financed Student Loan would
constitute a breach of the respective Student Loan Purchase Agreement,
enforceable by the Trustee, but would not constitute an Event of Default
under the Indenture or permit the exercise of remedies thereunder.
Risk of Possible Loss of Tax Exemption of the Interest on the Tax Exempt
Series 1997-1 Notes
Provisions of the Code impose continuing requirements that must be met
after the issuance of the Tax Exempt Series 1997-1 Notes for interest
thereon to be and remain excludable from gross income for federal income
tax purposes. Noncompliance with such requirements may cause the interest
on the Tax Exempt Series 1997-1 Notes to be includable in gross income for
such purposes, either prospectively or retroactively to the date of
issuance of the Tax Exempt Series 1997-1 Notes. These requirements include,
but are not limited to, provisions that prescribe that the proceeds of the
Tax Exempt Series 1997-1 Notes and certain other amounts are subject to
yield and other investment limits and provisions that require that certain
investment earnings be rebated on a periodic basis to the Treasury
Department of the United States.
In addition, Section 150(d)(3) of the Code contains numerous
provisions that must be complied with at and after the time an election
under such section is made for interest on the Tax Exempt Series 1997-1
Notes to be and remain excludable from gross income. Although the Original
Issuer and the Corporation believe that the issuance of the Series 1997-1
Notes, the organization of SLFC and the Corporation, and the transfers of
assets and assumptions of obligations described herein under "The Original
Issuer and the Corporation" will comply with the requirements of Section
150(d)(3) of the Code, no determination has been obtained or is expected to
be sought from the Internal Revenue Service with respect to such
compliance. Moreover, the Original Issuer believes that it will be the
first entity to make the election provided for in Section 150(d)(3) of the
Code, and no established practices have developed nor have any regulations
or other guidance been published by the Internal Revenue Service.
It is possible that future action or inaction by the Corporation, SLFC
or the Original Issuer could cause the inclusion of interest on the Tax
Exempt Series 1997-1 Notes in gross income for federal income tax purposes
(in some cases retroactively to the date of their original issuance). In
such event, it is probable that certain (and possibly all) of the interest
payments received by owners of Tax Exempt Series 1997-1 Notes would be
subject to Federal income taxes, thereby having the effect of reducing
(possibly substantially) the effective, after-tax yield on their investment
in the Tax Exempt Series 1997-1 Notes.
Risk of Insolvency of the Original Issuer, SLFC or the Corporation
The Corporation has taken steps in structuring the transactions
contemplated hereby that are intended to ensure that the voluntary or
involuntary application for relief by the Original Issuer or SLFC under the
United States Bankruptcy Code or other insolvency laws, as the case may be
("Insolvency Laws"), will not result in consolidation of the assets and
liabilities of the Corporation with those of the Original Issuer and/or
SLFC. These steps include the creation of the Corporation as a separate,
limited-purpose subsidiary of SLFC pursuant to a certificate of
incorporation containing certain limitations (including restrictions on the
nature of the Corporation's business and
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a restriction on the Corporation's ability to commence a voluntary case or
proceeding under any Insolvency Law without the prior unanimous affirmative
vote of all of its directors, including at least two directors who must be
independent of the Corporation and its affiliates). However, there can be
no assurance that the activities of the Corporation would not result in a
court concluding that the assets and liabilities of the Corporation should
be consolidated with those of the Original Issuer or SLFC in a proceeding
under any Insolvency Law. If a court were to reach such a conclusion or if
a filing were made under any Insolvency Law by or against the Corporation,
or if an attempt were made to litigate any of the foregoing issues, then
delays in payments on the Notes could occur or reductions in the amounts of
such payments could result. See "The Original Issuer and the Corporation"
and "Certain Relationships Among Financing Participants."
The Original Issuer will transfer all of its rights and interest in
and to the Financed Student Loans (subject to the lien of the Trustee under
the Indenture) to SLFC, and SLFC will in turn transfer all such rights and
interest in and to the Financed Student Loans to the Corporation.
The Original Issuer intends that its transfer of the Financed Student
Loans to SLFC constitute a sale of all of the Original Issuer's rights in
such Financed Student Loans (subject to the lien of the Trustee under the
Indenture), rather than a pledge to secure indebtedness. Similarly, SLFC
intends that its transfer of the Financed Student Loans to the Corporation
constitute a sale of all of SLFC's rights in such Financed Student Loans,
rather than a pledge to secure indebtedness. If such transfers constitute
sales, the Financed Student Loans would not be considered property of the
Original Issuer or SLFC should either entity thereafter become subject to
any Insolvency Law.
If, however, the Original Issuer or SLFC were to become subject to any
Insolvency Law and a creditor or trustee-in-bankruptcy of the Original
Issuer or SLFC were to take the position that the sale of the Financed
Student Loans by the Original Issuer to SLFC or by SLFC to the Corporation,
as appropriate, should instead be treated as a pledge of such interest to
secure a borrowing from SLFC or the Corporation, as appropriate, delays in
payments of collections of Financed Student Loans on the Notes could occur
or (should the court rule in favor of the Original Issuer or SLFC, as
appropriate, or such creditor) reductions or delays in the amounts of such
payments could result.
If an Insolvency Event occurs with respect to the Corporation, the
Financed Student Loans may be liquidated after the date of such Insolvency
Event. The proceeds from any such liquidation of Financed Student Loans
would be treated as collections on the Financed Student Loans and deposited
in the Revenue Fund. There can be no assurance that the proceeds from the
liquidation of the Financed Student Loans and amounts (if any) on deposit
in the Reserve Fund and the other Funds and Accounts held under the
Indenture would be sufficient to pay the Notes in full. See Appendix IX -
"Summary of the Indenture--Events of Default."
As the Servicer of the Financed Student Loans, the insolvency of SLFC
may result in a disruption in the servicing of the Financed Student Loans
and the receipt of payments with respect thereto, and also may result in a
failure to comply with servicing requirements of the Department of
Education and the Guarantee Agencies.
Risk That Failure to Comply with the Original Issuer's Plan for Doing
Business May Result in the Department of Education Refusing to Make Special
Allowance Payments with Respect to Financed Student Loans or Seeking to be
Reimbursed for Prior Special Allowance Payments
The Higher Education Act provides that, for holders of Federal Family
Education Loan Program loans that are financed with tax exempt debt to be
eligible for Special Allowance Payments with respect to such loans, the
issuer of the debt must adopt, obtain approval of, and comply with, a plan
for doing business meeting the requirements of the Higher Education Act.
The Original Issuer has adopted, and the Governor of the State of South
Dakota has approved, such a plan. Because the Original Issuer expects to
terminate its participation in the Federal Family Education Loan Program,
the Original Issuer will no longer be capable of carrying out certain
provisions of such plan for doing business. The Original Issuer, SLFC, and
the Corporation will each covenant to comply with
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the provisions of such plan for doing business that apply to their
respective operations. However, if any such party fails to comply with
such provisions of the plan for doing business, or if the Original Issuer
failed to comply in the past with all provisions of its plan for doing
business, or if the Department of Education determines that the Original
Issuer's plan for doing business or the reallocation of responsibilities
thereunder in connection with the Original Issuer's election under Section
150(d)(3) of the Code does not comply with the Higher Education Act,
Financed Student Loans could lose their eligibility for Special Allowance
Payments and the Original Issuer, the Corporation and/or the Trustee may be
required to repay Special Allowance Payments theretofore made to the
Original Issuer or the Trustee with respect to Financed Student Loans.
Depending on the amount involved, loss of Special Allowance Payments or
required repayment of Special Allowance Payments could have a materially
adverse affect on the Corporation's ability to pay the principal of and
interest on the Series 1997-1 Notes.
Risk of Offset by Guarantee Agencies or the Department of Education Against
Federal Benefit Payments Due to Shared Lender Identification Number
Due to Department of Education policy limiting the granting of new
lender identification numbers, the Indenture will allow the Trustee, if
necessary, to use the Department of Education lender identification number
that it uses for the Financed Student Loans for other Student Loans held by
the Trustee as trustee under other indentures, if any, securing obligations
of the Corporation or obligations of other subsidiaries of SLFC, or for
trusts established by the Corporation or other subsidiaries of SLFC. In
that event, the billings submitted to the Department of Education for
interest subsidy payments and Special Allowance Payments on Financed
Student Loans would be consolidated with the billings for such payments for
Student Loans held under such other indentures and trusts using the same
lender identification number and payments on such billings would be made by
the Department of Education to the Trustee in lump sum form. Such lump sum
payments would then be allocated by the Trustee among the various trusts
and indentures using the same lender identification number.
In addition, such sharing of the lender identification number may
result in the receipt of Guarantee Payments by Guarantee Agencies in lump
sum form. In that event, such payments would be allocated by the Trustee
among the various trusts and indentures in a manner similar to the
allocation process for interest subsidy payments and Special Allowance
Payments.
The Department of Education regards the Trustee as the party primarily
responsible to the Department of Education for any liabilities owed to the
Department of Education or Guarantee Agencies resulting from the Trustee's
activities in the Federal Family Education Loan Program. As a result, if
the Department of Education or a Guarantee Agency were to determine that
the Trustee owes a liability to the Department of Education or a Guarantee
Agency on any Student Loans for which the Trustee is or was legal
titleholder, including loans held under the Indenture or such other trusts
or indentures, the Department of Education or the Guarantee Agency might
seek to collect that liability by offset against payments due the Trustee
under the Indenture. If the Department of Education or a Guarantee Agency
determines such a liability exists in connection with a trust or indenture
using the shared lender identification number, the Department of Education
or the Guarantee Agency would be likely to collect that liability by
offsetting against amounts due the Trustee under the shared lender
identification number, including amounts owed in connection with the
Financed Student Loans. Such offsetting of payments due to the Trustee
with respect to the Financed Student Loans could adversely affect the
receipt of revenues under the Indenture and the Corporation's ability to
pay interest and principal on the Notes.
In addition, other trusts or indentures using the shared lender
identification number may in a given quarter incur origination fees that
exceed the interest subsidy payments and Special Allowance Payments payable
by the Department of Education on the loans held under such other trusts
and indentures, resulting in the payment from the Department of Education
received by the Trustee under such shared lender identification number for
that quarter equaling an amount that is less than the amount owed by the
Department of Education on the Financed Student Loans for that quarter.
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The Indenture and the indentures or trust agreements under which the
Trustee may separately hold Student Loans which share the lender
identification number to be used by the Trustee (the separate trusts
created thereunder being collectively referred to herein as the
"Corporation Trusts") may require a Corporation Trust (including the Trust
Estate under the Indenture) to indemnify the other Corporation Trusts for a
shortfall or an offset by the Department of Education or a Guarantee Agency
arising from the Student Loans held by the Trustee on such Corporation
Trust's behalf. To the extent that the Trustee is required to indemnify
other Corporation Trusts from the assets held under the Indenture as part
of the Trust Estate with respect to an offset by the Department of
Education or a Guarantee Agency arising from Financed Student Loans held by
the Trustee under the Indenture, such indemnification obligation could
adversely affect the amount of assets in the Trust Estate and the
Corporation's ability to pay principal of and interest on the Notes. Also,
to the extent that the Trustee may be entitled to indemnification with
respect to an offset by the Department of Education or a Guarantee Agency
arising from Student Loans held by the Trustee for a Corporation Trust
other than the Trust Estate under the Indenture, there can be no assurance
that the amount of funds available to the Trustee with respect to such
right of indemnification may be adequate to compensate the Trust Estate
under the Indenture and Noteholders for any previous reduction in the Trust
Estate.
Risk Due to Defeat or Lack of Perfected Security Interest in Trust Estate
Assets
The Higher Education Act provides that a security interest in student
loans made pursuant to the Federal Family Education Loan Program may be
perfected either through the taking of possession of such loans or by the
filing of notice of such security interest in the manner in which security
interests in accounts may be perfected by applicable state law. The
Uniform Commercial Code as in effect in the State of South Dakota provides
for perfection of security interests in accounts by the filing of financing
statements with the Secretary of State. The perfection of the security
interest in the Financed Student Loans granted by the Corporation to the
Trustee is to be accomplished by the filing of financing statements. SLFC,
acting as custodial agent for the Trustee, will retain possession of the
promissory notes evidencing the Financed Student Loans. The Corporation is
a wholly-owned subsidiary of SLFC. If, through fraud, inadvertence or
otherwise, a third-party lender or purchaser acting in good faith were to
obtain possession of any such promissory notes, the security interest of
the Trustee in the related Financed Student Loans could be defeated. See
"Certain Relationships Among Financing Participants" herein.
The Trustee's security interest in revenues, moneys, evidences of
indebtedness (including any Financed Student Loans that are not made under
the Federal Family Education Loan Program) and, unless registered in the
name of the Trustee, securities payable into the various Funds and Accounts
under the Indenture does not constitute a perfected security interest until
such revenues, moneys, evidences of indebtedness and securities are
received by the Trustee.
Risk of Insolvency of Lenders on the Transfer of Student Loans
Each Student Loan Purchase Agreement is structured as, and intended to
effectuate, a valid sale and assignment by the Lender to the Original
Issuer or the Trustee on behalf of the Corporation, as applicable, of the
Financed Student Loans transferred thereunder. Notwithstanding the
foregoing, if a Lender were to become subject to any Insolvency Law and a
creditor or trustee-in-bankruptcy of such Lender were to take the position
that the sale of Financed Student Loans by such Lender should instead be
treated as a pledge of such Financed Student Loans to secure a borrowing,
delays in payments of collections of Financed Student Loans on the Notes
could occur or (should the court rule in favor of such Lender or such
creditor) reductions or delays in the amounts of such payments could
result. In the event of insolvency of any such Lender that is a bank,
moreover, its affairs might become subject to Federal Deposit Insurance
Corporation ("FDIC") receivership. In such case, the FDIC, as a receiver,
or a court could treat the transfer of the Financed Student Loans to the
Original Issuer or the Trustee on behalf of the Corporation as an
assignment of collateral as security for the benefit of the Original Issuer
or the Corporation as a creditor of such Lender. If the transfer of the
Financed Student Loans to the Original Issuer or the Trustee on behalf of
the Corporation is deemed to create a security interest therein, a tax or
government lien on property of such Lender arising before the Financed
Student Loans were transferred may have priority over the
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Trustee's interest in such Financed Student Loans. If such Lender becomes
subject to receivership, to the extent that the transfer of the Financed
Student Loans is deemed to create a security interest, and that such
interest was validly perfected before such Lender's insolvency and was not
taken in contemplation of insolvency or with the intent to hinder, delay or
defraud such Lender or its creditors, such security interest should not be
subject to avoidance and payments with respect to the Financed Student
Loans should not be subject to recovery by such Lender's creditors. The
Corporation will receive an opinion of counsel, subject to the assumptions
and limitations set forth therein, that the provisions of the Indenture,
the Student Loan Purchase Agreements, and the SLFC Servicing Agreement and
the actions required thereunder in connection with the acquisition of
Financed Student Loans are sufficient to create both a perfected security
interest in favor of the Trustee against any such Lender in the Financed
Student Loans, if the transfer of Financed Student Loans by such Lender is
considered as an assignment of collateral as security for an obligation, as
well as a perfected security interest in favor of the Trustee against the
Corporation in the Financed Student Loans. No assurance can be given that
delays in receipt of funds with respect to the Financed Student Loans will
not occur even if no such prior liens exist. Moreover, no assurance can be
given that the FDIC would not seek to effect the release of the Financed
Student Loans to it, as receiver, by accelerating such Lender's "debt" and
repaying the outstanding amount thereof.
Risk That the Financed Student Loans Do Not Comply with Consumer Protection
Laws
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers
involved in consumer finance. Also, some state laws impose finance charge
ceilings and other restrictions on certain consumer transactions and
require contract disclosures in addition to those required under federal
law. These state laws are, in large part, preempted by the Higher
Education Act. However, the form of promissory notes required by the
Department of Education for Federal Family Education Loan Program loans
provides that holders of such promissory notes evidencing certain loans
made to borrowers attending for-profit schools are subject to any defenses
that the borrower may have against the school. Moreover, the Indenture
permits, under certain circumstances, the Financing of Student Loans other
than those made under the Federal Family Education Loan Program. Such
state laws may not be pre-empted as they apply to any such Student Loans.
Reinvestment Risk to Holders of Auction Rate Series 1997-1 Notes and Tax
Exempt Fixed Rate Series 1997-1 Notes From Redemptions From Unused Proceeds
The Corporation expects approximately $___________________ of the
Series 1997-1 Note proceeds deposited in the Series 1997-1 Tax Exempt
Acquisition Account to be used to originate or purchase Eligible Loans on
or before _____________, 2002. If such proceeds are not so used, they may
be used to redeem Tax Exempt Auction Rate Series 1997-1 Senior Notes and,
if no Tax Exempt Auction Rate Series 1997-1 Senior Notes remain
Outstanding, Tax Exempt Fixed Rate Series 1997-1 Notes. Investors holding
such Tax Exempt Series 1997-1 Notes (particularly Tax Exempt Fixed Rate
Series 1997-1 Notes) which are redeemed may be unable to reinvest the
proceeds of the redemption at the same yield as the Tax Exempt Series 1997-
1 Notes. Also, depending on the price at which investors purchased such
Series 1997-1 Notes, their yield may be adversely affected by such early
redemption.
The Corporation expects approximately $__________ of the Series 1997-
1 Note proceeds deposited in the Series 1997-1 Taxable Acquisition Account
to be used to originate or purchase Eligible Loans on or before [September
1, 1998]. If such proceeds are not so used, they may be transferred to the
Retirement Account and used to redeem Taxable Auction Rate Series 1997-1
Notes. Investors holding such Taxable Auction Rate Series 1997-1 Notes
which are redeemed may be unable to reinvest the proceeds of the redemption
at the same yield as the Taxable Auction Rate Series 1997-1 Notes. Also,
depending on the price at which investors purchased such Series 1997-1
Notes, their yield may be adversely affected by such early redemption. See
"Application of Series 1997-1 Note Proceeds" and "Description of Series
1997-1 Notes - Special Redemption and Prepayment - From Unused Proceeds."
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Risk of Reduction in Amounts Available to Pay Notes From Variability of Actual
Cash Flows and From Inability of Guarantee Agencies to Make Guarantee Payments
Amounts received with respect to the Financed Student Loans for a
particular period may vary in both timing and amount from the payments actually
due on the Financed Student Loans for a variety of economic, social and other
factors, including both individual factors, such as additional periods of
deferment or forbearance prior to or after a borrower's commencement of
repayment, and general factors, such as a general economic downturn which could
increase the amount of defaulted Financed Student Loans. Failures by borrowers
to pay timely the principal and interest on the Financed Student Loans will
affect the amount of revenues, which may reduce the amount available to be paid
to the Series 1997-1 Noteholders. The inability of any Guarantee Agency to meet
its guarantee obligations could reduce the amount available to be paid to the
Series 1997-1 Noteholders.
Reinvestment Risk of Prepayment or Redemption of Series 1997-1 Notes
Principal payments with respect to the Financed Student Loans may be
influenced by a variety of economic, geographic, social and other factors. The
Financed Student Loans may be prepaid at any time without penalty. The
Corporation believes that in a fluctuating interest rate environment a factor
affecting the prepayment rate on a large pool of loans such as the Student Loan
Portfolio is the difference between the interest rates on the loans and
prevailing interest rates generally (giving consideration to the cost of any
refinancing). In general, if interest rates fall below the interest rates on the
Financed Student Loans, the rate of prepayment would be expected to increase.
Conversely, if interest rates rise above the interest rates on the Financed
Student Loans, the rate of prepayment would be expected to decrease. No
assurances can be given as to the actual rate of prepayment with respect to the
Financed Student Loans in the Student Loan Portfolio. Other factors affecting
prepayment of loans include changes in the borrower's employment and other
economic circumstances, and refinancing opportunities which may provide more
favorable repayment terms such as those offered under various consolidation loan
programs, including the federal direct consolidation loan programs. Because of
the benefits of consolidating numerous Student Loans into a single loan and, in
some cases, obtaining more favorable repayment terms, a borrower may choose to
prepay Financed Student Loans through consolidation programs regardless of the
general level of interest rates. In addition, the rate of the payments of
principal on the Notes will be directly related to the actual amortization
schedules of the Financed Eligible Loans. See "Description of Federal Family
Education Loan Program -- Loan Terms --Repayment."
Receipt of principal and interest on Financed Student Loans may be
accelerated due to: (1) default claims or claims due to the disability, death or
bankruptcy of the borrowers or school closure; (2) actual principal amortization
periods which are shorter than those assumed based upon the current analysis of
the expected Student Loan Portfolio; (3) the commencement of principal repayment
by borrowers on earlier dates than are assumed based upon the current analysis
of the expected Student Loan Portfolio; and (4) economic conditions being such
that borrowers elect to refinance or prepay their loans prior to maturity.
Eligible lenders, including the Trustee on behalf of the Corporation, and the
Secretary of Education may make Consolidation Loans to borrowers for the purpose
of retiring borrowers' existing loans under various federal higher education
loan programs. To the extent that Financed Student Loans are repaid with
Consolidation Loans, the Corporation will realize payment of such loans earlier
than projected. In addition, under certain circumstances, a Lender will be
obligated to repurchase Financed Student Loans from the Trust Estate pursuant to
its Student Loan Purchase Agreement as a result of breaches of its
representations, warranties or covenants.
Taxable LIBOR Rate Series 1997-1 Notes are subject to prepayment in amounts
related to the amount of principal payments received with respect to Student
Loan Financed with the proceeds of the Taxable Series 1997-1 Notes in the
Acquisition Fund. Because of the uncertainties relating to the timing of receipt
of principal of Student Loans expected to be Financed with proceeds of the
Taxable Series 1997-1 Notes, the actual level of prepayments resulting therefrom
cannot be definitively stated. Investors holding Taxable LIBOR Rate Series 1997-
1 Notes which are prepaid may be unable to reinvest the proceeds of the
prepayment at the same yield as the Taxable LIBOR Rate
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Series 1997-1 Notes. Also, depending on the price at which investors purchased
such Series 1997-1 Notes, their yield may be adversely affected by such
prepayment.
The Series 1997-1 Notes (other than the Taxable LIBOR Rate Series
1997-1 Notes) are subject to redemption from revenues under the Indenture in
excess of required debt service payments and other expenses under the Indenture
and all Series 1997-1 Notes are subject to redemption if the Student Loan
Portfolio balance is less than 10% of the amount deposited to the Acquisition
Fund on the Date of Issuance. Investors holding Series 1997-1 Notes which are
redeemed may be unable to reinvest the proceeds of the redemption at the same
yield as the Series 1997-1 Notes they previously held. Also, depending on the
price at which investors purchased such Series 1997-1 Notes, their yield may be
adversely affected by such redemption.
Risk Resulting From Differences Between Series of Taxable Series 1997-1 Notes
with Respect to Receipt of Payments on the Financed Student Loans
The Taxable Auction Rate Series 1997-1 Notes are not expected to receive
any payments of principal from principal payments on Financed Student Loans
until all Taxable LIBOR Rate Series 1997-1 Notes have been paid in full. Series
1997-1J Notes will receive no payments of principal from such source until the
Series 1997-1I Notes have been paid in full. Therefore, the Series 1997-1I Notes
and (as compared to all Taxable Series 1997-1 Notes other than Series 1997-1I
Notes) the Series 1997-1J Notes bear relatively greater risk than other series
of Taxable Series 1997-1 Notes of an increased rate of principal payments
derived from principal payments relating to Financed Student Loans.
Risk That the Average Life of the Series 1997-1 Notes May Be Lengthened As a
Result of Extension of Payments on the Financed Student Loans
Principal and interest payments on Financed Student Loans may be delayed
due to: (1) borrowers entering Deferment Periods due to a return to school or
other eligible purposes: (2) forbearance being granted to borrowers; (3) loans
becoming delinquent for periods longer than assumed; (4) actual loan principal
amortization periods which are longer than those expected based upon the current
analysis of the expected Student Loan Portfolio; and (5) the commencement of
principal repayment by borrowers at dates later than those assumed based upon
the current analysis of the Eligible Loans expected to be Financed. These
factors may lengthen the remaining term of the Financed Student Loans and the
average life of the Series 1997-1 Notes. See "Description of Federal Family
Education Loan Program -- Loan Terms -- Repayment."
Risk of the Trustee's Inability to Liquidate Financed Student Loans and Possible
Insufficiency of Trust Estate Assets
If an Event of Default occurs under the Indenture, subject to certain
conditions, the Trustee is authorized, without the consent of the Noteholders,
to sell the Financed Student Loans. There can be no assurance that the Trustee
would be able to find a purchaser for the Financed Student Loans in a timely
manner or that the market value of such Financed Student Loans would, at any
time, be sufficient to provide for the payment of all amounts due with respect
to the Notes. The Higher Education Act requires that the purchaser of the
Student Loans must be an eligible lender under the Higher Education Act.
Additionally, any such sale by the Trustee would need to comply with the
applicable requirements of the Uniform Commercial Code then in effect in the
State of South Dakota, which currently provides that such sale may be by private
or public proceedings conducted at any time or place and on any terms, provided
that every aspect of the sale, including the method, manner, time, place and
terms, be commercially reasonable. If it were established that the Trustee
failed to proceed in a commercially reasonable manner, the Corporation may be
entitled to recover from the Trustee (which would, in turn, look to the Trust
Estate for indemnification) any loss to the Corporation caused by such failure.
However, if the Trustee sells the Student Loans in the usual manner in any
recognized market therefor, or sells at the price current in such market at the
time of such sale, or has otherwise
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sold the Student Loans in conformity with reasonable commercial practices among
dealers in Student Loans, the Trustee will have sold the Student Loans in a
commercially reasonable manner. Further, a sale which has been approved in any
judicial proceeding or by any bona fide creditors' committee or representatives
of creditors of the Corporation shall conclusively be deemed to be commercially
reasonable. Seeking such approval could result in delays in the ultimate
disposition of the Financed Student Loans.
Risk That Financial Status of Guarantee Agencies Will Affect Their Ability to
Make Guarantee Payments
The Higher Education Act requires all loans made under the Federal Family
Education Loan Program to be unsecured. As a result, the only security for
payment of the Financed Eligible Loans is the Guarantee Agreements between the
Trustee and each Guarantee Agency. A deterioration in the financial status of
the Guarantee Agencies and their ability to honor guarantee claims with respect
to the Financed Eligible Loans could result in a delay in making or a failure to
make Guarantee Payments to the Trustee. Failures by borrowers of Student Loans
generally to pay timely the principal and interest due on such Student Loans
could obligate the Guarantee Agencies to make payments thereon, which could
adversely affect the solvency of the Guarantee Agencies and their ability to
meet their guarantee obligations (including with respect to the Financed Student
Loans). Moreover, to the extent that the Department of Education pays
reimbursement claims submitted by a Guarantee Agency for any fiscal year
exceeding certain specified levels (see "Description of the Guarantee Agencies
- --Effect of Annual Claims Rate"), the Department of Education's obligation to
reimburse the Guarantee Agency for losses will be reduced on a sliding scale
from a maximum of 98% to a minimum of 78% of Guarantee Agency payments.
Pursuant to Section 432(o) of the Higher Education Act, if the Department
of Education has determined that a Guarantee Agency is unable to meet its
insurance obligations, the holders of loans guaranteed by such Guarantee Agency
may submit claims directly to the Department of Education and the Department of
Education is required to pay the full Guarantee Payment due with respect thereto
in accordance with standards no more stringent than those applied by the
Guarantee Agency. However, the Department of Education's obligation to pay
guarantee claims directly in this fashion is contingent upon the Department of
Education making the determination referred to above. There can be no assurance
that the Department of Education would ever make such a determination with
respect to a Guarantee Agency or, if such a determination were made, that such
determination or the ultimate payment of such guarantee claims would be made in
a timely manner. See "Description of the Federal Family Education Loan Program."
Risks Relating to Investment of Series 1997-1 Note Proceeds
The proceeds of the Series 1997-1 Notes that are not used to acquire
Financed Student Loans on the Date of Issuance will be invested under a limited
number of investment agreements with one or more Investment Providers. Each such
investment agreement will initially involve the investment of a significant
portion of the proceeds of the Series 1997-1 Notes. If any Investment Provider
were unable to repay funds invested under an unsecured investment agreement, or
if the collateral pledged for a secured investment agreement were insufficient
or unavailable for any reason, the Corporation's ability to pay the principal of
and interest on the Series 1997-1 Notes could be adversely affected.
Risk of Change of Ratings of the Series 1997-1 Notes
It is a condition to issuance of the Series 1997-1 Notes that they be rated
as indicated under the caption "Ratings." Ratings are based primarily on the
credit underlying the Financed Eligible Loans, the existence and amount of
subordinate debt, any credit enhancement and the legal structure of the
transaction. The ratings are not a recommendation to purchase, hold or sell
Series 1997-1 Notes and do not take into account factors such as the market
price or suitability for a particular investor. There is no expectation that any
additional rating agency will rate the Series 1997-1 Notes, and there can be no
assurance the rating that would be assigned by any such other rating agency
would be equivalent to the initial ratings described herein. Moreover, there can
be no assurance that the ratings will remain for any given period of time or
that ratings will not be lowered or withdrawn by any Rating
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Agency if in such Rating Agency's judgment circumstances so warrant. Any
such lowering or withdrawal could adversely affect the market value of the
Series 1997-1 Notes.
Risk Resulting From Limited Liquidity of the Series 1997-1 Notes
The Series 1997-1 Notes will not be listed on any national security
exchange. There is currently no secondary market for the Series 1997-1
Notes and there is no assurance that one will develop or, if such a market
does develop, that such market will continue. The Underwriters expect, but
will not be obligated, to make a market in the Series 1997-1 Notes. As a
result, investors must be prepared to bear the risk of holding the Series
1997-1 Notes for so long as the Series 1997-1 Notes remain outstanding.
Risks Relating to Swap Agreements
Under the Indenture, the Corporation may execute Swap Agreements if
certain requirements are met, including that the Trustee shall have
received written confirmation from each Rating Agency that the execution
and delivery of the Swap Agreement will not cause the reduction or
withdrawal of any rating or ratings then applicable to any Outstanding
Notes. No Swap Agreement is being entered into in connection with the
issuance of the Series 1997-1 Notes. See "Source of Payment and Security
for the Notes -- Additional Indenture Obligations." Swap Agreements carry
risks relating to the credit quality of the counterparty and the legal
enforceability of the Swap Agreement.
Effect of Book-Entry Registration
Initially, the Series 1997-1 Notes will be in the form of certificates
registered in the name of Cede & Co., the nominee for DTC, and will not be
registered in the names of the beneficial owners of the Series 1997-1 Notes
or their nominees. Because of this, unless and until definitive securities
are issued, beneficial owners of the Series 1997-1 Notes will not be
recognized by the Trustee as "Holders" (as such term is used in the
Indenture). Therefore, unless and until certificated securities are
issued, beneficial owners of the Series 1997-1 Notes will only be able to
exercise the rights of Holders indirectly through DTC and its participating
organizations in the United States or Cedel Bank, societe anonyme or the
Euroclear System in Europe. See "Description of Series 1997-1 Notes Book-
Entry-Only System."
DESCRIPTION OF SERIES 1997-1 NOTES
The Series 1997-1 Notes will be issued pursuant to the Indenture. The
form of the Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
Terms of the Series 1997-1 Notes
For summaries of the terms of the Series 1997-1 Notes, see Appendix I
- "Terms of the Tax Exempt Auction Rate Series 1997-1 Senior Notes,"
Appendix II - "Terms of the Tax Exempt Fixed Rate Series 1997-1 Senior
Notes," Appendix III - "Terms of the Taxable Auction Fixed Rate Series
1997-1 Senior Notes," Appendix IV - "Terms of the Taxable LIBOR Rate Series
1997-1 Senior Notes," Appendix V - "Terms of the Tax Exempt Fixed Rate
Series 1997-1 Subordinate Notes" and Appendix VI - "Terms of the Taxable
LIBOR Rate Series 1997-1 Subordinate Notes."
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Book-Entry-Only System
The description which follows of the procedures and record keeping
with respect to beneficial ownership interests in the Series 1997-1 Notes,
payment of principal of and interest on the Series 1997-1 Notes to DTC
Participants, Cedel Participants and Euroclear Participants (as hereinafter
respectively defined) or to purchasers of the Series 1997-1 Notes,
confirmation and transfer of beneficial ownership interests in the Series
1997-1 Notes, and other securities-related transactions by and between DTC,
Cedel, Euroclear, DTC Participants, Cedel Participants, Euroclear
Participants and Beneficial Owners (as hereinafter defined), is based
solely on information furnished by DTC, Cedel and Euroclear and has not
been independently verified by the Original Issuer, the Corporation or the
Underwriters. The inclusion of this information is not, and should not be
construed as, a representation by the Original Issuer, the Corporation or
the Underwriters as to its accuracy or completeness or otherwise.
DTC will act as securities depository for the Series 1997-1 Notes.
Upon the issuance of the Series 1997-1 Notes, one or more fully registered
notes for each series, in the aggregate principal amount of the Series
1997-1 Notes, are to be registered in the name of Cede & Co., as nominee
for DTC. So long as Cede & Co. is the Holder of the Series 1997-1 Notes,
as nominee of DTC, references herein to the owners or Holders of the Series
1997-1 Notes shall mean DTC or its nominee, Cede & Co., and shall not mean
the Beneficial Owners of the Series 1997-1 Notes. Noteholders may hold
their certificates through DTC (in the United States) or Cedel or Euroclear
(in Europe) if they are participants of such systems, or indirectly through
organizations that are participants in such systems.
Cede, as nominee for DTC, will hold the global Notes. Cedel and
Euroclear will hold omnibus positions on behalf of the Cedel Participants
and the Euroclear Participants, respectively, through customers' securities
accounts in Cedel's and Euroclear's names on the books of their respective
depositories (collectively, the "Depositories") which in turn will hold
such positions in customers' securities accounts in the Depositories' names
on the books of DTC.
DTC is a limited-purpose trust company organized under New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC holds securities that its participants (the
"DTC Participants") deposit with DTC. DTC also facilitates the settlement
among DTC Participants of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized book-entry
changes in DTC Participants' accounts, thereby eliminating the need for
physical movement of securities certificates. DTC Participants include
securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations. DTC is owned by a number of
DTC Participants and by the New York Stock Exchange, Inc., the American
Stock Exchange, Inc., and the National Association of Securities Dealers,
Inc. Access to the DTC system is also available to others such as
securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a DTC Participant, either
directly or indirectly (the "Indirect Participants"). The Rules applicable
to DTC and the DTC Participants are on file with the Commission.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Cedel Participants and Euroclear Participants
will occur in the ordinary way in accordance with their applicable rules
and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in
DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by its Depository; however, such cross-market
transactions will require delivery of instructions to the relevant European
international
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clearing system by the counterparty in such system in accordance with its
rules and procedures and within its established deadlines (European time).
The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
Depository to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment
in accordance with normal procedures for same-day funds settlement
applicable to DTC. Cedel Participants and Euroclear Participants may not
deliver instructions directly to the Depositories.
Because of time-zone differences, credits of securities in Cedel or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business
day following the DTC settlement date, and such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Cedel Participant or Euroclear Participant on such business day.
Cash received in Cedel or Euroclear as a result of sales of securities by
or through a Cedel Participant or a Euroclear Participant to a DTC
Participant will be received with value on the DTC settlement date but will
be available in the relevant Cedel or Euroclear cash account only as of the
business day following settlement in DTC.
Purchases of the Series 1997-1 Notes (in authorized denominations)
under the book-entry system may be made only through brokers and dealers
who are, or act through, DTC Participants. The DTC Participants purchasing
the Series 1997-1 Notes will receive a credit balance in the records of
DTC. The ownership interest of the actual purchaser of each Series 1997-1
Note (a "Beneficial Owner") will be recorded in the records of the
applicable DTC Participant or Indirect Participant. Beneficial Owners will
not receive written confirmation from DTC of their purchase, but Beneficial
Owners are expected to receive from the applicable DTC Participant or
Indirect Participant written confirmations providing details of the
transaction, as well as periodic statements of their holdings. Transfers
of beneficial ownership of the Series 1997-1 Notes will be accomplished by
book entries made by the DTC Participants or Indirect Participants who act
on behalf of the Beneficial Owners and, if necessary, in turn by DTC. No
Series 1997-1 Notes will be registered in the names of the Beneficial
Owners, and Beneficial Owners will not receive certificates representing
their ownership interest in the Series 1997-1 Notes, except in the event
participation in the book-entry system is discontinued as described below.
The Corporation and the Trustee will recognize DTC or its nominee as
the Holder of the Series 1997-1 Notes for all purposes, including notice
purposes. DTC has no knowledge of the actual Beneficial Owners of the
Series 1997-1 Notes; DTC's records reflect only the identity of the DTC
Participants to whose accounts such Series 1997-1 Notes are credited, which
may or may not be the Beneficial Owners. The DTC Participants and Indirect
Participants will remain responsible for keeping account of their holdings
on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Indirect Participants and by DTC
Participants and Indirect Participants to Beneficial Owners will be
governed by arrangements among DTC, DTC Participants, Indirect Participants
and Beneficial Owners, subject to any statutory and regulatory requirements
as may be in effect from time to time. Beneficial Owners may desire to
make arrangements with a DTC Participant or an Indirect Participant so that
all notices of redemption of Series 1997-1 Notes or other communications to
DTC which affect such Beneficial Owners, and notification of all interest
payments, will be forwarded in writing by the DTC Participant or Indirect
Participant. Any failure of DTC to advise any DTC Participant, or of any
DTC Participant or Indirect Participant to advise a Beneficial Owner, of
any notice of redemption or its content or effect will not affect the
validity of the redemption of the Series 1997-1 Notes called for redemption
or any other action premised on such notice.
Neither DTC nor Cede & Co. will consent or vote with respect to the
Series 1997-1 Notes. Under its usual procedures, DTC mails an Omnibus
Proxy to the Corporation as soon as possible after the record date it
establishes. The Omnibus Proxy assigns Cede & Co.'s consenting or voting
rights to those DTC Participants to whose accounts the Series 1997-1 Notes
are credited on the record date (identified in a listing attached to the
Omnibus Proxy).
Payments of principal of, premium, if any, and interest on the Series
1997-1 Notes will be made to DTC or its nominee, Cede & Co., as Holder of
the Series 1997-1 Notes. DTC's current practice is to credit the accounts
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of the DTC Participants on payment dates in accordance with their
respective holdings shown on the records of DTC, unless DTC has reason to
believe that it will not receive payment on that date. Payments by DTC
Participants and Indirect Participants to Beneficial Owners will be
governed by standing instructions and customary practices, as is the case
with securities held for the accounts of customers in bearer form or
registered in "street name", and will be the responsibility of such DTC
Participant or Indirect Participant and not of DTC or the Corporation,
subject to any statutory and regulatory requirements as may be in effect
from time to time. Payment of principal and interest to DTC is the
responsibility of the Corporation and the Trustee, disbursement of such
payments to DTC Participants shall be the responsibility of DTC, and
disbursement of such payments to the Beneficial Owners shall be the
responsibility of DTC Participants and Indirect Participants.
By purchasing the Auction Rate Series 1997-1 Senior Notes, whether in
an Auction or otherwise, each prospective purchaser of the Auction Rate
Series 1997-1 Senior Notes or its Broker-Dealer must agree and will be
deemed to have agreed: (i) to have its beneficial ownership of the Auction
Rate Series 1997-1 Senior Notes maintained at all times in Book-Entry Form
for the account of its Participant, which in turn will maintain records of
such beneficial ownership, and to authorize such Participant to disclose to
the Auction Agent such information with respect to such beneficial
ownership as the Auction Agent may request; and (ii) so long as the
beneficial ownership of the Auction Rate Series 1997-1 Senior Notes is
maintained in Book-Entry Form, to sell, transfer or otherwise dispose of
the Auction Rate Series 1997-1 Senior Notes only pursuant to a Bid or a
Sell Order in an Auction, or otherwise through a Broker-Dealer, provided
that in the case of all transfers other than those pursuant to an Auction,
the Existing Holder of the Auction Rate Series 1997-1 Senior Notes so
transferred, its Participant or Broker-Dealer advises the Auction Agent of
such transfer.
For every transfer of the Series 1997-1 Notes, the Beneficial Owner
may be charged a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto.
So long as Cede & Co. or its registered assign is the registered
holder of the Series 1997-1 Notes, the Corporation and the Trustee will be
entitled to treat Cede & Co., or its registered assign, as the absolute
owner thereof for all purposes of the Indenture and any applicable laws,
notwithstanding any notice to the contrary received by the Corporation or
the Trustee, and the Corporation and the Trustee will have no
responsibility for transmitting payments to, communicating with, notifying,
or otherwise dealing with any Beneficial Owners of the Series 1997-1 Notes.
If (i) the Series 1997-1 Notes of any series are not eligible for the
services of DTC, (ii) DTC determines to discontinue providing its services
with respect to the Series 1997-1 Notes of any series or (iii) the
Corporation determines that a system of book-entry transfers for Series
1997-1 Notes of any series, or the continuation thereof, through DTC is not
in the best interest of the Beneficial Owners or the Corporation, the
Corporation may either identify another qualified securities depository or
direct or cause Series 1997-1 Note certificates for such series to be
delivered to Beneficial Owners thereof or their nominees and, if
certificates are delivered to the Beneficial Owners, the Beneficial Owners
or their nominees, upon authentication of the Series 1997-1 Notes of such
series in authorized denominations and registration thereof in the
Beneficial Owners' or nominees' names, shall become the Holders of such
Series 1997-1 Notes for all purposes. In any such event, the Trustee is to
mail an appropriate notice to the securities depository for notification to
DTC Participants and Beneficial Owners of the substitute securities
depository or the issuance of Series 1997-1 Note certificates to Beneficial
Owners or their nominees, as applicable.
Cedel Bank, societe anonyme ("Cedel") is incorporated under the laws
of Luxembourg as a professional depository. Cedel holds securities for its
participating organizations ("Cedel Participants") and facilitates the
clearance and settlement of securities transactions between Cedel
Participants through electronic book-entry changes in accounts of Cedel
Participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in Cedel in any of 32
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and
securities lending and borrowing. Cedel interfaces with domestic markets
in several countries.
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As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers
and dealers, banks, trust companies, clearing corporations and certain
other organizations and may include the underwriters of the Series 1997-1
Notes. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a Cedel Participant, either directly or
indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to
clear and settle transactions between Euroclear Participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk
from lack of simultaneous transfers of securities and cash. Transactions
may now be settled in any of 32 currencies, including United States
dollars. The Euroclear System includes various other services, including
securities lending and borrowing and interfaces with domestic markets in 25
countries generally similar to the arrangements for cross-market transfers
with DTC described above. The Euroclear System is operated by Morgan
Guaranty Trust Company of New York, Brussels, Belgium office (the
"Euroclear Operator" or "Euroclear"), under contract with Euroclear
Clearance System, Societe Cooperative, a Belgian cooperative corporation
(the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear
cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative Board establishes policy for the Euroclear
System. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial
intermediaries and may include the underwriters of any Series of Notes.
Indirect access to the Euroclear System is also available to other firms
that maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such,
it is regulated and examined by the Board of Governors of the Federal
Reserve System and the New York State Banking Department, as well as the
Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System
(collectively, the "Terms and Conditions"). The Terms and Conditions
govern transfers of securities and cash within the Euroclear System,
withdrawal of securities and cash from the Euroclear System, and receipts
of payments with respect to securities in the Euroclear System. All
securities in the Euroclear System are held on a fungible basis without
attribution of specific certificates to specific securities clearance
accounts. The Euroclear Operator acts under the Terms and Conditions only
on behalf of Euroclear Participants and has no record of or relationship
with persons holding through Euroclear Participants.
Distributions with respect to Series 1997-1 Notes held through Cedel
or Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depository. Such distributions
will be subject to tax reporting in accordance with relevant United States
tax laws and regulations. See "Tax Matters - Federal Tax Consequences."
Cedel or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Series 1997-1 Noteholder under the
Indenture on behalf of a Cedel Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to its
Depository's ability to effect such actions on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Series 1997-1 Notes among
participants of DTC, Cedel and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
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Denomination and Payment
The Tax Exempt Auction Rate Series 1997-1 Senior Notes and the Taxable
Series 1997-1 Notes are being issued in denominations of $100,000 in
original Principal Amount and any multiple thereof. The Tax Exempt Fixed
Rate Series 1997-1 Notes are being issued in denominations of $5,000 in
original Principal Amount and any multiple thereof.
The principal of and premium, if any, on the Series 1997-1 Notes,
together with interest payable on the Series 1997-1 Notes at the Maturity
thereof if the date of such Maturity is not a regularly scheduled Interest
Payment Date, shall be payable in lawful money of the United States of
America upon, except as otherwise provided in the Indenture with respect to
a Securities Depository, presentation and surrender of such Series 1997-1
Notes at the Principal Office of the Trustee, as Paying Agent with respect
to the Series 1997-1 Notes, or a duly appointed successor Paying Agent.
Interest on each series of the Series 1997-1 Notes shall be payable on each
regularly scheduled Interest Payment Date with respect to such series,
except as otherwise provided in the Indenture with respect to a Securities
Depository, by check or draft drawn upon the Paying Agent and mailed to the
person who is the Holder thereof as of 5:00 p.m. in the city in which the
Principal Office of the Note Registrar is located on the Regular Record
Date for such Interest Payment Date at the address of such Holder as it
appears on the Note Register, or, in the case of any Series 1997-1 Note the
Holder of which is the Holder of Series 1997-1 Notes in the aggregate
Principal Amount of $1,000,000 or more (or, if less than $1,000,000 in
Principal Amount of Series 1997-1 Notes is outstanding, the Holder of all
outstanding Series 1997-1 Notes), at the direction of such Holder received
by the Paying Agent by 5:00 p.m. in the city in which the Principal Office
of the Paying Agent is located on the last Business Day preceding the
applicable Regular Record Date, by electronic transfer by the Paying Agent
in immediately available funds to an account designated by such Holder.
The Regular Record Date is (i) with respect to any regularly scheduled
Interest Payment Date for a series of the Auction Rate Series 1997-1 Senior
Notes or the Taxable LIBOR Rate Series 1997-1 Notes, the last Business Day
preceding such Interest Payment Date, and (ii) with respect to any
regularly scheduled Interest Payment Date for the Tax Exempt Fixed Rate
Series 1997-1 Senior Notes or the Tax Exempt Fixed Rate Series 1997-1
Subordinate Notes, the fifteenth day (whether or not a Business Day) of the
calendar month immediately preceding such Interest Payment Date. Any
interest not so timely paid or duly provided for (herein referred to as
"Defaulted Interest") shall cease to be payable to the person who is the
Holder thereof at the close of business on the Regular Record Date and
shall be payable to the person who is the Holder thereof at the close of
business on a Special Record Date for the payment of any such Defaulted
Interest. Such Special Record Date shall be fixed by the Trustee whenever
moneys become available for payment of the Defaulted Interest, and notice
of the Special Record Date shall be given to the Holders of the Series
1997-1 Notes not less than 10 days prior thereto by first-class mail to
each such Holder as shown on the Note Register on a date selected by the
Trustee, stating the date of the Special Record Date and the date fixed for
the payment of such Defaulted Interest. All payments of principal of and
interest on the Series 1997-1 Notes shall be made in lawful money of the
United States of America.
Special Redemption and Prepayment
From Principal Repayments
The Taxable LIBOR Rate Series 1997-1 Notes shall receive prepayments
of principal on any Interest Payment Date from moneys credited to the
Retirement Account as hereinafter described. The Corporation is required
to direct the Trustee to transfer to the Retirement Account from the
Special Redemption and Prepayment Account any moneys therein, up to an
amount equal to the Special Prepayment Amount, which the Corporation has
not determined are reasonably expected to be required to be transferred to
the Note Fund, the Rebate Fund or the Reserve Fund prior to the next
succeeding regularly scheduled Interest Payment Date, provided no
deficiencies exist at the time of such transfer in the Note Fund, the
Rebate Fund or the Reserve Fund. See "Source of Payment and Security for
the Notes -- Description of Flow of Revenues in the Funds." Such
prepayments of principal shall, subject to the Senior Asset Requirement, be
allocated between the Taxable LIBOR Rate Series 1997-1 Senior Notes
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and the Taxable LIBOR Rate Series 1997-1 Subordinate Notes pro rata. All
such prepayments of principal allocated to the Taxable LIBOR Rate Series
1997-1 Senior Notes shall be applied to the Series 1997-1I Notes so long as
any such Notes remain Outstanding, and thereafter to the Series 1997-1J
Notes. All such prepayments of principal applied to a given series of
Taxable LIBOR Rate Series 1997-1 Notes shall be allocated pro rata to the
reduction of the Principal Amount of all Notes of such series.
The Special Prepayment Amount is an amount, as of the last day of any
month, equal to the excess, if any, of (1) the sum of (a) all payments
received with respect to principal of Financed Student Loans credited to
the Series 1997-1 Taxable Acquisition Account as of the Monthly Payment
Date for such month, plus (b) the amount of any Balances theretofore
transferred from the Series 1997-1 Taxable Acquisition Account to the
Retirement Account to redeem Taxable Auction Rate Series 1997-1 Notes as
described below under "From Unused Proceeds," less (c) the principal
component of the repurchase price of Student Loans originally Financed from
Balances in Series 1997-1 Taxable Acquisition Account which have been
repurchased from a Guarantee Agency upon rehabilitation of such Eligible
Loans pursuant to the Higher Education Act, over (2) the sum of (a) the
aggregate of the amounts previously applied to the reduction of the
Principal Amount of all Taxable LIBOR Rate Series 1997-1 Notes, plus (b)
the aggregate Principal Amount of Taxable LIBOR Rate Series 1997-1 Notes to
be prepaid on the next regularly scheduled Interest Payment Date from
Balances then on hand in the Retirement Account. Payments described in
clause (1)(a) of the preceding sentence include, without limitation, any
prepayments by borrowers from the proceeds of a consolidation loan made or
acquired by the Trustee on behalf of the Corporation or from any other
sources, but exclude, for this purpose, proceeds of the sale or other
disposition of Financed Student Loans to any Person other than a Guarantee
Agency, with respect to Guarantee payments, or a Lender, with respect to
the repurchase of Financed Student Loans by such Lender pursuant to its
repurchase obligation under a Student Loan Purchase Agreement.
In general, this prepayment provision is intended to require the
Corporation to prepay Taxable LIBOR Rate Series 1997-1 Notes in amounts
related to the amount of principal payments received with respect to
Student Loans Financed with proceeds of the Taxable Series 1997-1 Notes in
the Acquisition Fund. See Appendix X -- "Weighted Average Life of the
Taxable LIBOR Rate Series 1997-1 Notes." Because of the uncertainties
relating to the timing of receipt of principal of Student Loans expected to
be Financed with proceeds of the Taxable Series 1997-1 Notes, the actual
level of prepayments resulting therefrom cannot be definitively stated.
See "Risk Factors -- Reinvestment Risk of Prepayment or Redemption of
Series 1997-1 Notes."
From Moneys in the Surplus Account
Tax Exempt Auction Rate Series 1997-1 Senior Notes of any series, Tax
Exempt Fixed Rate Series 1997-1 Senior Notes and Tax Exempt Fixed Rate
Series 1997-1 Subordinate Notes, may, at the Corporation's option, be
redeemed, in whole or in part, at a Redemption Price equal to 100% of
Principal Amount of such Notes to be redeemed, plus accrued interest
thereon to the Redemption Date, on any Interest Rate Adjustment Date for
such series or on any regularly scheduled Interest Payment Date for such
series occurring on or after ________ 1, 199_, from amounts transferred to
the Series 1997-1 Tax Exempt Retirement Sub-Account from the Series 1997-1
Tax Exempt Surplus Sub-Account and the Series 1997-1 Tax Exempt Reserve
Account. In general, such transfers are intended to allow the Corporation
to redeem Tax Exempt Auction Rate Series 1997-1 Notes, Tax Exempt Fixed
Rate Series 1997-1 Senior Notes and Tax Exempt Fixed Rate Series 1997-1
Subordinate Notes to the extent that revenues allocable to the Tax Exempt
Series 1997-1 Notes under the Indenture exceed scheduled debt service
payments on the Tax Exempt Series 1997-1 Notes, payments on other Indenture
Obligations and other expenses payable under the Indenture. See Appendix
IX -"Summary of the Indenture -- Funds and Accounts -- Surplus Fund" and
"-- Reserve Fund".
Taxable Auction Rate Series 1997-1 Senior Notes of any series may, at
the Corporation's option, be redeemed, in whole or in part, at a Redemption
Price equal to 100% of Principal Amount of such Notes to be redeemed, plus
accrued interest thereon to the Redemption Date, on any Interest Rate
Adjustment Date for such series or on any regularly scheduled Interest
Payment Date for such series occurring on or after __________ 1,
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199_, from amounts transferred to the Series 1997-1 Taxable Retirement Sub-
Account from the Series 1997-1 Taxable Surplus Sub-Account and the Series
1997-1 Taxable Reserve Account. In general, such transfers are intended to
allow the Corporation to redeem Taxable Auction Rate Series 1997-1 Notes to
the extent that revenues under the Indenture allocable to Taxable Notes
exceed scheduled debt service payments on the Taxable Series 1997-1 Notes,
payments on other Indenture Obligations and other expenses payable under
the Indenture. Such revenues could result in whole or in part from Student
Loans acquired with, and from investment earnings on, the proceeds of
Additional Notes. (Any Additional Notes will not be offered or sold
pursuant to this Prospectus.) See Appendix IX - "Summary of the Indenture
-- Funds and Accounts -- Surplus Fund" and "-- Reserve Fund."
Because of the uncertainties relating to the amounts and timing of
receipt of revenues under the Indenture, and the amounts and terms of
additional Indenture Obligations, if any, the amounts expected to be
available for such redemption in the Surplus Account cannot be definitively
stated. In addition, it is difficult to predict whether the Corporation
will elect to exercise such option. However, the Corporation expects that
such redemptions will occur.
From Unused Proceeds
Taxable Auction Rate Series 1997-1 Senior Notes of any series may, at
the Corporation's option, be redeemed, in whole or in part, on any Interest
Rate Adjustment Date for such series or on any regularly scheduled Interest
Payment Date for such series at a Redemption Price of 100% of Principal
Amount of such Notes to be redeemed, plus accrued interest thereon to the
Redemption Date, from proceeds of the Series 1997-1 Notes in the Series
1997-1 Taxable Acquisition Account that have not been used to acquire
Eligible Loans and from amounts in the Series 1997-1 Taxable Reserve
Account. See Appendix IX - "Summary of the Indenture -- Funds and Accounts
-- Acquisition Fund" and " -- Reserve Fund".
Tax Exempt Auction Rate Series 1997-1 Senior Notes of any series may,
at the Corporation's option, be redeemed, in whole or in part, on any
Interest Rate Adjustment Date for such series or on any regularly scheduled
Interest Payment Date for such series, and (if no Tax Exempt Auction Rate
Series 1997-1 Notes remain Outstanding) Tax Exempt Fixed Rate Series 1997-1
Notes may, at the Corporation's option, be redeemed, in whole or in part,
on any date, in each case at a Redemption Price of 100% of Principal Amount
of such Notes to be redeemed, plus accrued interest thereon to the
Redemption Date, from proceeds of the Series 1997-1 Notes in the Series
1997-1 Tax Exempt Acquisition Account that have not been used to acquire
Eligible Loans and from amounts in the Series 1997-1 Tax Exempt Reserve
Account. Such Series 1997-1 Notes shall be so redeemed on
________________, unless the Corporation delivers to the Trustee: (i) an
opinion of Bond Counsel stating in effect that such redemption is not
required pursuant to the Code and that failure to so redeem Tax Exempt
Series 1997-1 Notes will not adversely affect the tax exempt status of
interest on any Tax Exempt Series 1997-1 Notes for federal income tax
purposes, (ii) a Corporation certificate certifying that, based on a Cash
Flow Projection, the failure to so redeem Series 1997-1 Notes will not
materially adversely affect the Corporation's ability to pay Debt Service
on the Outstanding Notes and other Indenture Obligations, Carry-Over
Amounts (including accrued interest thereon) with respect to Outstanding
Notes, Administrative Expenses or Note Fees or to make required deposits to
the Rebate Fund, and (iii) written confirmation from each of the Rating
Agencies then rating the Series 1997-1 Notes to the effect that the failure
to redeem such Series 1997-1 Notes will not result in a reduction or
withdrawal of the rating of the Series 1997-1 Notes. See Appendix IX -
"Summary of the Indenture -- Funds and Accounts -- Acquisition Fund" and "
-- Reserve Fund".
Redemption of Series 1997-1 Notes Upon Reduction of Portfolio Balance
The Series 1997-1 Notes may, at the Corporation's option, be redeemed,
in whole but not in part, at a Redemption Price of 100% of Principal
Amount, plus accrued interest thereon to the Redemption Date, on any date
when the remaining aggregate outstanding principal balance of Student Loans
Financed with the proceeds of the Series 1997-1 Notes is less than 10% of
the amount deposited to the Acquisition Fund on the Date of Issuance.
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Optional Redemption
At the Corporation's option, Auction Rate Series 1997-1 Senior Notes
of any series may be redeemed on any Interest Rate Adjustment Date for such
series or on any regularly scheduled Interest Payment Date for such series,
in whole or in part, at a Redemption Price of 100% of Principal Amount of
such Notes to be redeemed, plus accrued interest thereon to the Redemption
Date.
At the Corporation's option, Tax Exempt Fixed Rate Series 1997-1
Senior Notes and Tax Exempt Series 1997-1 Subordinate Notes may be redeemed
at any time on and after December 1, 2007, in whole or in part, at the
following Redemption Prices (expressed as a percentage of Principal Amount)
plus accrued interest to the Redemption Date:
Redemption Period
(both dates inclusive) Redemption Price
---------------------- ----------------
December 1, 2007, through November 30, 2008 ___%
December 1, 2008, though November 30, 2009 ___%
December 1, 2009 and thereafter 100%
Notwithstanding the foregoing, no Series 1997-1 Notes shall be so
redeemed unless the Trustee receives a Corporation certificate certifying
that, based on a Cash Flow Projection, such redemption will not materially
adversely affect the Corporation's ability to pay Debt Service on the
Outstanding Notes and other Indenture Obligations, Carry-Over Amounts
(including accrued interest thereon) with respect to Outstanding Notes,
Administrative Expenses or Note Fees or to make required deposits to the
Rebate Fund.
Selection of Series 1997-1 Notes for Redemption
If less than all Outstanding Series 1997-1 Notes are to be redeemed,
the Principal Amounts of each series of Series 1997-1 Notes to be redeemed
shall be selected as follows, to the extent that the provisions of the
Indenture described under "Senior Asset Requirement" below will not be
violated thereby: either (1) except as otherwise specifically provided
above under "Special Redemption and Prepayment" or as described in clause
(2), to the extent Series 1997-1 Subordinate Notes are subject to
redemption, that Principal Amount thereof shall be redeemed which bears, as
nearly as practicable, the same proportion to the Principal Amount of all
Series 1997-1 Notes to be redeemed as the aggregate Principal Amount of
Outstanding Series 1997-1 Subordinate Notes bears to the aggregate
Principal Amount of all Outstanding Series 1997-1 Notes, or (2) if the
Trustee receives a Corporation certificate certifying that, based on a Cash
Flow Projection, a different proportion of Series 1997-1 Subordinate Notes
to be redeemed will not materially adversely affect the Corporation's
ability to pay Debt Service on the Outstanding Notes and other Indenture
Obligations, Carry-Over Amounts (including accrued interest thereon) with
respect to Outstanding Notes, Administrative Expenses or Note Fees or to
make required deposits to the Rebate Fund, Series 1997-1 Subordinate Notes
shall be redeemed in such principal amount as is designated by the
Corporation in such certificate. The remaining Series 1997-1 Notes to be
redeemed on a given Redemption Date shall be selected from the appropriate
series of Series 1997-1 Senior Notes.
If less than all Outstanding Series 1997-1 Senior Notes subject to
redemption are to be redeemed, and more than one series of Series 1997-1
Senior Notes is so subject, the Principal Amounts of each series of Series
1997-1 Notes to be redeemed shall be selected from each such series in such
Principal Amounts as the Corporation may designate or, in the absence of
such designation, from each such series in, as nearly as practicable, the
same proportion to the aggregate Principal Amount of all Outstanding Series
1997-1 Senior Notes to be redeemed as the aggregate Principal Amount of
Outstanding Series 1997-1 Senior Notes of such series bears to the
aggregate Principal Amount of all Outstanding Series 1997-1 Senior Notes
subject to such redemption.
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Notwithstanding the foregoing, if Series 1997-1 Subordinate Notes
cannot be redeemed due to the application of the provisions of the
Indenture described under "Senior Asset Requirement" below, but Series
1997-1 Senior Notes can be redeemed without violating such provisions, the
particular Series 1997-1 Notes to be redeemed shall be selected from the
Series 1997-1 Senior Notes according to the provisions described above.
If less than all of the Outstanding Series 1997-1 Notes of a given
series are to be redeemed, the particular Series 1997-1 Notes to be
redeemed shall be selected by the Trustee by lot in such manner as the
Trustee shall deem fair and appropriate and which may provide for the
selection for redemption of portions of the principal of Series 1997-1
Notes in authorized denominations.
Senior Asset Requirement
No redemption or prepayment of any Series 1997-1 Note under any of the
foregoing provisions is to be made unless, after giving effect to the
redemption or prepayment: (a) in the case of the redemption or prepayment
of Series 1997-1 Senior Notes, either the Senior Asset Requirement will be
met or the Senior Percentage will be greater than it would have been
without such redemption or prepayment, and (b) in the case of the
redemption or prepayment of Series 1997-1 Subordinate Notes, the Senior
Asset Requirement will be met. Compliance with the Senior Asset
Requirement will be determined as of the date of the selection of Series
1997-1 Notes to be redeemed or as of the date on which moneys are
transferred to the Retirement Account to make any prepayment, and any
failure to meet the Senior Asset Requirement as of the redemption date or
prepayment date, as applicable, will not affect such determination. In
general, the "Senior Asset Requirement" requires that the Senior Percentage
is at least ___% and the Subordinate Percentage is at least ___%, although
each such percentage may be lowered under the conditions prescribed in the
Indenture. See "Glossary of Certain Defined Terms" and Appendix IX -
"Summary of the Indenture -- Redemption, Prepayment or Purchase of Notes;
Senior Asset Requirement".
Notice and Effect of Redemption
Notice of redemption of the Series 1997-1 Notes shall be given by
first class mail, mailed not less than 15 days (in the case of Auction Rate
Series 1997-1 Senior Notes) or 30 days (in the case of any other Series
1997-1 Notes), as the case may be, prior to the date fixed for redemption
to each Holder (which initially will be DTC or its nominee) of Series
1997-1 Notes to be redeemed at the address of such Holder appearing in the
Note Register; but no defect in or failure to give such mailed notice of
redemption shall affect the validity of proceedings for the redemption of
any Series 1997-1 Note not affected by such defect or failure. All notices
of redemption shall state: (i) the Redemption Date; (ii) the Redemption
Price; (iii) the name, Stated Maturity and CUSIP numbers of the Series
1997-1 Notes to be redeemed, the principal amount of Series 1997-1 Notes of
each series to be redeemed and, if less than all Outstanding Notes of such
series are to be redeemed, the identification (and, in the case of partial
redemption, the respective principal amounts) of the Series 1997-1 Notes to
be redeemed; (iv) that, on the Redemption Date, the Redemption Price of and
accrued interest on each such Series 1997-1 Note will become due and
payable and interest thereon shall cease to accrue on and after such date;
(v) the place or places where such Series 1997-1 Notes are to be
surrendered for payment of the Redemption Price thereof and accrued
interest thereon; and (vi) if it be the case, that such Series 1997-1 Notes
are to be redeemed by the application of certain specified trust moneys and
for certain specified reasons.
Notice of redemption having been given as provided above, the Series
1997-1 Notes designated in such notice shall become due and payable at the
applicable Redemption Price, plus interest accrued thereon to the
Redemption Date, and, upon surrender in accordance with such notice, shall
be so paid, and thereafter such Series 1997-1 Notes shall cease to accrue
interest.
No such notice shall be required with respect to prepayments of the
Taxable LIBOR Rate Series 1997-1 Notes as described above under "Special
Redemption and Prepayment - From Principal Repayments."
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APPLICATION OF SERIES 1997-1 NOTE PROCEEDS
The Original Issuer and the Corporation intend to use the proceeds of
the sale of the Series 1997-1 Notes in the following amounts for the following
purposes:
(1) $___________ will be deposited in the Series 1997-1 Tax
Exempt Acquisition Account and used as follows:
(a) approximately $___________ will be used on the Date of
Issuance to refinance approximately $_______ aggregate principal
amount of Eligible Loans previously acquired or originated by the
Original Issuer; and
(b) the remainder will be used to acquire or originate
additional Eligible Loans;
(2) $___________ will be deposited in the Series 1997-1 Taxable
Acquisition Account and used as follows:
(a) approximately $___________ will be used on the Date of
Issuance to refinance approximately $_______ aggregate principal
amount of Eligible Loans previously acquired or originated by or
on behalf of the Original Issuer; and
(b) the remainder will be used to acquire or originate
additional Eligible Loans; and
(3) $_________ will be deposited in the Reserve Fund.
It is expected that immediately after the deposit of the proceeds of
the Series 1997-1 Notes as described above, the principal amount of, and accrued
interest on and Special Allowance Payments with respect to, Financed Eligible
Loans, together with the remaining proceeds in the Acquisition Fund and the
Balance in the Reserve Fund, will equal ___% of the principal amount of the
Series 1997-1 Notes.
The characteristics as of May 31, 1997 of the Eligible Loans expected
to be Financed on the Date of Issuance with proceeds deposited to the Series
1997-1 Tax Exempt Acquisition Account and to the Series 1997-1 Taxable
Acquisition Account (aggregating approximately $___________) are more
particularly described under "Characteristics of the Initial Financed Student
Loans." These Eligible Loans currently secure outstanding obligations of the
Original Issuer used to acquire such Student Loans, which will be refunded from
the proceeds of the Series 1997-1 Notes.
The Corporation expects the remaining proceeds deposited to the Series
1997-1 Tax Exempt Acquisition Account (approximately $___________________ or __%
of the Series 1997-1 Note proceeds) to be used to purchase Eligible Loans (see
"Glossary of Certain Defined Terms") from Lenders or to originate Eligible Loans
on or before [June 30, 2002], approximately according to the following schedule:
<TABLE>
<CAPTION>
Amount
By June 30 (millions)
---------- ----------
<S> <C>
1998 $62.43
1999 60.89
2000 62.42
2001 63.98
2002 [___]
</TABLE>
-50-
<PAGE>
If such proceeds are not used to purchase Eligible Loans on or before
_____________, 2002, such proceeds may be transferred to the Retirement Account
and used to redeem Tax Exempt Auction Rate Series 1997-1 Senior Notes and, if no
Tax Exempt Auction Rate Series 1997-1 Senior Notes remain Outstanding, Tax
Exempt Fixed Rate Series 1997-1 Notes. See "Description of Series 1997-1 Notes -
Special Redemption and Prepayment - From Unused Proceeds" herein. Investors
holding such Tax Exempt Series 1997-1 Notes (particularly Tax Exempt Fixed Rate
Series 1997-1 Notes) which are redeemed may be unable to reinvest the proceeds
of the redemption at the same yield as the Tax Exempt Series 1997-1 Notes. Also,
depending on the price at which investors purchased such Series 1997-1 Notes,
their yield may be adversely affected by such early redemption.
The Corporation expects the remaining proceeds deposited to the Series
1997-1 Taxable Acquisition Account (approximately $___________________ or __% of
the Series 1997-1 Note proceeds) to be used to purchase Eligible Loans from
Lenders or to originate Eligible Loans on or before [September 1, 1998]. If such
proceeds are not used to purchase Eligible Loans on or before [September 1,
1998], such proceeds may be transferred to the Retirement Account and used to
redeem Taxable Auction Rate Series 1997-1 Notes. See "Description of Series
1997-1 Notes - Special Redemption and Prepayment - From Unused Proceeds" herein.
Investors holding such Taxable Auction Rate Series 1997-1 Notes which are
redeemed may be unable to reinvest the proceeds of the redemption at the same
yield as the Taxable Auction Rate Series 1997-1 Notes. Also, depending on the
price at which investors purchased such Series 1997-1 Notes, their yield may be
adversely affected by such early redemption.
For a more detailed description of the Original Issuer's programs of
Financing Eligible Loans (which will be continued by SLFC on behalf of the
Corporation pursuant to the Servicing Agreement), Eligible Loans expected to be
Financed after the Date of Issuance, and possible limitations on the expenditure
of these proceeds as expected, see "Description of Financed Eligible Loan
Program." Use of the moneys in the Acquisition Fund pending Financing of
Eligible Loans is more particularly described in Appendix IX -- "Summary of the
Indenture -- Funds and Accounts -- Acquisition Fund."
Balances in the Acquisition Fund representing proceeds of the Series
1997-1 Notes not used to acquire Eligible Loans on the Date of Issuance, and
Balances in the Reserve Fund, are expected to be invested pending use for
Financing Eligible Loans under one or more investment agreements meeting the
requirements of the Indenture. Each investment agreement will require the
Investment Provider (a financial institution with which such proceeds are
invested) to repay such proceeds when requested by the Corporation or the
Trustee (subject to such limitations as may be provided therein), and to pay
interest on such invested proceeds periodically. Each Investment Provider will
be a party which meets the Rating Agencies' criteria for creditworthiness or
which has pledged collateral satisfactory to the Rating Agencies to secure its
repayment obligations. See Appendix IX - "Summary of the Indenture --
Investments".
Although the Corporation expects that the investment return on the
Balances in the Acquisition Fund pending its use to Finance Eligible Loans,
together with other Pledged Revenues and Pledged Funds and Accounts (each as
defined in "Source of Payment and Security for the Notes -- General") under the
Indenture (including Financed Eligible Loans), will be sufficient to meet
principal and interest payments on the Series 1997-1 Notes and required expenses
under the Indenture, various risk factors could adversely affect that
expectation. See "Risk Factors."
The Costs of Issuance of the Series 1997-1 Notes will be paid by the
Original Issuer from other moneys available therefor.
-51-
<PAGE>
SOURCE OF PAYMENT AND SECURITY FOR THE NOTES
General
The Notes will be limited obligations of the Corporation payable
solely from the Trust Estate created under the Indenture, consisting of
certain revenues ("Pledged Revenues") and Funds and Accounts pledged under
the Indenture (the "Pledged Funds and Accounts", which do not include the
Rebate Fund). The Pledged Revenues include: (i) payments of interest and
principal made by obligors of Financed Student Loans, (ii) Guarantee
Payments made by the Guarantee Agencies to or for the account of the
Trustee as the holder of defaulted Financed Student Loans, (iii) interest
subsidy payments and Special Allowance Payments made by the Department of
Education to or for the account of the Trustee as the holder of Financed
Student Loans (excluding any Special Allowance Payments and interest
subsidy payments accrued prior to the date of Financing the related Student
Loan), (iv) income from investment of moneys in the Pledged Funds and
Accounts (except to the extent such income is required to be deposited in
the Rebate Fund), (v) payments from a Swap Counterparty under a Swap
Agreement, (vi) proceeds of any sale or assignment by the Corporation of
any Financed Student Loans, and (vii) available Note proceeds. In
addition, the Pledged Revenues with respect to one or more series of Notes
may include payments made by a Credit Facility Provider pursuant to a
Credit Enhancement Facility. No Credit Enhancement Facility or Swap
Agreement is being delivered in connection with the issuance of the Series
1997-1 Notes, and it is not expected that any such revenues will be
available to pay the Series 1997-1 Notes.
The principal of, premium, if any, and interest on the Notes will
be secured by a pledge of and a security interest in all rights, title,
interest and privileges of the Corporation (1) with respect to Financed
Student Loans, in, to and under any Servicing Agreement, the Student Loan
Purchase Agreements, the Guarantee Agreements and the Federal Reimbursement
Contracts; (2) in, to and under all Financed Student Loans (including the
evidences of indebtedness thereof and related documentation), any Swap
Agreement and (subject to the limitations therein or in the Indenture
limiting the benefits thereunder to the Notes of one or more series) any
Credit Enhancement Facility; and (3) in and to the proceeds from the sale
of the Notes (until expended for the purpose for which issued) and the
Pledged Revenues, moneys, evidences of indebtedness and securities in the
Pledged Funds and Accounts. The security interest in revenues, moneys,
evidences of indebtedness and, unless registered in the name of the
Trustee, securities payable into the various Funds and Accounts does not
constitute a perfected security interest until received by the Trustee.
Certain Pledged Revenues are subject to withdrawal from the Pledged Funds
and Accounts, to prior applications to pay Costs of Issuance,
Administrative Expenses and Note Fees, and to certain other applications as
described under "Description of Flow of Revenues in the Funds" below and
Appendix IX -- "Summary of the Indenture -- Funds and Accounts".
Additional Indenture Obligations
The Indenture provides that, upon the satisfaction of certain
conditions, the Corporation may issue one or more series of Additional
Notes thereunder. (Any Additional Notes will not be offered or sold
pursuant to this Prospectus.) Additional Notes may be issued as Senior
Notes on a parity basis with the Series 1997-1 Senior Notes; as Subordinate
Notes on a parity basis with the Series 1997-1 Subordinate Notes; or as
Class C Notes on a subordinate basis to the Senior Notes and the
Subordinate Notes. In addition, the Corporation may enter into Swap
Agreements and may obtain Credit Enhancement Facilities from one or more
Credit Facility Providers. The Corporation's obligations under the Swap
Agreements, and its obligations to pay the premiums or fees of Credit
Facility Providers and, if applicable, to reimburse payments made under
Credit Enhancement Facilities, may be parity obligations with the Senior
Notes (such Other Senior Obligations, together with the Senior Notes, being
referred to herein as Senior Obligations) or parity obligations with the
Subordinate Notes (such Other Subordinate Obligations, together with the
Subordinate Notes, being referred to herein as Subordinate Obligations).
The Senior Obligations, the Subordinate Obligations, and any Class C Notes
are referred to herein as "Indenture Obligations". See Appendix IX --
"Summary of the Indenture -- Additional Notes" and "-- Covenants -- Credit
Enhancement Facilities and Swap Agreements".
-52-
<PAGE>
Under the Indenture, the Corporation may not execute a Swap
Agreement unless the Swap Counterparty's obligations are rated by each
Rating Agency not lower than in its third highest Specific Rating Category.
No Swap Agreement shall be a Senior Obligation unless, as of the date the
Corporation enters into such Swap Agreement, the Senior Asset Requirement
will be met and the Trustee shall have received written confirmation from
each Rating Agency that the execution and delivery of the Swap Agreement
will not cause the reduction or withdrawal of any rating or ratings then
applicable to any Outstanding Notes. No Swap Agreement is being entered
into in connection with the issuance of the Series 1997-1 Notes.
No limitations are imposed by the Indenture on the ability of the
Corporation to obtain Credit Enhancement Facilities or to enter into
agreements with respect thereto, or as to the identity or creditworthiness
of any Credit Facility Provider. Any Credit Enhancement Facility may be
obtained for the sole benefit of the series of Notes designated therein, in
which event payments under such Credit Enhancement Facility would not be
available for the payment of principal of, premium, if any, or interest on
any other series of Notes. However, any payments required to be made to
any Credit Facility Provider would be parity obligations with the other
Senior Obligations or Subordinate Obligations, as the case may be, payable
from any revenues available to pay such Indenture Obligations. No Credit
Enhancement Facility is being entered into in connection with the issuance
of the Series 1997-1 Notes and it is not expected that any Credit
Enhancement Facility which may be obtained would be for the benefit of the
Series 1997-1 Notes.
The Indenture also permits the Corporation to issue Class C Notes
from time to time upon satisfaction of the conditions specified therein.
See Appendix IX -- "Summary of the Indenture -- Additional Notes".
Priorities
The Series 1997-1 Senior Notes (and any other Senior Obligations)
are entitled to payment and certain other priorities over the Series 1997-1
Subordinate Notes (and any other Subordinate Obligations). Current
payments of interest and principal due on the Subordinate Notes on an
Interest Payment Date or Principal Payment Date will be made (on a parity
basis with any other Subordinate Obligations) only to the extent there are
sufficient moneys available for such payment, after making all such
payments due on such date with respect to Senior Obligations. So long as
any Senior Obligations remain Outstanding under the Indenture, the failure
to make interest or principal payments with respect to Subordinate Notes
(including the Series 1997-1 Subordinate Notes) will not constitute an
Event of Default under the Indenture. In the event of an acceleration of
the Notes, the principal of and accrued interest on the Subordinate Notes
will be paid (on a parity basis with any other Subordinate Obligations)
only to the extent there are moneys available under the Indenture after
payment of the principal of, and accrued interest on, all Senior Notes and
the satisfaction of all other Senior Obligations. In addition, holders of
Senior Notes and Beneficiaries of other Senior Obligations are entitled to
direct certain actions to be taken by the Trustee prior to and upon the
occurrence of an Event of Default, including election of remedies. See
Appendix IX -- "Summary of the Indenture -- Remedies".
Senior Obligations and Subordinate Obligations are entitled to
payment and certain other priorities over any Class C Notes. Principal of
and interest on the Class C Notes are not payable from moneys in the Note
Fund or the Reserve Fund, but are payable solely from amounts available
therefor in the Surplus Fund. See Appendix IX -- "Summary of the Indenture
-- Funds and Accounts -- Surplus Fund".
Description of Flow of Revenues in the Funds
The Indenture establishes a Revenue Fund which is divided into a
Repayment Account and an Income Account. Except for certain amounts
received with respect to Financed Student Loans required to be credited to
the Surplus Fund, the Indenture requires the deposit into the Revenue Fund
of (i) all amounts received as principal and interest in repayment of
Financed Student Loans, including all federal interest subsidy payments,
Guarantee Payments and Special Allowance Payments received with respect to
each Financed Student Loan (excluding Special
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<PAGE>
Allowance Payments and federal interest subsidy payments that accrued prior
to the date on which such Student Loans were Financed), (ii) except as
otherwise provided in a Supplemental Indenture, proceeds of the resale to a
Lender of any Financed Student Loans pursuant to the Lender's repurchase
obligation under the applicable Student Loan Purchase Agreement, (iii) all
amounts received as earnings on or income from Investment Securities in the
Revenue Fund, the Surplus Fund, the Reserve Fund, the Administration Fund
and the Note Fund, and (iv) any amounts permitted to be transferred to the
Revenue Fund from the Rebate Fund. The Trustee is required to credit all
such revenues received as payments of principal of Financed Student Loans
to the Repayment Account, and to credit all other such revenues and amounts
(including revenues received as payments of interest on or Special
Allowance Payments with respect to Financed Student Loans and income from
Investment Securities) to the Income Account. The Indenture requires the
Trustee to transfer moneys on a monthly basis (after taking into account
any periodic rebate fee payment required to be made in respect of Student
Loans Financed under the Indenture), first from the Repayment Account and
then from the Income Account, to the following Funds and Accounts in the
following order: the Rebate Fund, the Interest Account for the payment of
Senior Obligations, the Principal Account for the payment of Senior
Obligations, the Retirement Account for the redemption of Senior Notes, the
Interest Account for the payment of Subordinate Obligations, the Principal
Account for the payment of Subordinate Obligations, the Retirement Account
for the redemption of Subordinate Notes, the Administration Fund (but only
from the Income Account), the Reserve Fund, the Principal Account (relating
to cumulative sinking fund installments with respect to Subordinate Term
Notes to be redeemed on a Sinking Fund Payment Date), the Special
Redemption and Prepayment Account and the Surplus Account. In addition,
any amounts payable by a Swap Counterparty pursuant to a Swap Agreement are
required to be credited directly to the Interest Account.
Moneys in the Administration Fund may be used, as provided in the
Indenture, to pay Costs of Issuance, Note Fees and Administrative Expenses.
Balances in the Surplus Fund shall be used first to make up
deficiencies in, or make required transfers to, the Rebate Fund, the Note
Fund, the Administration Fund and the Reserve Fund. Balances in the
Surplus Fund may also be applied, as determined by the Corporation from
time to time, to the payment of principal of or interest on Class C Notes
when due or upon the redemption thereof at the option of the Corporation;
provided that the conditions described under Appendix IX -- "Summary of the
Indenture -- Funds and Accounts -- Surplus Fund" are met.
If the Trustee shall have first certified that no deficiencies
exist in any of the Rebate Fund, the Note Fund, the Reserve Fund or the
Special Redemption and Prepayment Account, and shall have received certain
certifications from the Corporation, Balances in the Surplus Account may be
used to redeem Notes (including Series 1997-1 Notes as described under
"Description of Series 1997-1 Notes -- Special Redemption and Prepayment --
From Moneys in the Surplus Account") or to purchase Notes or may be: (a)
used to acquire Student Loans meeting the requirements of clauses (A) (1)
and (2) or clause (B) of the definition of "Eligible Loans" (see "Glossary
of Certain Defined Terms"); or (b) released from the Indenture to be used
for certain other authorized purposes; provided, however, that the
Indenture prohibits the use of the Surplus Account to acquire Student Loans
that are not Eligible Loans and for the purposes specified in clause (b)
above unless, after taking into account any such application (i) the Senior
Percentage will be not less than ___%, and (ii) the Subordinate Percentage
will be not less than ___%; provided that such percentages may be lower
upon receipt of certain approvals from each Rating Agency and, under
certain circumstances, consent of Other Beneficiaries.
The Indenture establishes a Rebate Fund into which the Trustee is
required to make annual deposits from Balances in the Revenue Fund, the
Surplus Fund, the Reserve Fund, the Administration Fund, the Bond Fund and
the Acquisition Fund, in that order, equal to the amount computed under
Section 148(f) of the Code as being subject to rebate to the United States
(the "Rebate Amount") and certain amounts constituting Excess Earnings on
the Financed Student Loans. The Trustee is required to pay to the United
States Treasury, at least once every five years, an amount which ensures
that not less than 90% of the cumulative Rebate Amount will have been paid
to the United States Treasury. The Trustee is required to consult with
Bond Counsel and take such action as may be required under the Code (which
may include forgiveness of principal of Financed Student Loans or payments
to the
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<PAGE>
United States Treasury) with respect to Excess Earnings. Under certain
circumstances, including delivery to the Trustee of a favorable opinion of
Bond Counsel, certain amounts determined not to be subject to rebate or
other disposition may be transferred from the Rebate Fund to the Income
Account.
Balances in the Reserve Fund shall be used and applied solely for
the purpose of paying Debt Service on the Senior Notes and the Subordinate
Notes, paying net amounts due with respect to other Senior Obligations or
Subordinate Obligations or for transfer to the Rebate Fund to the extent
provided in the Indenture.
For a more detailed description of the receipt and application of
moneys in the Revenue Fund, the Acquisition Fund, the Note Fund, the Rebate
Fund, the Reserve Fund, the Administration Fund and the Surplus Fund, see
Appendix IX -- "Summary of the Indenture -- Funds and Accounts".
THE ORIGINAL ISSUER AND THE CORPORATION
The Original Issuer is a South Dakota nonprofit corporation
organized in December 1978, at the request of the then Governor of the
State, to provide a statewide student loan acquisition program pursuant to
the provisions of the Higher Education Act and Section 150(d) of the Code.
Former Governor Wollman designated the Original Issuer as the single
nonprofit private agency in the State acting as an eligible lender in
connection with the student loan program provided for by the Higher
Education Act. The Original Issuer has received an Internal Revenue
Service determination that, based on its original organization and
purposes, it is a tax-exempt organization under Section 501(c)(3) of the
Code.
As required by Section 150(d) of the Code, the Original Issuer's
Articles of Incorporation provide that the Original Issuer is organized
exclusively for the purpose of acquiring student loan notes incurred under
the Higher Education Act, and that income of the Original Issuer may be
used only for: (i) the payment of expenses and debt service on bonds or
notes issued by the Original Issuer or the creation of reserves for such
purposes; (ii) the acquisition of additional student loan notes; or (iii)
payment to the United States. In connection with an election under Section
150(d)(3) of the Code to terminate its status as a corporation described in
Section 150(d), the Original Issuer will enter into an agreement with
Student Loan Finance Corporation, a newly organized South Dakota
corporation and wholly-owned subsidiary of the Original Issuer ("SLFC"),
pursuant to which the Original Issuer will transfer all of its student
loans (including its rights in Financed Student Loans), student loan
acquisition and servicing operations and physical facilities, together with
certain other assets (including the Original Issuer's interest in the other
assets comprising the Trust Estate), to SLFC and SLFC will assume all of
the Original Issuer's obligations with respect to the Notes, the Indenture,
the Trust Estate and all related contracts. See "The Servicer" herein.
The Original Issuer will transfer such assets without recourse, and will be
released from all obligations under the Indenture or otherwise with respect
to the Notes. Concurrently with such transfer, the Original Issuer will
amend its articles of incorporation to amend its corporate purpose and
change its name to Great Plains Education Foundation, Inc. Under Section
150(d)(3) of the Code, the Original Issuer must continue to be an
organization described in Section 501(c)(3) of the Code. No determination
has been received from the Internal Revenue Service as to the Original
Issuer's qualification as an organization described in Section 501(c)(3) of
the Code after the amendment of its articles of incorporation.
Immediately upon such transfer, SLFC will transfer all its right,
title and interest in the Financed Student Loans and other assets of the
Trust Estate to the Corporation, which is a newly organized, bankruptcy-
remote, limited purpose Delaware corporation and wholly-owned subsidiary of
SLFC, and the Corporation will assume all of SLFC's obligations under the
Indenture and otherwise with respect to the Notes, the Trust Estate and the
related contracts. SLFC will also transfer such assets without recourse,
and will be released from all obligations under the Indenture or otherwise
with respect to the Notes (except in its capacity as Servicer). Neither
the Original Issuer nor SLFC (except in its capacity as Servicer) will be
obligated under the Indenture.
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<PAGE>
The Corporation was organized as a limited purpose corporation
and has covenanted in the Indenture that it will not engage in any business
other than financing, originating, purchasing, owning, selling and managing
Student Loans in the manner contemplated by its certificate of
incorporation and the Indenture and activities incidental thereto.
The Corporation will have no substantial assets other than those
transferred to it from SLFC and pledged under the Indenture. The
Corporation will have no full-time employees. Certain responsibilities of
the Corporation under the Indenture will be administered by SLFC. See "The
SLFC Servicing Agreement" and "Certain Relationships Among Financing
Participants."
THE SERVICER
General
SLFC will be a newly organized South Dakota corporation. In
connection with the Original Issuer's election under Section 150(d)(3) of
the Code, all of the assets of the Original Issuer used in its business of
acquiring, originating, holding, servicing and collecting student loans,
including its physical facilities, computer hardware and software, and
certain other assets will be transferred to SLFC. At that time, all of the
Original Issuer's employees are expected to become employees of SLFC.
Immediately after such transfer, SLFC expects to operate the student loan
business formerly operated by the Original Issuer and service and collect
the Financed Eligible Loans in substantially the same manner (including
using the same staff, offices and computer hardware and software) in which
the Original Issuer currently administers its program and services and
collects such loans.
The Original Issuer has operated as a secondary market for
student loans since 1979. As of _____, 1997, the Original Issuer had a
staff of ____ persons. The Original Issuer services the student loans
which it owns and has also from time to time serviced student loans owned
by other lenders in anticipation of sale to the Original Issuer. The
Original Issuer utilizes its own computer hardware and software systems
designed specifically for student loan servicing. The Original Issuer
installed the original hardware in 1979 and since then has added additional
hardware or replaced hardware as needed. As of __________, 1997, the
Original Issuer owned and was servicing student loans to approximately
_____ borrowers representing approximately $_________ outstanding principal
amount of student loans. As of such date, the Original Issuer was not
servicing student loans held by other lenders.
The Original Issuer has financed its acquisition of student loans
through the issuance of its student loan revenue bonds, student loan asset-
backed notes and other evidences of indebtedness. The Original Issuer has
issued approximately ___ billion aggregate principal amount of bonds and
notes, of which $______ principal amount were outstanding as of
_____________, 1997. All of such outstanding bonds and notes will be
refunded with a portion of the proceeds of the Series 1997-1 Notes. At the
time of the transfer of the assets described above to SLFC, the Original
Issuer expects to cease its participation in the student loan business.
The information included above concerning the Original Issuer has
been included solely to describe the expected future operations of SLFC.
The Original Issuer will not transfer all of its cash and investments to
SLFC. None of the assets retained by the Original Issuer will be available
to SLFC or for the payment of the Notes. The Original Issuer will have no
obligation with respect to (i) the Financed Eligible Loans or the servicing
thereof, (ii) the payment of the Series 1997-1 Notes, or (iii) the
administration of the Indenture. Moreover, the Original Issuer's transfer
of assets to SLFC will be without recourse or warranty. Thus, in the event
of a failure of the Original Issuer's hardware and software systems to
adequately function, or any other factor which adversely affects the value
of the assets transferred to SLFC or SLFC's ability to perform its
obligations under the SLFC Servicing Agreement, the Original Issuer would
have no obligation or liability with respect thereto.
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<PAGE>
Delinquency and Loan Loss Experience
The following tables provide information regarding the
delinquency status of the student loan portfolio of the Original Issuer
(which has been serviced by the Original Issuer) as of May 31, 1997 and
June 30, 1996, 1995, 1994 and 1993. For each delinquency status listed
(based on number of days delinquent and claims filed), the tables show the
aggregate principal amount of Student Loans in each delinquency status as
of each date; the percent of the aggregate principal amount of the Original
Issuer's Student Loan portfolio in repayment, deferment, forbearance and
claims status as of each date represented by such principal amounts; and
the percent of the aggregate principal amount of the Original Issuer's
entire Student Loan portfolio as of each date represented by such principal
amounts. The Original Issuer's management believes that the distribution
of delinquent loans in the Original Issuer's Student Loan portfolio has
been consistent over the last five years and it is unaware of any current
trends that are expected to materially alter such distributions or
materially impact the future performance of the Financed Eligible Loans.
Notwithstanding the above, no assurance can be made that any such trends
will continue or not deteriorate.
Distribution of Original Issuer's Student Loan Portfolio by Delinquency Status
As of May 31, 1997 and June 30, 1996, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Delinquency Status May 31, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
- --------------------------------------------------------------------------------------------------------------
Principal Amount
- ----------------
<S> <C> <C> <C> <C> <C>
31 to 60 days $15,591,664 $17,766,179 $14,077,909 $13,639,924 $12,866,442
61 to 90 days 7,653,626 7,666,789 6,550,528 6,212,040 5,843,349
91 to 120 days 5,594,082 4,664,322 3,834,229 3,633,351 2,770,248
121 to 180 days 6,976,065 6,339,235 5,817,809 5,225,322 4,150,481
181 to 270 days 2,197,429 2,579,598 2,319,294 1,398,039 1,400,538
Over 270 days 2,132 3,532 0 147 4,227
Claims filed, not yet paid 1,602,799 1,193,954 1,200,925 1,460,674 2,096,725
--------------------------------------------------------------------------
Total $39,617,797 $40,212,609 $33,800,694 $31,569,497 $29,132,010
==========================================================================
Percent of Outstanding
- ----------------------
Principal - Repayment
- ---------------------
Deferment, Forbearance and
- --------------------------
Claim Status Loans Only
- -----------------------
31 to 60 days 3.1% 3.7% 3.5% 3.8% 3.9%
61 to 90 days 1.5 1.6 1.6 1.7 1.8
91 to 120 days 1.1 1.0 1.0 1.0 0.8
121 to 180 days 1.4 1.3 1.5 1.5 1.2
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
181 to 270 days 0.4 0.5 0.6 0.4 0.4
Over 270 days 0.0 0.0 0.0 0.0 0.0
Claims filed, not yet paid 0.3 0.2 0.3 0.4 0.6
------------------------------------------------------------------------------
Total 7.8% 8.3% 8.5% 8.8% 8.7%
==============================================================================
Percent of Outstanding
- ----------------------
Principal - Entire Portfolio
- ----------------------------
31 to 60 days 2.8% 3.3% 3.2% 3.5% 3.6%
61 to 90 days 1.4 1.4 1.5 1.6 1.6
91 to 120 days 1.0 0.9 0.9 0.9 0.8
121 to 180 days 1.2 1.2 1.3 1.3 1.2
181 to 270 days 0.4 0.5 0.5 0.4 0.4
Over 270 days 0.0 0.0 0.0 0.0 0.0
Claims filed, not yet paid 0.3 0.2 0.3 0.4 0.6%
------------------------------------------------------------------------------
Total 7.1% 7.5% 7.7% 8.1% 8.2%
==============================================================================
</TABLE>
The following tables provide information regarding principal
losses relating to the Original Issuer's Student Loan portfolio (which has
been serviced by the Original Issuer) for the 11 months ended May 31, 1997
and for each of the years ended June 30, 1993 through 1996. The first
table shows the aggregate principal amount of losses during each period,
and the breakdown of such losses between the amount representing the two
percent portion of default claims filed with a Guarantee Agency which is
not paid by the Guarantee Agency with respect to loans made after September
30, 1993, and the amount representing other principal write-offs (i.e., for
loans that may have lost Guarantee eligibility) net of recoveries. The
second table shows the percent of the Original Issuer's entire Student Loan
portfolio end-of-period balances represented by the aggregate losses listed
in the first table during the relevant period. Subject to compliance with
Department of Education and Guarantee Agency requirements, student loans
made under the Federal Family Education Loan Program prior to October 1,
1993 are entitled to 100% guarantee coverage for defaulted loans while
student loans made on or after that date are entitled to 98% coverage. The
Original Issuer's management expects that overall write-offs of the
portfolio related to this two percent difference will increase over time as
a greater percentage of the portfolio consists of loans made on or after
October 1, 1993. The Original Issuer's management believes that the amount
of other write-offs during this period has been consistent and immaterial
and it is unaware of any current trends that are expected to materially
alter the loss experience or materially impact the future performance of
the Financed Eligible Loans. Notwithstanding the above, no assurance can
be made that any such trends will continue or not deteriorate.
-58-
<PAGE>
Original Issuer's Student Loan Portfolio Principal Losses
For the 11 Months Ended May 31, 1997 and
Each of the Years Ended June 30, 1993 Through 1996
<TABLE>
<CAPTION>
Total
2% Claim Losses on 98% Other Principal Write-Offs, Principal
Guaranteed Loans Net of Recoveries Losses
---------------------- ---------------------------- ---------
Principal Amounts
- -----------------
<S> <C> <C> <C>
For the 11 Months Ended
May 31, 1997 $82,866 $ 6,920 $89,786
For the Fiscal Year Ended:
June 30, 1996 56,730 20,484 77,214
June 30, 1995 10,266 9,211 19,477
June 30, 1994 0 3,778 3,778
June 30, 1993 0 55 55
Percentage (Annualized) of
Principal Losses to End-of-
Period Portfolio Balances
- ----------------------------
For the 11 Months Ended
May 31, 1997 0.016% 0.001% 0.017%
For the Fiscal Year Ended:
June 30, 1996 0.011% 0.004% 0.015%
June 30, 1995 0.002% 0.002% 0.004%
June 30, 1994 0.000% 0.001% 0.001%
June 30, 1993 0.000% 0.000% 0.000%
</TABLE>
The data presented in the foregoing tables are for illustrative
purposes only and there is no assurance that the delinquency and loss
experience of the Financed Student Loans will be similar to that set forth
above.
THE SLFC SERVICING AGREEMENT
In General
The Corporation and the Trustee will enter into a Servicing
Agreement, dated as of _________ 1, 1997 (the "SLFC Servicing Agreement"),
with SLFC. A form of the SLFC Servicing Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
The following summary describes certain provisions of the SLFC Servicing
Agreement. The summary does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all of the provisions of
the SLFC Servicing Agreement.
-59-
<PAGE>
Pursuant to the SLFC Servicing Agreement, SLFC agrees to provide
services to the Corporation and the Trustee in connection with the
origination and acquisition of Student Loans to be Financed, to commence
servicing the Financed Student Loans as of the day they are Financed and to
service the Financed Student Loans, all in accordance with the SLFC
Servicing Agreement. SLFC may perform all or part of its origination,
acquisition, and servicing activities through a subcontractor. SLFC is
required to perform or cause its subcontractor to perform all services
under the SLFC Servicing Agreement in compliance with the Higher Education
Act, applicable requirements of the Guarantee Agency and all other
applicable federal, state and local laws and regulations. SLFC will be
responsible for the performance of its obligations under the SLFC Servicing
Agreement, whether such obligations are performed by SLFC or by its
subcontractor, and SLFC will be responsible for any fees and payments
required by the subcontractor. The SLFC Servicing Agreement requires a
subcontractor to be subject to the same obligations relating to audits,
examinations and inspections as to which SLFC is subject. SLFC also agrees
to perform various duties of the Corporation under the Indenture.
Acquisition Process
Unless and until otherwise directed in writing by the
Corporation, SLFC agrees to provide to the Trustee all certificates and
directions required to be delivered by the Corporation to the Trustee under
the Indenture in connection with the Financing through acquisition of
Eligible Loans and Student Loans thereunder. SLFC also agrees to work with
the Lenders to obtain from each Lender loan documentation and information
relating to each Student Loan to be Financed and to establish and maintain
all records delivered to SLFC with respect to each Financed Student Loan,
and complete records of SLFC's servicing of the Financed Student Loan from
the date SLFC's servicing commences. However, SLFC will not conduct a
complete file and note examination of each Student Loan to be Financed.
Origination Process
Unless and until otherwise directed in writing by the
Corporation, SLFC agrees to provide to the Trustee all certificates and
directions required to be delivered by the Corporation to the Trustee under
the Indenture in connection with the Financing through origination of
Eligible Loans and Student Loans thereunder. SLFC also agrees to provide
disbursement and origination services in connection with the origination
and disbursement of Eligible Loans under the Indenture.
Servicing
SLFC agrees to perform all servicing obligations relating to the
Financed Student Loans required of the Corporation or the Trustee, or which
the Corporation or the Trustee is required to cause the Servicer to
perform. The SLFC Servicing Agreement specifies various activities and
obligations to be performed by SLFC in servicing the Financed Student
Loans. These activities and obligations include, without limitation, file
maintenance; maintaining Insurance and Guarantee coverage on Financed
Student Loans; handling borrower requests for forbearance and deferments;
exercising due diligence (within the meaning of the Higher Education Act
and the Guarantee Program regulations) in the servicing, administration and
collection of all Financed Student Loans; collecting payments of principal
and interest, Special Allowance Payments, and Guarantee Payments with
respect to Financed Student Loans and causing all such interest subsidy
payments and Special Allowance Payments to be forwarded by the Secretary of
Education directly to the Trustee for immediate deposit into the
appropriate fund or account under the Indenture and depositing all other
such payments immediately upon receipt into a lock-box account (which shall
be part of the Revenue Fund) to be established by the Trustee in the name
of and for the account of the Trustee; representing the interests of the
Corporation and the Trustee in handling discrepancies or disputes, if any,
with the Secretary of Education; preparing and maintaining all appropriate
accounting records with respect to all transactions related to each
Financed Student Loan; for defaulted Financed Student Loans, taking steps
necessary to file and prove a claim for loss with the Secretary of
Education or the Guarantee Agency, as the case may be and as required, and
assuming responsibility for all necessary communications and contacts with
the Secretary of Education or the Guarantee Agency, as the case may be and
as required, to recover on such defaulted Financed
-60-
<PAGE>
Student Loans within the time required by the Higher Education Act and the
requirements of the Guarantee Agency; if a claim is denied by the Secretary
of Education or the Guarantee Agency, as the case may be, under
circumstances resulting in a Lender being required by a Student Loan
Purchase Agreement to repurchase a Financed Student Loan, taking such
action as shall be necessary to allow the Corporation or the Trustee to
cause such Lender to repurchase such Financed Student Loan or to substitute
a different Eligible Loan in accordance with the requirements of the
applicable Student Loan Purchase Agreement; preparing and filing various
reports with the Secretary of Education, the Guarantee Agency, the
Corporation and the Trustee; identifying on the servicing system the Notes
as the source of financing for each such Financed Student Loan; and
maintaining duplicates or copies of certain file documents.
Right of Inspection and Audits
The SLFC Servicing Agreement provides that, subject to any
restrictions of applicable law, the Corporation, the Trustee, the Guarantee
Agency, the Secretary of Education and/or any governmental agency having
jurisdiction over the Corporation or the Trustee (and, in each case, such
entities' representatives), will have the right, at any time and from time
to time, during normal business hours, and upon reasonable notice to SLFC,
to examine and audit any and all of the SLFC's records or accounts
pertaining to any Financed Student Loan. The Corporation and the Trustee
also may require SLFC to furnish such documents as they from time to time
deem necessary to determine that SLFC has complied with the provisions of
the SLFC Servicing Agreement, the Student Loan Purchase Agreements and the
Indenture.
SLFC also agrees to have prepared and submitted to the Secretary
of Education and the Guarantee Agencies any third-party servicer compliance
audits and audited financial statements required under the Higher Education
Act and the Guarantee Program regulations relating to SLFC and its
servicing of Financed Student Loans, and any lender compliance audits
required under the Higher Education Act and the Guarantee Program
regulations relating to the Trustee (as the holder of the Financed Student
Loans) and the Financed Student Loans. SLFC agrees to provide to the
Corporation and the Trustee these and various other specified reports and
audits.
Administration and Management
SLFC agrees to perform various administrative activities and
obligations on behalf of the Corporation under the SLFC Servicing
Agreement. These include providing all necessary personnel, facilities,
equipment, forms and supplies for operating the Program in accordance with
the Indenture; disseminating information on the Program to Lenders and to
student financial aid officers in Eligible Institutions and to other
persons as necessary; controlling and accounting for the receipt and
expenditure of the Corporation's funds in accordance with the resolutions
of the Corporation's board of directors and the Indenture and maintaining
accurate and complete records on all aspects of the Program; reviewing all
statements and reports to the Corporation required of the Trustee, the
Servicer and the Lender in accordance with the provisions of the Indenture,
the SLFC Servicing Agreement and the Student Loan Purchase Agreements; and
preparing and submitting to the Trustee the Monthly Servicing Reports
required to be delivered to the Noteholders pursuant to the Indenture.
SLFC also agrees to prepare for filing, and provide such other assistance
as is required by the Corporation to file, any other reports required to be
filed by the Corporation under the Indenture or under any applicable law,
including without limitation, the Higher Education Act and any federal and
state securities laws.
Servicer as Bailee
The SLFC Servicing Agreement provides that SLFC, in holding
documents relating to the Financed Student Loans, will hold such documents
as bailee for and on behalf of the Trustee.
-61-
<PAGE>
Plan for Doing Business
In providing administrative services on behalf of the Corporation
under the SLFC Servicing Agreement, SLFC agrees to operate the Program in
compliance with the Plan for Doing Business of the Original Issuer, to
advise the Original Issuer if any amendments to the Plan for Doing Business
are required from time to time, and to assist the Original Issuer in
preparing, obtaining approval of, and filing any such amendments to the
Plan for Doing Business.
Servicing Fees
The SLFC Servicing Agreement provides that SLFC shall be paid for
the performance of its functions under the SLFC Servicing Agreement (from
funds available for such purpose under the Indenture) a monthly fee in an
amount each month equal to 0.104167% of the outstanding principal balance
of all Financed Student Loans as of the last day of the immediately
preceding month. Such fee is required to be paid to SLFC on a monthly
basis within fifteen (15) days of receipt by the Trustee of a written
monthly billing statement from SLFC. If SLFC believes that it is necessary
to increase the monthly fee payable under the SLFC Servicing Agreement, it
shall provide a written request to the Corporation and the Trustee of its
need for an increase in such fee, together with all information required
under the Indenture for the Trustee to approve an increase in the fees
payable thereunder. SLFC acknowledges in the SLFC Servicing Agreement that
such fee shall not be increased unless the conditions for increasing such
fees under the Indenture have been satisfied.
SLFC also acknowledges in the SLFC Servicing Agreement that the
Corporation and the Trustee contemplate paying all servicing fees payable
under the SLFC Servicing Agreement solely from funds available for such
purpose in the Administration Fund created under the Indenture, which funds
are primarily dependent upon collection by SLFC and receipt by the Trustee
of payments with respect to the Financed Student Loans. SLFC agrees to
continue to be bound by the terms and provisions of the SLFC Servicing
Agreement relating to Financed Student Loans in all respects, and to
perform for a period of 120 days its obligations thereunder, regardless of
the receipt or non-receipt on a timely basis by it of any payments in
respect of servicing fees.
No Bankruptcy or Insolvency Petition
SLFC agrees that it will not at any time institute against the
Corporation, or join in any institution against the Corporation of, any
bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings, or other proceedings under any Federal or state bankruptcy or
similar law in connection with any obligation relating to the SLFC
Servicing Agreement.
Benefit of the Noteholders
The SLFC Servicing Agreement recites that it is made and entered
into for the benefit of all Noteholders, and its provisions may be enforced
not only by the parties thereto but also by the Noteholders in the manner
and to the extent to which Noteholders may enforce provisions of the
Indenture.
Amendment
The SLFC Servicing Agreement may be amended, supplemented or
modified only by written instrument duly executed by all parties thereto
and only upon receipt of a written certificate from the Corporation and the
Trustee that such amendment, supplement or modification will not deprive
any Noteholder in any material respect of the security afforded by the SLFC
Servicing Agreement.
-62-
<PAGE>
Term and Termination
The term of the SLFC Servicing Agreement continues for so long as any of
the Notes remain Outstanding, unless the SLFC Servicing Agreement is terminated
in accordance with its terms. The SLFC Servicing Agreement shall terminate:
A. If SLFC shall:
1. admit in writing its inability to pay its debts generally as
they become due;
2. consent to the appointment of a custodian (as that term is
defined in the federal Bankruptcy Code) for or assignment to a
custodian of the whole or any substantial part of SLFC's
property, or fail to stay, set aside or vacate within sixty (60)
days from the date of entry thereof any order or decree entered
by a court of competent jurisdiction ordering such appointment or
assignment;
3. commence any proceeding or file a petition under the provisions
of the federal Bankruptcy Code for liquidation, reorganization or
adjustment of debts, or under any insolvency law or other statute
or law providing for the modification or adjustment of the rights
of creditors, or fail to stay, set aside or vacate within sixty
(60) days from the date of entry thereof any order or decree
entered by a court of competent jurisdiction pursuant to an
involuntary proceeding, whether under federal or state law,
providing for liquidation or reorganization of SLFC or
modification or adjustment of the rights of creditors; or
4. contest in writing the validity or enforceability of the SLFC
Servicing Agreement as a whole or deny in writing that the SLFC
Servicing Agreement as a whole is binding upon SLFC;
B. upon written notice by the Corporation or the Trustee to SLFC, if SLFC
materially breaches its obligations, or any representation or warranty,
under the SLFC Servicing Agreement; or
C. upon written notice by the Corporation or the Trustee, if at any time the
Guarantee Agency or the Department of Education has issued a notice of
suspension or termination against SLFC, or has suspended or terminated the
payment of all claims with respect to Financed Student Loans or, in the
case of the Department of Education, all Special Allowance Payments or
interest benefit payments with respect to Financed Student Loans as a
result of actions or omissions of SLFC (it being understood that the
cessation of less than all such claims or payments may constitute a breach
under clause (B) above).
Notwithstanding the foregoing, any termination pursuant to clauses (B) or (C)
will be subject to the following conditions. If such breach under clause (B) or
suspension or termination under clause (C) is capable of being cured within 90
days without, in the judgment of the Trustee, adversely affecting the security
provided to the Noteholders by the Financed Student Loans and the related
Guarantee Payments, Special Allowance Payments and interest subsidy payments,
SLFC shall have the right to cure such breach, within 90 days of the date SLFC
learns of such breach or receives notice of such breach from the Corporation or
the Trustee, prior to such termination. If such breach is not capable of being
cured in the manner specified above, no termination pursuant to clause (B) or
(C) shall occur if, in the judgment of the Trustee, such breach or suspension or
termination will not adversely affect the security provided the Noteholders by
the Financed Student Loans and the related Guarantee Payments, Special Allowance
Payments and interest subsidy payments.
-63-
<PAGE>
SLFC agrees to promptly notify the Trustee and the Corporation of any
occurrence or condition which constitutes (or which with the passage of time or
the giving of notice or both would constitute) an event permitting the
termination of the SLFC Servicing Agreement.
DESCRIPTION OF FINANCED ELIGIBLE LOAN PROGRAM
Background of Original Issuer's Program
The Original Issuer was organized as a secondary market for student
loans for lenders throughout the State of South Dakota, including banks, savings
and loan associations and credit unions. The Original Issuer began operating a
secondary market program in 1979 and financed its initial acquisitions of
student loans through the issuance of its student loan revenue bonds. The
Original Issuer has ongoing contact with, and holds numerous workshop meetings
in various locations in the State and surrounding States which are attended by,
approximately 250 financial and educational institutions. SLFC will undertake
similar activities to make the financial and education communities aware of its
activities and objectives.
The following table lists the approximate aggregate outstanding
principal balances of all Student Loans acquired by the Original Issuer from the
proceeds of its tax exempt student loan revenue bond issues during each of the
last five fiscal years and for the 11 months ended May 31, 1997. These Student
Loans have been made to Eligible Borrowers for the post-secondary education of
(a) residents of the State attending post-secondary schools located within or
without the State, or (b) residents of a state other than the State attending
post-secondary schools located within the State (sometimes referred to herein as
"In-State Loans"). The Code requires that proceeds of tax exempt debt
obligations issued by the Original Issuer generally be used only to acquire In-
State Loans.
<TABLE>
<CAPTION>
Year Ending Student Loans
June 30 Acquired
------- --------
<S> <C>
1992.................... $49,702,000
1993.................... 56,963,000
1994.................... 65,818,000
1995.................... 81,802,000
1996.................... 92,043,000
May 31, 1997 (11 months) 66,840,000
</TABLE>
In addition to the loans included in the table above, the Original
Issuer has acquired Student Loans from the proceeds of its taxable borrowings
during each year since 1988. In general, the Original Issuer has used the
proceeds of these financings to acquire Student Loans for which the borrower is
neither a resident of the State nor attending an eligible school located within
the State. The following table lists the approximate aggregate outstanding
principal balances of all Student Loans acquired by or on behalf of the Original
Issuer from the proceeds of its taxable borrowings for each of the last five
fiscal years and for the 11 months ended May 31, 1997.
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<PAGE>
<TABLE>
<CAPTION>
Additional
Year Ending Student Loans
June 30 Acquired
------- --------
<S> <C>
1992................. $27,798,000
1993................. 35,113,000
1994................. 40,655,000
1995................. 60,665,000
1996................. 87,864,000
May 31, 1997 (11 months). 40,634,000
</TABLE>
Description of Eligible Loans to be Financed
It is expected that approximately $__________ of the proceeds of the
Series 1997-1 Notes deposited in the Acquisition Fund will be used to
refinance the Original Issuer's existing portfolio of student loans,
certain characteristics of which are set forth below under "Characteristics
of the Initial Financed Eligible Loans." Approximately ____% of such
Financed Eligible Loans have been acquired by the Original Issuer from
_______ Lenders.
It is expected that the remaining proceeds of the Series 1997-1 Notes
deposited in (i) the Series 1997-1 Tax Exempt Acquisition Account will be
used to acquire or originate approximately $___________ additional
aggregate principal amount of Eligible Loans that are In-State Loans on or
before [__________, 2002] and (ii) the Series 1997-1 Taxable Acquisition
Account will be used to acquire or originate approximately $___________
additional aggregate principal amount of Eligible Loans that are not In-
State Loans on or before [September 1, 1998]. See "Application of Series
1997-1 Note Proceeds."
Although the Higher Education Act contains certain provisions that may
decrease the principal amount of Eligible Loans made by Lenders, the
Corporation does not expect that such provisions will affect its ability to
spend the proceeds of the Series 1997-1 Notes initially deposited in the
Acquisition Fund to acquire Eligible Loans. There is no assurance,
however, that relevant federal laws, including the Higher Education Act,
will not be amended in a manner that may adversely affect the qualification
of Student Loans as Eligible Loans under the Indenture and thus prevent
their acquisition by the Trustee or that may decrease the aggregate
principal amount of Eligible Loans made by Lenders and available for
purchase by the Trustee. Proposals by Congress and the Administration to
amend the Higher Education Act could affect the qualification of Student
Loans made under the Federal Family Education Loan Program as Eligible
Loans. If any such amendments are enacted, the Corporation may seek any
necessary Rating Agency approvals to allow it to Finance such Student Loans
under the Indenture. If the Trustee does not acquire all the Eligible
Loans which it is expected to acquire, the Corporation may use the
unexpended portion of the Series 1997-1 Notes proceeds and Balances in the
Series 1997-1 Surplus Subaccount to redeem Series 1997-1 Notes. See
"Description of Series 1997-1 Notes -- Special Redemption and Prepayment --
From Unused Proceeds".
The First Supplemental Indenture contains various limits on certain
types of Eligible Loans that may be Financed (originated or purchased)
after the Date of Issuance, with proceeds deposited in the Series 1997-1
Tax Exempt Acquisition Account and the Series 1997-1 Taxable Acquisition
Account without receiving further approval from the Rating Agencies. The
First Supplemental Indenture limits the amount of additional Consolidation
Loans that may be Financed after the Date of Issuance from (i) the Series
1997-1 Tax Exempt Acquisition Account (together with the Series 1997-1 Tax
Exempt Surplus Subaccount) to $57,000,000 and (ii) the Series 1997-1
Taxable Acquisition Account (together with the Series 1997-1 Taxable
Surplus Subaccount) to $19,400,000. The First Supplemental Indenture also
limits the aggregate amount of Financed Eligible Loans that may be subject
to various forms of interest rate reduction features to Borrowers. In
either case, the Corporation could use Balances in such Accounts or
Subaccounts to originate or acquire additional amounts of such Eligible
Loans if it delivers to the
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<PAGE>
Trustee a Corporation certificate certifying that, based on a Cash Flow
Projection, the Financing of such Eligible Loans will not materially adversely
affect the Corporation's ability to pay Debt Service on the Outstanding Notes
and on Outstanding Other Obligations, to pay Carry-Over Amounts (including
accrued interest thereon) with respect to Outstanding Notes or to make required
deposits to the Rebate Fund. The Corporation does not expect that these
limitations will prevent the expenditure of the proceeds of the Series 1997-1
Note proceeds deposited in the Acquisition Fund.
For a more detailed description of student loans under the Higher Education
Act, see "Description of Federal Family Education Loan Program". For a
description of the Guarantee Agencies, see "Description of the Guarantee
Agencies".
The Indenture also permits the Financing of Student Loans from moneys in
the Surplus Account under certain circumstances. Such Student Loans are not
required to be Eligible Loans. See Appendix IX -- "Summary of the Indenture --
Funds and Accounts -- Surplus Fund".
Summary of Student Loan Purchase Agreements
The Original Issuer entered into Student Loan Purchase Agreements with 457
Lenders for the purchase of Eligible Loans to be refinanced with the proceeds of
the Series 1997-1 Notes (the "Original Issuer Student Loan Purchase
Agreements"). The Original Issuer's right, title and interest in the Original
Issuer Student Loan Purchase Agreements will be assigned to the Trustee. In
addition, the Corporation expects to enter into Student Loan Purchase Agreements
with approximately 140 Lenders for the purchase of additional Eligible Loans by
the Trustee from the proceeds of the Series 1997-1 Notes and from Balances in
the Series 1997-1 Surplus Subaccount (the "Corporation Student Loan Purchase
Agreements").
As of May 31, 1997, approximately $______________ outstanding principal
amount of the Eligible Loans to be Financed on the Date of Issuance represented
Consolidation Loans originated by the Original Issuer (and not acquired from
Lenders pursuant to Original Issuer Student Loan Purchase Agreements).
Consolidation Loans and other Eligible Loans Financed after the Date of Issuance
which are originated by the Trustee also will not be covered by Corporation
Student Loan Purchase Agreements.
The Corporation Student Loan Purchase Agreements will provide for the
purchase by the Trustee on behalf of the Corporation, of Eligible Loans at 100%
of their outstanding unpaid principal amount, plus accrued interest thereon
payable by the Borrower. The Corporation Student Loan Purchase Agreements
require the Lender to report and offset against its interest subsidy and Special
Allowance Payments all authorized origination fees. Under certain circumstances,
the Trustee will also pay to the Lender reasonable transfer, origination or
assignment fees and a premium to the extent permitted by the Indenture. See
Appendix IX -- "Summary of the Indenture -- Funds and Accounts -- Acquisition
Fund".
Each Lender, with respect to each Financed Eligible Loan purchased under a
Student Loan Purchase Agreement, has represented or will represent that at the
date of sale by the Lender to the Original Issuer or the Trustee, each Eligible
Loan was or will be Guaranteed. Each Lender makes additional representations as
to the validity, enforceability and transferability of each such Eligible Loan
and as to the legal authority of the Lender to engage in the transactions
contemplated by the respective Student Loan Purchase Agreement.
The Student Loan Purchase Agreements provide that if any representation
furnished by a Lender with respect to an Eligible Loan sold to the Original
Issuer or the Trustee proves to have been materially incorrect, or if the
Guarantee Agency refuses to honor all or part of a Guarantee claim filed with
respect to any Financed Eligible Loan on account of any circumstance or event
occurring prior to the sale of such Eligible Loan to the Original Issuer or the
Trustee, or under certain other circumstances specified in the Student Loan
Purchase Agreement, the Lender shall repurchase such loan at a price equal to
the then outstanding principal balance, plus accrued interest
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<PAGE>
and Special Allowance Payments, plus any expenses incurred by the Corporation,
the Original Issuer or the Trustee in connection therewith and any other amounts
paid to the Lender by the Original Issuer or the Trustee in connection with the
acquisition of such loan.
Servicing and "Due Diligence"
The Servicer will service student loans originated or acquired by the
Trustee under the Indenture. The Corporation will covenant in the Indenture to
cause a Servicer to administer and collect all Financed Student Loans in a
competent, diligent and orderly fashion, and in accordance with all requirements
of the Higher Education Act, the Secretary of Education, the Indenture, the
Federal Reimbursement Contracts and the Guarantee Agreements.
The Higher Education Act requires that the Original Issuer, the Trustee (in
its capacity as "eligible lender"), a Lender and their agents (including the
Servicer) and employees exercise "due diligence" in the making, servicing and
collection of Financed Student Loans and that a Guarantee Agency exercise due
diligence in collecting loans which it holds. The Higher Education Act defines
"due diligence" as requiring the holder of a Student Loan to utilize servicing
and collection practices at least as extensive and forceful as those generally
practiced by financial institutions for the collection of consumer loans, and
requires that certain specified collection actions be taken within certain
specified time periods with respect to a delinquent loan or defaulted loan. The
Guarantee Agencies have established procedures and standards for due diligence
to be exercised by each Guarantee Agency and by Lenders (including the Original
Issuer and the Trustee) which hold loans that are guaranteed by the respective
Guarantee Agencies. The Original Issuer, the Trustee, a Lender, or a Guarantee
Agency may not relieve itself of its responsibility for meeting these standards
by delegation to any servicing agent. Accordingly, if the Original Issuer has
failed to meet such standards, or if a Lender or the Servicer fails to meet such
standards, the Trustee's ability to realize the benefits of Guarantee Payments,
and (with respect to Student Loans eligible for such payments) interest subsidy
payments and Special Allowance Payments may be adversely affected. If a
Guarantee Agency fails to meet such standards, that Guarantee Agency's ability
to realize the benefits of federal reinsurance payments may be adversely
affected.
CHARACTERISTICS OF THE INITIAL
FINANCED ELIGIBLE LOANS*
Composition of the Student Loan Portfolio as of May 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Aggregate Outstanding Principal Balance......................... $561,198,751
Number of Borrowers............................................. 92,582
Average Outstanding Principal Balance Per Borrower.............. $ 6,062
Number of Loans (Promissory Notes).............................. 265,130
Average Outstanding Principal Balance Per Loan.................. $ 2,117
Repayment Status Loans:
Weighted Average Remaining Term (Months).................... 102
Weighted Average Payments Received (Months)................. 27
Weighted Average Interest Rate.................................. 8.23%
</TABLE>
- ------------------
* Financed Eligible Loans expected to be pledged to the Trustee on the Date
of Issuance of the Series 1997-1 Notes.
-67-
<PAGE>
Distribution of the Financed Eligible Loans by Loan Type as of May 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Loan Types Loans Balance Balance
---------- --------- ------------ -----------------
<S> <C> <C> <C>
Stafford - Subsidized 213,633 $362,549,776 64.6%
Stafford - Unsubsidized/**/ 21,372 49,609,999 8.9
Stafford - Nonsubsidized/**/ 3,429 5,700,516 1.0
PLUS 11,681 27,583,901 4.9
SLS 7,849 20,147,361 3.6
Consolidation 7,166 $ 95,607,198 17.0%
-------------------------------------------
Total 265,130 $561,198,751 100.0%
===========================================
</TABLE>
** Nonsubsidized Stafford loans are ineligible for interest subsidy payments
and Special Allowance Payments; Unsubsidized Stafford loans are eligible for
Special Allowance Payments.
Distribution of the Financed Eligible Loans by Interest Rate as of May 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Interest Rate Range Loans Balance Balance
------------------- --------- ------------ -----------------
<S> <C> <C> <C>
Less Than 7.00% 83 $ 377,728 0.1%
7.00% to 7.49% 12,136 16,969,334 3.0
7.50% to 7.99% 14,238 35,892,346 6.4
8.00% to 8.49% 201,654 389,623,593 69.4
8.50% to 8.99% 19,530 47,731,262 8.5
9.00% to 9.49% 17,354 69,385,764 12.4
9.50% or greater 135 1,218,724 0.2
------- ------------ -----
Total 265,130 $561,198,751 100.0%
======= ============ =====
</TABLE>
Distribution of the Financed Eligible Loans by School Types as of May 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
School Type Loans Balance Balance
----------- --------- ------------ -----------------
<S> <C> <C> <C>
Under 4 Year 42,332 $ 68,930,092 12.3%
4 and 5 Year 195,143 362,181,843 64.5
Proprietary 19,436 31,998,396 5.7
Consolidation 7,166 95,607,198 17.0
Other/Unknown 1,053 2,481,222 .5
------- ------------ -----
Total 265,130 $561,198,751 100.0%
======= ============ =====
</TABLE>
-68-
<PAGE>
Distribution of the Financed Eligible Loans by
Borrower Payment Status as of May 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Borrower Payment Status Loans Balance Balance
----------------------- --------- ----------- ----------------
<S> <C> <C> <C>
School 15,966 $ 40,226,782 7.2%
Grace 9,707 23,176,748 4.1
Repayment:
First Year Repayment 39,923 116,760,349 20.8
Second Year Repayment 35,132 95,202,225 17.0
Third Year Repayment 28,905 71,055,968 12.7
Fourth Year Repayment and 90,991 104,620,860 18.6
thereafter.
Deferment 24,221 62,102,316 11.1
Forbearance 18,487 44,414,097 7.9
Claims 1,798 3,639,406 .6
------- ------------ -----
Total 265,130 $561,198,751 100.0%
======= ============ =====
</TABLE>
Distribution of the Financed Eligible Loans by
Guarantee Status as of May 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Guarantee Status Loans Balance Balance
- ------------------ --------- ------------ -----------------
<S> <C> <C> <C>
Guaranteed 100% 177,091 $283,787,905 50.5%
Guaranteed 98% 87,016 277,009,820 49.4
Non-Guaranteed 1,023 401,026 .1
------- ------------ -----
Total 265,130 $561,198,751 100.0%
======= ============ =====
</TABLE>
Distribution of the Financed Eligible Loans by Guarantee Agency as of May 31,
1997
<TABLE>
<CAPTION>
Percent of Loans
Number of Outstanding Principal by Outstanding
Guarantee Agencies Loans Balance Balance
- -------------------------- --------- --------------------- ----------------
<S> <C> <C> <C>
EAC 138,954 $330,921,795 59.0%
PHEAA 106,735 194,879,590 34.7
Other Guarantee Agencies 18,418 34,996,340 6.2
Non-Guaranteed 1,023 401,026 .1
------- ------------ -----
Total 265,130 $561,198,751 100.0%
======= ============ =====
</TABLE>
-69-
<PAGE>
Distribution of the Financed Eligible Loans by Range of Principal
Balance as of May 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans by
Number of Principal Outstanding
Principal Balance Range Borrowers Balance Balance
- ------------------------- --------- ------------ --------------------
<S> <C> <C> <C>
Less than $1,000 11,400 $ 6,101,927 1.1%
$1,000-$1,999 13,173 19,669,889 3.5
$2,000-$2,999 14,084 35,062,205 6.3
$3,000-$3,999 9,198 32,111,249 5.7
$4,000-$4,999 7,366 33,075,107 5.9
$5,000-$5,999 6,396 34,915,733 6.2
$6,000-$6,999 4,862 31,378,968 5.6
$7,000-$7,999 3,703 27,714,271 4.9
$8,000-$8,999 3,009 25,524,873 4.6
$9,000-$9,999 2,569 24,368,672 4.3
$10,000-$10,999 2,278 23,885,795 4.3
$11,000-$11,999 2,013 23,090,015 4.1
$12,000-$12,999 1,625 20,303,854 3.6
$13,000-$13,999 1,542 20,803,256 3.7
$14,000-$14,999 1,280 18,526,288 3.3
$15,000 or greater 8,084 184,666,649 32.9%
------ ------------ -----
Total 92,582 $561,198,751 100.0%
====== ============ =====
</TABLE>
Distribution of Repayment Status Financed Eligible Loans by Remaining Term
As of May 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent By
Number Principal Outstanding
Remaining Term Of Loans Balance Balance
- -------------------------------------------------------------
<S> <C> <C> <C>
1 to 12 Months 14,656 $ 3,806,011 1.0%
13 to 24 Months 15,899 8,942,327 2.3
25 to 36 Months 16,886 14,292,001 3.7
37 to 48 Months 17,377 19,689,201 5.1
49 to 60 Months 18,889 25,905,675 6.7
61 to 72 Months 18,610 29,698,719 7.6
73 to 84 Months 19,905 38,676,298 10.0
85 to 96 Months 16,134 37,958,935 9.8
97 to 108 Months 28,388 72,783,379 18.8
109 to 120 Months 24,358 69,789,059 18.0
121 to 180 Months 2,720 34,369,287 8.9
</TABLE>
-70-
<PAGE>
<TABLE>
<CAPTION>
Outstanding Percent By
Number Principal Outstanding
Remaining Term Of Loans Balance Balance
- -------------------------------------------------------------
<S> <C> <C> <C>
181 to 240 Months 963 24,054,804 6.2
241 to 300 Months 129 5,530,391 1.4
Over 300 Months 37 2,143,315 0.5
-------------------------------------
Total 194,951 $387,639,402 100.0%
=====================================
</TABLE>
Distribution of Financed Eligible Loans by Borrowers' Address
As of May 31, 1997 (Based on Address as of June 24, 1997)
<TABLE>
<CAPTION>
Outstanding Percent By
Number Principal Outstanding
State of Borrowers' Address Of Loans Balance Balance
- --------------------------------------------------------------------
<S> <C> <C> <C>
South Dakota 111,580 $232,243,821 41.4%
Minnesota 50,813 105,857,520 18.9
North Dakota 23,565 47,415,516 8.4
Iowa 7,955 18,262,394 3.3
Nebraska 5,703 12,317,231 2.2
Colorado 5,097 10,477,320 1.9
Washington 5,118 10,290,260 1.8
Oregon 4,911 10,004,343 1.8
California 4,390 8,915,303 1.6
Texas 3,963 8,653,835 1.5
Wisconsin 3,079 7,368,088 1.3
Illinois 2,798 6,662,107 1.2
Idaho 3,069 6,495,177 1.2
Arizona 3,154 6,314,955 1.1
Alaska 2,114 5,790,341 1.0
Others Less Than 1% Each 27,821 64,130,540 11.4
-------------------------------------
Total 265,130 $561,198,751 100.0%
=====================================
</TABLE>
-71-
<PAGE>
DESCRIPTION OF FEDERAL FAMILY EDUCATION LOAN PROGRAM
General
The Higher Education Act sets forth provisions establishing the
Federal Family Education Loan Program, pursuant to which state agencies or
private nonprofit corporations administering student loan insurance
programs (referred to as "guarantee agencies") are reimbursed for losses
sustained in the operation of their programs, and holders of certain loans
made under such programs are paid subsidies for owning such loans.
The Higher Education Act currently authorizes certain student
loans to be covered under the Federal Family Education Loan Program if they
are contracted for and paid to the student prior to September 30, 1998,
unless a student has received a loan under the Federal Family Education
Loan Program prior to such date, in which case that student may receive a
student loan covered by the Federal Family Education Loan Program until
September 30, 2002. Congress has extended similar authorization dates in
prior versions of the Higher Education Act; however, there can be no
assurance that the current authorization dates will again be extended or
that the other provisions of the Higher Education Act will be continued in
their present form.
Various amendments to the Higher Education Act have revised the
Federal Family Education Loan Program from time to time. These amendments
include, but are not limited to, the Higher Education Technical Amendments
Act of 1993 (the "1993 Technical Amendments"), the Omnibus Budget
Reconciliation Act of 1993 (the "1993 Amendments"), the Higher Education
Amendments of 1992 (the "1992 Amendments"), which reauthorized the Federal
Family Education Loan Program, the Omnibus Budget Reconciliation Act of
1990, the Omnibus Budget Reconciliation Act of 1989 (the "1989
Amendments"), the Omnibus Budget Reconciliation Act of 1987, the Higher
Education Technical Amendments Act of 1987 (the "1987 Amendments"), the
Higher Education Amendments of 1986 (the "1986 Amendments"), which
reauthorized the Federal Family Education Loan Program, the Consolidated
Omnibus Budget Reconciliation Act of 1985, the Postsecondary Student
Assistance Amendments of 1981 (the "1981 Amendments") and the Education
Amendments of 1980 (the "1980 Amendments").
The 1993 Amendments made several changes to the terms of the
Federal Family Education Loan Program that are adverse to the Guarantee
Agencies and lenders under the Federal Family Education Loan Program. In
addition, the 1993 Amendments authorized a program of student loans
originated by schools on behalf of the Secretary of Education to partially
replace the Federal Family Education Loan Program. See "Direct Loans"
below. There can be no assurance that relevant federal laws, including the
Higher Education Act, will not be further changed in a manner that may
adversely impact the receipt of funds by the Guarantee Agencies or by the
Corporation or the Trustee with respect to Financed Eligible Loans or the
amount of loans made by Lenders and available for purchase by the Trustee
on behalf of the Corporation.
Proposals have been made by Congress and the Administration
which, if enacted into law, would amend the Higher Education Act and make
various changes to the Federal Family Education Loan Program, including
changes that would reduce various payments to Guarantee Agencies and
restructure guarantee agencies' operations and programs and revise terms of
student loans and payments to Lenders. There is no certainty that any of
the proposals will be enacted into law in their current form or at all, and
the Corporation cannot predict at this time how such legislation, if
enacted, would affect SLFC's business or operations, or the Corporation.
This is only a summary of certain provisions of the Higher
Education Act. Reference is made to the text of the Higher Education Act
for full and complete statements of its provisions.
-72-
<PAGE>
Loan Terms
General
Four types of loans are currently available under the Federal
Family Education Loan Program: Stafford Loans, Unsubsidized Stafford
Loans, Plus Loans and Consolidation Loans. These loan types vary as to
eligibility requirements, interest rates, repayment periods, loan limits
and eligibility for interest subsidies and Special Allowance Payments.
Some of these loan types have had other names in the past. References
herein to the various loan types include, where appropriate, predecessors
to such loan types.
The primary loan under the Federal Family Education Loan Program
is the Stafford Loan. Students who are not eligible for Stafford Loans
based on their economic circumstances may be able to obtain Unsubsidized
Stafford Loans. Parents of students may be able to obtain Plus Loans.
Consolidation Loans are available to borrowers with existing loans made
under the Federal Family Education Loan Program and certain other federal
programs to consolidate repayment of such existing loans. For periods of
enrollment beginning prior to July 1, 1994, SLS Loans were available to
students with costs of education that were not met by other sources and
that exceeded the Stafford or Unsubsidized Stafford Loan limits.
Eligibility
General. A student is eligible for loans made under the Federal
Family Education Loan Program only if he or she: (i) has been accepted for
enrollment or is enrolled in good standing at an eligible institution of
higher education (which term includes certain vocational schools), (ii) is
carrying or planning to carry at least one-half the normal full-time
workload for the course of study the student is pursuing as determined by
the institution (which, in the case of a loan to cover the cost of a period
of enrollment beginning on or after July 1, 1987, must either lead to a
recognized educational credential or be necessary for enrollment in a
course of study that leads to such a credential), (iii) has agreed to
notify promptly the holder of the loan concerning any change of address,
(iv) (if presently enrolled) is maintaining satisfactory progress in the
course of study he or she is pursuing, (v) does not owe a refund on, and is
not (except as specifically permitted under the Higher Education Act) in
default under, any loan or grant made under the Higher Education Act, (vi)
has filed with the eligible institution a statement of educational purpose,
(vii) meets certain citizenship requirements, and (viii) (except in the
case of a graduate or professional student) has received a preliminary
determination of eligibility or ineligibility for a Pell Grant.
Stafford Loans. Stafford Loans generally are made only to
student borrowers who meet certain needs tests. The educational
institution must provide the lender with a statement evidencing a
determination of need for a loan, and the amount of such need, calculated
by subtracting from the estimated cost of attendance the sum of the
expected family contribution with respect to the student plus the estimated
financial assistance available to such student. The amounts of the
expected family contribution, estimated available financial assistance, and
estimated costs of attendance are to be computed in accordance with
standards set forth in the Higher Education Act.
Unsubsidized Stafford Loans. A student borrower meeting the
requirements set forth under "General" above is eligible for an
Unsubsidized Stafford Loan without regard to need. Unsubsidized Stafford
Loans were not available before October 1, 1992.
Plus Loans. Plus Loans are made only to borrowers who are
parents (and, under certain circumstances, spouses of remarried parents) of
dependent undergraduate students. For Plus Loans made on or after July 1,
1993, the parent borrower must not have an adverse credit history (as
determined pursuant to criteria established by the Department of
Education). Prior to the 1986 Amendments, the Higher Education Act did not
distinguish between Plus Loans and SLS Loans. Student borrowers were
eligible for Plus Loans; however, parents of graduate and professional
students were ineligible.
-73-
<PAGE>
SLS Loans. Eligible borrowers for SLS Loans were limited to (a) graduate
or professional students, (b) independent undergraduate students, and (c) under
certain circumstances, dependent undergraduate students, if such students'
parents were unable to obtain a Plus Loan and were also unable to provide such
students' expected family contribution. Prior to the 1987 Amendments, a
dependent undergraduate student was not eligible under any circumstances. Except
as described in clause (c), eligibility was determined without regard to need.
Consolidation Loans. To be eligible for a Consolidation Loan a borrower
must (a) have outstanding indebtedness on student loans made under the Federal
Family Education Loan Program and/or certain other federal student loan
programs, and (b) be in repayment status or in a Grace Period, or be a defaulted
borrower who has made arrangements to repay the defaulted loan(s) satisfactory
to the holder of the defaulted loan(s). A married couple who agree to be jointly
liable on a Consolidation Loan for which the application is received on or after
January 1, 1993 may be treated as an individual for purposes of obtaining a
Consolidation Loan. For Consolidation Loans disbursed prior to July 1, 1994 the
Borrower was required to have outstanding student loan indebtedness of at least
$7,500. Prior to the adoption of the 1993 Technical Amendments, Plus Loans could
not be included in the Consolidation Loan. For Consolidation Loans for which the
applications were received prior to January 1, 1993, the minimum student loan
indebtedness was $5,000 and the borrower could not be delinquent more than 90
days in the payment of such indebtedness.
Interest Rates
The Higher Education Act establishes maximum interest rates for each of the
various types of loans. These rates vary not only among loan types, but also
within loan types depending upon when the loan was made or when the borrower
first obtained a loan under the Federal Family Education Loan Program. The
Higher Education Act allows lesser rates of interest to be charged. Many Lenders
have offered repayment incentives or other programs that involve reduced
interest rates on certain loans made under the Federal Family Education Loan
Program.
Stafford Loans. For a Stafford Loan made prior to July 1, 1994, the
applicable interest rate for a borrower who, on the date the promissory note was
signed, did not have an outstanding balance on a previous loan which was made,
insured or guaranteed under the Federal Family Education Loan Program (a "New
Borrower"):
(a) is 7% per annum for a loan covering a period of instruction beginning
before January 1, 1981;
(b) is 9% per annum for a loan covering a period of instruction beginning
on or after January 1, 1981, but before September 13, 1983;
(c) is 8% per annum for a loan covering a period of instruction beginning
on or after September 13, 1983, but before July 1, 1988;
(d) for a loan made prior to October 1, 1992, covering a period of
instruction beginning on or after July 1, 1988, is 8% per annum for
the period from the disbursement of the loan to the date which is four
years after the loan enters repayment, and thereafter shall be
adjusted annually, and for any 12-month period commencing on a July 1
shall be equal to the bond equivalent rate of 91-day U.S. Treasury
bills auctioned at the final auction prior to the preceding June 1,
plus 3.25% per annum (but not to exceed 10% per annum); or
(e) for a loan made on or after October 1, 1992 shall be adjusted
annually, and for any 12-month period commencing on a July 1 shall be
equal to the bond equivalent rate of 91-day U.S. Treasury bills
auctioned at the final auction prior to the preceding June 1, plus
3.1% per annum (but not to exceed 9% per annum).
-74-
<PAGE>
For a Stafford Loan made prior to July 1, 1994, the applicable interest rate for
a borrower who, on the date the promissory note evidencing the loan was signed,
had an outstanding balance on a previous loan made, insured or guaranteed under
the Federal Family Education Loan Program (a "Repeat Borrower"):
(f) for a loan made prior to July 23, 1992 is the applicable interest rate
on the previous loan or, if such previous loan is not a Stafford Loan,
8% per annum; or
(g) for a loan made on or after July 23, 1992 shall be adjusted annually,
and for any twelve month period commencing on a July 1 shall be equal
to the bond equivalent rate of 91-day U.S. Treasury bills auctioned at
the final auction prior to the preceding June 1, plus 3.1% per annum
but not to exceed:
(i) 7% per annum in the case of a Stafford Loan made to a borrower
who has a loan described in clause (a) above;
(ii) 8% per annum in the case of (A) a Stafford Loan made to a
borrower who has a loan described in clause (c) above, (B) a
Stafford Loan which has not been in repayment for four years
and which was made to a borrower who has a loan described in
clause (d) above or (C) a Stafford Loan for which the first
disbursement was made prior to December 20, 1993 to a borrower
whose previous loans do not include a Stafford Loan or an
Unsubsidized Stafford Loan;
(iii) 9% per annum in the case of a (A) Stafford Loan made to a
borrower who has a loan described in clauses (b) or (e) above
or (B) a Stafford Loan for which the first disbursement was
made on or after December 20, 1993 to a borrower whose previous
loans do not include a Stafford Loan or an Unsubsidized
Stafford Loan; and
(iv) 10% per annum in the case of a Stafford Loan which has been in
repayment for four years or more and which was made to a
borrower who has a loan described in clause (d) above.
The interest rate on all Stafford Loans made on or after July 1, 1994,
regardless of whether the borrower is a New Borrower or a Repeat Borrower, is
the rate described in clause (g) above, except that such rate shall not exceed
8.25% per annum. For any Stafford Loan made on or after July 1, 1995, the
interest rate is further reduced prior to the time the loan enters repayment and
during any Deferment Periods (as such term is defined below under "Repayment").
During such periods, the formula described in clause (g) above is applied,
except that 2.5% is substituted for 3.1%, and the rate shall not exceed 8.25%
per annum.
For loans made on or after July 1, 1998, the applicable rate will continue
to be adjusted annually, but for any 12-month period commencing on a July 1 will
be equal to the bond equivalent rate of securities with a comparable maturity
(as established by the Secretary of Education), plus 1% per annum, but not to
exceed 8.25% per annum. There can be no assurance that the interest rate
provisions for such loans will not be further amended, either before or after
the rate described herein becomes effective.
Unsubsidized Stafford Loans. Unsubsidized Stafford Loans are subject to
the same interest rate provisions as Stafford Loans.
-75-
<PAGE>
Plus Loans. The applicable interest rate on a Plus Loan:
(a) made on or after January 1, 1981, but before October 1, 1981 is
9% per annum;
(b) made on or after October 1, 1981, but before November 1, 1982 is
14% per annum;
(c) made on or after November 1, 1982, but before July 1, 1987 is 12%
per annum;
(d) made on or after July 1, 1987 and before October 1, 1992 shall be
adjusted annually, and for any 12-month period beginning on July
1 shall be equal to the bond equivalent rate of 52-week U.S.
Treasury bills auctioned at the final auction prior to the
preceding June 1, plus 3.25% per annum (but not to exceed 12% per
annum); or
(e) made on or after October 1, 1992 shall be adjusted annually, and
for any 12-month period beginning on July 1 shall be equal to the
bond equivalent rate of 52-week U.S. Treasury bills auctioned at
the final auction prior to the preceding June 1, plus 3.1% per
annum (but not to exceed 10% per annum).
The applicable interest rate for Plus Loans made on or after July 1,
1994 is the same as that described in clause (e) above, except that such
rate shall not exceed 9% per annum. For Plus Loans made on or after July
1, 1998, the applicable rate will continue to be adjusted annually, but for
any 12-month period commencing on a July 1 will be equal to the bond
equivalent rate of securities with a comparable maturity (as established by
the Secretary of Education), plus 2.1% per annum, but not to exceed 9% per
annum.
If requested by the borrower, an eligible lender may consolidate SLS
or Plus Loans of the same borrower held by the lender under a single
repayment schedule. The repayment period for each included loan shall be
based on the commencement of repayment of the most recent loan. The
consolidated loan shall bear interest at a rate equal to the weighted
average of the rates of the included loans. Such a consolidation shall not
be treated as the making of a new loan. In addition, at the request of the
borrower, a lender may refinance an existing fixed rate SLS or Plus Loan
(including an SLS or Plus Loan held by a different lender who has refused
so to refinance such loan) at a variable interest rate. In such a case,
proceeds of the new loan are used to discharge the original loan.
SLS Loans. The applicable interest rates on SLS Loans made prior to
October 1, 1992 are identical to the applicable interest rates on Plus
Loans made at the same time. For SLS Loans made on or after October 1,
1992, the applicable interest rate is the same as the applicable interest
rate on Plus Loans, except that the ceiling is 11% per annum instead of 10%
per annum.
Consolidation Loans. A Consolidation Loan made prior to July 1, 1994
bears interest at a rate equal to the weighted average of the interest
rates on the loans retired, rounded to the nearest whole percent, but not
less than 9% per annum. A Consolidation Loan made on or after July 1, 1994
bears interest at a rate equal to the weighted average of the interest
rates on the loans retired, rounded upward to the nearest whole percent,
but with no minimum rate. For a discussion of required payments that
reduce the return on Consolidation Loans, see "Fees -- Rebate Fees on
Consolidation Loans" below.
Loan Limits
Each type of loan (other than Consolidation Loans, which are limited
only by the amount of eligible loans to be consolidated) is subject to
limits as to the maximum principal amount, both with respect to a given
year and in the aggregate. All of the loans are limited to the difference
between the cost of attendance and the other aid available to the student.
Stafford Loans are also subject to limits based upon the needs analysis as
described above under "Eligibility -- Stafford Loans" above. In addition:
-76-
<PAGE>
Stafford and Unsubsidized Stafford Loans. Except as described in the
next paragraph, Stafford and Unsubsidized Stafford Loans are generally
treated as one loan type for loan limit purposes. A student who has not
successfully completed the first year of a program of undergraduate
education may borrow up to $2,625 in an academic year. A student who has
successfully completed such first year, but who has not successfully
completed the second year may borrow up to $3,500 per academic year. An
undergraduate student who has successfully completed the first and second
year, but who has not successfully completed the remainder of a program of
undergraduate education, may borrow up to $5,500 per academic year. For
students enrolled in programs of less than an academic year in length, the
limits are generally reduced in proportion to the amount by which such
programs are less than one year in length. A graduate or professional
student may borrow up to $8,500 in an academic year. The maximum aggregate
amount of Stafford and Unsubsidized Stafford Loans (including that portion
of a Consolidation Loan used to repay such loans) which an undergraduate
student may have outstanding is $23,000. The maximum aggregate amount for
a graduate and professional student, including loans for undergraduate
education, is $65,500. The Secretary is authorized to increase the limits
applicable to graduate and professional students who are pursuing programs
which the Secretary determines to be exceptionally expensive.
Under the 1993 Amendments, at the same time that SLS Loans were
eliminated, the loan limits for Unsubsidized Stafford Loans to independent
students, or dependent students whose parents cannot borrow a Plus Loan,
were increased by amounts equal to the prior SLS Loan limits (as described
below under "SLS Loans").
Prior to the enactment of the 1992 Amendments, an undergraduate
student who had not successfully completed the first and second year of a
program of undergraduate education could borrow Stafford Loans in amounts
up to $2,625 in an academic year. An undergraduate student who had
successfully completed such first and second year, but who had not
successfully completed the remainder of a program of undergraduate
education could borrow up to $4,000 per academic year. The maximum for
graduate and professional students was $7,500 per academic year. The
maximum aggregate amount of Stafford Loans which a borrower could have
outstanding (including that portion of a Consolidation Loan used to repay
such loans) was $17,250. The maximum aggregate amount for a graduate or
professional student, including loans for undergraduate education, was
$54,750. Prior to the enactment of the 1986 Amendments, the annual limits
were generally lower.
Plus Loans. For Plus Loans made on or after July 1, 1993, the amounts
of Plus Loans are limited only by the student's unmet need. Prior to that
time Plus Loans were subject to limits similar to those to which SLS Loans
were then subject (see "SLS Loans" below), applied with respect to each
student on behalf of whom the parent borrowed.
SLS Loans. A student who had not successfully completed the first and
second year of a program of undergraduate education could borrow an SLS
Loan in an amount of up to $4,000. A student who had successfully
completed such first and second year, but who had not successfully
completed the remainder of a program of undergraduate education could
borrow up to $5,000 per year. Graduate and professional students could
borrow up to $10,000 per year. SLS Loans were subject to an aggregate
maximum of $23,000 ($73,000 for graduate and professional students). Prior
to the 1992 Amendments, SLS Loans were available in amounts of $4,000 per
academic year, up to a $20,000 aggregate maximum. Prior to the 1986
Amendments, a graduate or professional student could borrow $3,000 of SLS
Loans per academic year, up to a $15,000 maximum, and an independent
undergraduate student could borrow $2,500 of SLS Loans per academic year
minus the amount of all other Federal Family Education Loan Program loans
to such student for such academic year, up to a maximum amount of all
Federal Family Education Loan Program loans to that student of $12,500.
The 1989 Amendments limited the amount of SLS Loans for students enrolled
in programs of less than an academic year in length (similar to the limits
described above under "Stafford Loans"), and such limits were continued by
the 1992 Amendments.
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Repayment
Loans made under the Federal Family Education Loan Program (other than
Consolidation Loans) must provide for repayment of principal in periodic
installments over a period of not less than five nor more than ten years.
A Consolidation Loan must be repaid during a period agreed to by the
borrower and lender, subject to maximum repayment periods which vary
depending upon the principal amount of the Consolidation Loan (but no
longer than 30 years). For Consolidation Loans for which the application
was received prior to January 1, 1993, the repayment period could not
exceed 25 years. The repayment period commences (a) not more than twelve
months after the borrower ceases to pursue at least a half-time course of
study with respect to Stafford Loans for which the applicable rate of
interest is 7% per annum, (b) not more than six months after the borrower
ceases to pursue at least a half-time course of study with respect to other
Stafford Loans and Unsubsidized Stafford Loans (the six month or twelve
month periods are the "Grace Periods") and (c) on the date of final
disbursement of the loan in the case of SLS, Plus and Consolidation Loans,
except that the borrower of an SLS Loan who also has a Stafford or
Unsubsidized Stafford Loan may defer repayment of the SLS Loan to coincide
with the commencement of repayment of the Stafford or Unsubsidized Stafford
Loan. During periods in which repayment of principal is required, payments
of principal and interest must in general be made at a rate of not less
than the greater of $600 per year or the interest that accrues during the
year, except that a borrower and lender may agree at any time before or
during the repayment period that repayment may be at a lesser rate. A
borrower may agree, with concurrence of the lender, to repay the loan in
less than five years with the right subsequently to extend his minimum
repayment period to five years. Borrowers are entitled to accelerate,
without penalty, the repayment of all or any part of the loan.
In addition, the 1992 Amendments required lenders of Consolidation
Loans to establish graduated or income-sensitive repayment schedules and
required lenders of Stafford and SLS Loans to offer borrowers the option of
repaying in accordance with graduated or income-sensitive repayment
schedules. The Original Issuer has implemented (and SLFC will implement)
graduated repayment schedules and income-sensitive repayment schedules.
Use of income-sensitive repayment schedules may extend the ten-year maximum
term for up to five years. In addition, if the repayment schedule on a
loan that has been converted to a variable interest rate does not provide
for adjustments to the amount of the monthly installment payments, the ten-
year maximum term may be extended for up to three years.
No principal repayments need be made during certain periods of
deferment prescribed by the Higher Education Act ("Deferment Periods").
For loans to a borrower who first obtained a loan which was disbursed
before July 1, 1993, deferments are available (i) during a period not
exceeding three years while the borrower is a member of the Armed Forces,
an officer in the Commissioned Corps of the Public Health Service or, with
respect to a borrower who first obtained a student loan disbursed on or
after July 1, 1987, or a student loan to cover the cost of instruction for
a period of enrollment beginning on or after July 1, 1987, an active duty
member of the National Oceanic and Atmospheric Administration Corps, (ii)
during a period not in excess of three years while the borrower is a
volunteer under the Peace Corps Act, (iii) during a period not in excess of
three years while the borrower is a full-time volunteer under the Domestic
Volunteer Act of 1973, (iv) during a period not exceeding three years while
the borrower is in service, comparable to the service referred to in
clauses (ii) and (iii), as a full-time volunteer for an organization which
is exempt from taxation under Section 501(c)(3) of the Code, (v) during a
period not exceeding two years while the borrower is serving an internship,
the successful completion of which is required to receive professional
recognition required to begin professional practice or service, or a
qualified internship or residency program, (vi) during a period not
exceeding three years while the borrower is temporarily totally disabled,
as established by sworn affidavit of a qualified physician, or while the
borrower is unable to secure employment by reason of the care required by a
dependent who is so disabled, (vii) during a period not to exceed twenty-
four months while the borrower is seeking and unable to find full-time
employment, (viii) during any period that the borrower is pursuing a full-
time course of study at an eligible institution (or, with respect to a
borrower who first obtained a student loan disbursed on or after July 1,
1987, or a student loan to cover the cost of instruction for a period of
enrollment beginning on or after July 1, 1987, is pursuing at least a half-
time course of study for
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which the borrower has obtained a loan under the Federal Family Education
Loan Program), or is pursuing a course of study pursuant to a graduate
fellowship program or a rehabilitation training program for disabled
individuals approved by the Secretary of Education, (ix) during a period,
not in excess of 6 months, while the borrower is on parental leave, and (x)
only with respect to a borrower who first obtained a student loan disbursed
on or after July 1, 1987, or a student loan to cover the cost of
instruction for a period of enrollment beginning on or after July 1, 1987,
(A) during a period not in excess of three years while the borrower is a
full-time teacher in a public or nonprofit private elementary or secondary
school in a "teacher shortage area" (as prescribed by the Secretary of
Education), and (B) during a period not in excess of 12 months for mothers,
with preschool age children, who are entering or re-entering the work force
and who are compensated at a rate not exceeding $1 per hour in excess of
the federal minimum wage. For loans to a borrower who first obtains a loan
on or after July 1, 1993, deferments are available (a) during any period
that the borrower is pursuing at least a half-time course of study at an
eligible institution or a course of study pursuant to a graduate fellowship
program or rehabilitation training program approved by the Secretary, (b)
during a period not exceeding three years while the borrower is seeking and
unable to find full-time employment, and (c) during a period not in excess
of three years for any reason which the lender determines, in accordance
with regulations under the Higher Education Act, has caused or will cause
the borrower economic hardship. Economic hardship includes working full
time and earning an amount not in excess of the greater of the minimum wage
or the poverty line for a family of two. Additional categories of economic
hardship are based on the relationship between a borrower's educational
debt burden and his or her income. Prior to the 1992 Amendments, only the
Deferment Periods described above in clauses (vi) and (vii) (with respect
to the parent borrower) and the Deferment Period described in clause (viii)
(with respect to the parent borrower or a student on whose behalf the
parent borrowed) were available to Plus Loan borrowers, and only the
Deferment Periods described above in clauses (vi), (vii) and (viii) were
available to Consolidation Loan borrowers. Prior to the 1986 Amendments,
Plus Loan borrowers were not entitled to Deferment Periods. Deferment
Periods extend the ten year maximum term.
The Higher Education Act also provides for periods of forbearance
during which the borrower, in case of temporary financial hardship, may
defer any payments. A borrower is entitled to forbearance for a period not
to exceed three years while the borrower's debt burden under Title IV of
the Higher Education Act (which includes the Federal Family Education Loan
Program) equals or exceeds 20% of the borrower's gross income, and also is
entitled to forbearance while he or she is serving in a qualifying medical
or dental internship program or in a "national service position" under the
National and Community Service Trust Act of 1993. In addition, mandatory
administrative forbearances are provided when exceptional circumstances
such as a local or national emergency or military mobilization exist; or
when the geographical area in which the borrower or endorser resides has
been designated a disaster area by the President of the United States or
Mexico, the Prime Minister of Canada, or by the governor of a state. In
other circumstances, forbearance is at the lender's option. Such
forbearance also extends the ten year maximum term.
As described under "Contracts with Guarantee Agencies -- Federal
Interest Subsidy Payments" below, the Secretary of Education makes interest
payments on behalf of the borrower of certain eligible loans while the
borrower is in school and during Grace and Deferment Periods. Interest
that accrues during periods of forbearance and, if the loan is not eligible
for interest subsidy payments, while the borrower is in school and during
the Grace and Deferment Periods, may be paid monthly or quarterly or
capitalized (added to the principal balance) not more frequently than
quarterly.
Disbursement
Loans made under the Federal Family Education Loan Program (except
Consolidation Loans) generally must be disbursed in two or more
installments, none of which may exceed 50% of the total principal amount of
the loan.
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Fees
Guarantee Fee. A Guarantee Agency is authorized to charge a premium,
or guarantee fee, of up to 1% of the principal amount of the loan, which
must be deducted proportionately from each installment payment of the
proceeds of the loan to the borrower. Guarantee fees may not currently be
charged to borrowers of Consolidation Loans. However, lenders may be
charged an insurance fee to cover the costs of increased or extended
liability with respect to Consolidation Loans. For loans made prior to
July 1, 1994, the maximum guarantee fee was 3% of the principal amount of
the loan, but no such guarantee fee was authorized to be charged with
respect to Unsubsidized Stafford Loans.
Origination Fee. An eligible lender is authorized to charge the
borrower of a Stafford or Plus Loan an origination fee in an amount not to
exceed 3% of the principal amount of the loan, and is required to charge
the borrower of an Unsubsidized Stafford Loan an origination fee in the
amount of 3% of the principal amount of the loan. These fees must be
deducted proportionately from each installment payment of the loan proceeds
prior to payment to the borrower and are not retained by the eligible
lender, but must be passed on to the Secretary of Education. For loans
made prior to July 1, 1994, the maximum authorized fee for Stafford, Plus
and SLS Loans was 5%, and the required fee for Unsubsidized Stafford Loans
was 6.5%, of the principal amount of the loan.
Lender Origination Fee. The lender of any loan under the Federal
Family Education Loan Program made on or after October 1, 1993 is required
to pay to the Secretary of Education a fee equal to 0.5% of the principal
amount of such loan.
Rebate Fee on Consolidation Loans. The holder of any Consolidation
Loan made on or after October 1, 1993 is required to pay to the Secretary
of Education a monthly fee equal to .0875% (1.05% per annum) of the
principal amount of, and accrued interest on, such Consolidation Loan.
Loan Guarantees
Under the Federal Family Education Loan Program, Guarantee Agencies
are required to guarantee the payment of not less than 100% of the
principal amount of loans made prior to October 1, 1993 and covered by
their respective guarantee programs. For a description of the requirements
for loans to be covered by such guarantees, see "Description of the
Guarantee Agencies". The 1993 Amendments reduced the minimum percentage
of the principal amount of loans which a Guarantee Agency must pay to 98%,
effective with respect to loans made on or after October 1, 1993. The
Department of Education has taken the position that a Guarantee Agency may
not pay more than 98% of the principal amount of and accrued interest on
such a loan. Under certain circumstances, guarantees may be assumed by the
Secretary of Education or another Guarantee Agency. See "Contracts with
Guarantee Agencies" below.
Contracts with Guarantee Agencies
Under the Federal Family Education Loan Program, the Secretary of
Education is authorized to enter into guaranty and interest subsidy
agreements with Guarantee Agencies. The Federal Family Education Loan
Program provides for reimbursements to Guarantee Agencies for default
claims paid by Guarantee Agencies, support payments to Guarantee Agencies
for administrative and other expenses, advances for a Guarantee Agency's
reserve funds, and interest subsidy payments and Special Allowance Payments
to the holders of qualifying student loans made pursuant to the Federal
Family Education Loan Program.
The 1992 Amendments gave the Secretary of Education certain oversight
powers over Guarantee Agencies. Guarantee Agencies are required to
maintain their reserves at certain levels based on the amount of
outstanding loans that they have guaranteed. If a Guarantee Agency falls
below the required level in two consecutive years, or its claims rate
exceeds 9% in any year, or if the Secretary determines that the agency's
administrative or financial
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condition jeopardizes its ability to meet its obligations, the Secretary can
require the Guarantee Agency to submit and implement a plan by which it will
correct such problem(s). If a Guarantee Agency fails to timely submit an
acceptable plan or fails to improve its condition, or if the Secretary
determines that the Guarantee Agency is in danger of financial collapse, the
Secretary may terminate the Guarantee Agency's reimbursement contract. The 1993
Amendments broadened the circumstances under which the Secretary may terminate
such reimbursement contracts, to include a determination that such action is
necessary to protect the federal fiscal interest or to ensure continued
availability of student loans or a smooth transition to direct lending (See
"Direct Loans" below).
The 1992 Amendments also added provisions authorizing the Secretary of
Education to assume the guarantee obligations of a Guarantee Agency. The Higher
Education Act now provides that, if the Secretary terminates a Guarantee
Agency's agreements under the Federal Family Education Loan Program, the
Secretary shall assume responsibility for all functions of the Guarantee Agency
under its program. To that end, the Secretary is authorized to, among other
options, transfer the guarantees to another Guarantee Agency or assume the
guarantees. It also provides that in the event the Secretary has determined that
a Guarantee Agency is unable to meet its guarantee obligations, holders of loans
guaranteed by such Guarantee Agency may submit claims directly to the Secretary
for payment, unless the Secretary has provided for the assumption of such
guarantees by another Guarantee Agency.
Federal Reimbursement
A Guarantee Agency's right to receive federal reimbursements for
various guarantee claims paid by such Guarantee Agency is governed by the Higher
Education Act and various contracts entered into between Guarantee Agencies and
the Secretary of Education. See "Description of the Guarantee Agencies --Federal
Agreements". Under the Higher Education Act and the Federal Reimbursement
Contracts, the Secretary of Education currently agrees to reimburse a Guarantee
Agency for the amounts expended by the Guarantee Agency in the discharge of its
guarantee obligation (i.e., the unpaid principal balance of and accrued interest
on loans guaranteed by the Guarantee Agency, which loans are referred to herein
as "guaranteed loans") as a result of the default of the borrower. With respect
to loans made prior to October 1, 1993, the Secretary currently agrees to
reimburse the Guarantee Agency for up to 100% of the amounts so expended. The
1993 Amendments provide for reimbursement of a maximum of 98% of the amount
expended with respect to guaranteed loans made on or after October 1, 1993.
Depending on the claims rate experience of a Guarantee Agency, such 100% (or
98%) reimbursement may be reduced as discussed in the formula described below.
The Secretary of Education also agrees to repay 100% of the unpaid principal
plus applicable accrued interest expended by a Guarantee Agency in discharging
its guarantee obligation as a result of the bankruptcy, death, or total and
permanent disability of a borrower (or in the case of a Plus Loan, the death of
the student on behalf of whom the loan was borrowed), or in certain
circumstances, as a result of school closures, which reimbursements are not to
be included in the calculations of the Guarantee Agency's Claims Rate experience
for the purpose of federal reimbursement under the Federal Reimbursement
Contracts.
The formula for computing the percentage of federal reimbursement
under the Federal Reimbursement Contracts is not accumulated over a period of
years but is measured by the amount of federal reimbursement payments in any one
federal fiscal year as a percentage of the original principal amount of loans
under the Federal Family Education Loan Program guaranteed by the Guarantee
Agency and in repayment at the end of the preceding fiscal year. Under the
formula, federal reimbursement payments to a Guarantee Agency in any one fiscal
year not exceeding 5% of the original principal amount of loans in repayment at
the end of the preceding fiscal year are to be paid by the Secretary of
Education at 100% (or 98% for loans made on or after October 1, 1993). Beginning
at any time during any fiscal year that federal reimbursement payments exceed
5%, and until such time as they may exceed 9%, of the original principal amount
of loans in repayment at the end of the preceding fiscal year, then
reimbursement payments on claims submitted during that period are to be paid at
90% (or 88% for loans made on or after October 1, 1993). Beginning at any time
during any fiscal year that federal reimbursement payments exceed 9% of the
original principal amount of loans in repayment at the end of the preceding
fiscal year, then such
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payments for the balance of that fiscal year will be paid at 80% (or 78% for
loans made on or after October 1, 1993). The original principal amount of loans
in repayment for purposes of computing reimbursement payments to a Guarantee
Agency means the original principal amount of all loans guaranteed by such
Guarantee Agency less: (1) guarantee payments on such loans, (2) the original
principal amount of such loans that have been fully repaid, and (3) the original
principal amount of such loans for which the first principal installment payment
has not become due or such first installment need not be paid because of a
Deferment Period.
Under present practice, after the Secretary of Education reimburses a
Guarantee Agency for a default claim paid on guaranteed loan, the Guarantee
Agency continues to seek repayment from the borrower. The Guarantee Agency
returns to the Secretary of Education payments that it receives from a borrower
after deducting and retaining (i) a percentage amount equal to the complement of
the reimbursement percentage in effect at the time the loan was reimbursed, and
(ii) an amount equal to 27% (or 18 1/2% in the case of a payment from the
proceeds of a Consolidation Loan) of such payments for certain administrative
costs. The Secretary of Education may, however, require the assignment to the
Secretary of defaulted guaranteed loans, in which event no further collections
activity need be undertaken by the Guarantee Agency, and no amount of any
recoveries shall be paid to the Guarantee Agency. Prior to the 1993 Amendments,
the percentage of collections which Guarantee Agencies could retain (as
described in clause (ii) above) was 30%.
A Guarantee Agency may enter into an addendum to its Interest Subsidy
Agreement (as hereinafter defined), which addendum provides for the Guarantee
Agency to refer to the Secretary of Education certain defaulted guaranteed
loans. Such loans are then reported to the Internal Revenue Service to "offset"
any tax refunds which may be due any defaulted borrower. To the extent that the
Guarantee Agency has originally received less than 100% reimbursement from the
Secretary of Education with respect to such a referred loan, the Guarantee
Agency will not recover any amounts subsequently collected by the federal
government which are attributable to that portion of the defaulted loan for
which the Guarantee Agency has not been reimbursed.
Rehabilitation of Defaulted Loans
Under Section 428F of the Higher Education Act, the Secretary of
Education is authorized to enter into an agreement with a Guarantee Agency
pursuant to which the Guarantee Agency shall sell defaulted loans that are
eligible for rehabilitation to an eligible lender. The Guarantee Agency shall
repay the Secretary of Education an amount equal to 81.5% of the then current
principal balance of such loan, multiplied by the reimbursement percentage in
effect at the time the loan was reimbursed. The amount of such repayment shall
be deducted from the amount of federal reimbursement payments for the fiscal
year in which such repayment occurs, for purposes of determining the
reimbursement rate for that fiscal year.
For a loan to be eligible for rehabilitation, the Guarantee Agency
must have received consecutive payments for 12 months of amounts owed on such
loan. Upon rehabilitation, a loan is eligible for all the benefits under the
Higher Education Act for which it would have been eligible had no default
occurred (except that a borrower's loan may only be rehabilitated once).
Eligibility for Federal Reimbursement
To be eligible for federal reimbursement payments, guaranteed loans
must be made by an eligible lender under the applicable Guarantee Agency's
Guarantee Program, which must meet requirements prescribed by the rules and
regulations promulgated under the Higher Education Act, including the borrower
eligibility, loan amount, disbursement, interest rate, repayment period and
guarantee fee provisions described herein and the other requirements set forth
in Section 428(b) of the Higher Education Act.
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Under the Higher Education Act, a guaranteed loan must be delinquent
for 180 days if it is repayable in monthly installments or 240 days if it is
payable in less frequent installments before a lender may obtain payment on a
guarantee from the Guarantee Agency. The Guarantee Agency must pay the lender
for the defaulted loan prior to submitting a claim to the Secretary of Education
for reimbursement. The Guarantee Agency must submit a reimbursement claim to the
Secretary of Education within 45 days after it has paid the lender's default
claim. As a prerequisite to entitlement to payment on the guarantee by the
Guarantee Agency, and in turn payment of reimbursement by the Secretary of
Education, the lender must have exercised reasonable care and diligence in
making, servicing and collecting the Guaranteed Loan.
Federal Interest Subsidy Payments
Interest subsidy payments are interest payments paid with respect to
an eligible loan during the period prior to the time that the loan enters
repayment and during Grace and Deferment Periods. The Secretary of Education and
the Guarantee Agencies entered into the Interest Subsidy Agreements as described
in "Description of the Guarantee Agencies --Federal Agreements", whereby the
Secretary of Education agrees to pay interest subsidy payments to the holders of
eligible guaranteed loans for the benefit of students meeting certain
requirements, subject to the holders' compliance with all requirements of the
Higher Education Act. Only Stafford Loans, and Consolidation Loans for which the
application was received on or after January 1, 1993, are eligible for interest
subsidy payments. Consolidation Loans made after August 10, 1993 are eligible
for interest subsidy payments only if all loans consolidated thereby are
Stafford Loans. In addition, to be eligible for interest subsidy payments,
guaranteed loans must be made by an eligible lender under the applicable
Guarantee Agency's Guarantee Program, and must meet requirements prescribed by
the rules and regulations promulgated under the Higher Education Act, including
the borrower eligibility, loan amount, disbursement, interest rate, repayment
period and guarantee fee provisions described herein and the other requirements
set forth in Section 428(b) of the Higher Education Act.
The Secretary of Education makes interest subsidy payments quarterly
on behalf of the borrower to the holder of a guaranteed loan in a total amount
equal to the interest which accrues on the unpaid principal amount prior to the
commencement of the repayment period of the loan or during any Deferment Period.
A borrower may elect to forego interest subsidy payments, in which case the
borrower is required to make interest payments.
Federal Administrative Expense Allowances
Prior to the adoption of the 1993 Amendments, each Guarantee Agency
was entitled to receive from the Secretary of Education an administrative cost
allowance equal to 1% of the total principal amount of the loans (other than
Consolidation Loans) guaranteed by the Guarantee Agency in any fiscal year, for
the purposes of administrative costs of pre-claims assistance for default
prevention and collection of defaulted guaranteed loans, administrative costs of
promoting commercial lender participation, administrative costs of monitoring
the enrollment and repayment status of students, and for other such costs
related to the Guarantee Agency's Guarantee Program. The 1993 Amendments
repealed such entitlement, effective October 1, 1993. The 1993 Amendments,
however, authorize payments for transition support (including administrative
costs) to Guarantee Agencies, in connection with the transition to direct
lending. See "Direct Loans" below. The Omnibus Rescissions and Appropriations
Act of 1996 provided for the payment to Guarantee Agencies of an administrative
expense allowance for the fiscal year ending September 30, 1995 equal to 1% of
the agency's new guarantee volume, and for the fiscal year ending September 30,
1996 equal to 0.85% of the agency's new guarantee volume. There are no
assurances that Congress will require such payments or that the Secretary of
Education will determine to continue to make any such payments in future years.
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Federal Advances
Pursuant to agreements entered into between the Guarantee Agencies and
the Secretary of Education under Sections 422 and 422(c) of the Higher Education
Act, the Secretary of Education was authorized to advance moneys from time to
time to the Guarantee Agencies for the purpose of establishing and strengthening
the Guarantee Agencies' reserves. Section 422(c) currently authorizes the
Secretary of Education to make advances to Guarantee Agencies in various
circumstances, on terms and conditions satisfactory to the Secretary, including
if the Secretary is seeking to terminate the Guarantee Agency's reimbursement
contract or assume the Guarantee Agency's functions, to assist the Guarantee
Agency in meeting its immediate cash needs or to ensure the uninterrupted
payment of claims.
Federal Special Allowance Payments
The Higher Education Act provides for the payment by the Secretary of
Education of additional subsidies, called Special Allowance Payments, to holders
of qualifying student loans. The amount of the Special Allowance Payments, which
are made on a quarterly basis, is computed by reference to the average of the
bond equivalent rates of the 91-day Treasury bills auctioned during the
preceding quarter (the "91-day T-Bill Rate"). The quarterly rate for Special
Allowance Payments for Student Loans made on or after October 1, 1981, and
generally before November 16, 1986 is computed by subtracting the applicable
interest rate on such loans from the 91-day T-Bill Rate, adding 3.5% to the
resulting per centum, and dividing the resulting per centum by four. For loans
disbursed on or after November 16, 1986, or loans to cover the costs of
instruction for periods of enrollment beginning on or after November 16, 1986,
the 1986 Amendments and 1987 Amendments substituted 3.25% for 3.5% in the
foregoing formula. For loans disbursed on or after October 1, 1992, the 1992
Amendments substituted 3.1% for 3.5% in such formula. For Stafford and
Unsubsidized Stafford Loans made on or after July 1, 1995, the 1993 Amendments
substitute 2.5% for 3.1% in such formula prior to the time such loans enter
repayment and during any Deferment Periods. For loans made on or after July 1,
1998, the special allowance formula is to be revised similarly to the manner in
which the applicable interest rate formula is revised, as described above under
"Loan Terms -- Interest Rates -- Stafford Loans".
For Plus and SLS Loans which bear interest at rates adjusted annually,
Special Allowance Payments are made only in years during which the interest rate
ceiling on such loans operates to reduce the rate that would otherwise apply
based upon the applicable formula. See "Loan Terms -- Interest Rates-- Plus
Loans" and "-- SLS Loans" above. Under the 1993 Amendments, Special Allowance
Payments are paid with respect to Plus Loans made on or after July 1, 1994 only
if the rate that would otherwise apply exceeds 10% per annum, notwithstanding
that the interest rate ceiling on such loans is 9% per annum.
The Balanced Budget and Deficit Control Act of 1985, as amended (known
as the "Gramm-Rudman Law") requires the President to issue a sequester order for
any federal fiscal year in which the projected budget exceeds the target for
that year. A sequester order for any fiscal year would apply to loans made on or
after October 1 of that fiscal year. The sequester order would change the
formula for calculating Special Allowance Payments for the first four Special
Allowance Payment periods relating to loans originally disbursed during that
fiscal year. The special allowance formula would be reduced to the 91-day T-Bill
Rate plus 3.0% (for loans with a special allowance formula of the 91-day T-Bill
Rate plus 3.1%).
For the Trustee to be eligible to receive Special Allowance Payments
with respect to any loans which were made or purchased with funds obtained by
the issuance of obligations, the income from which is exempt from taxation under
the Code (such as the Tax Exempt Series 1997-1 Notes), the Original Issuer may
not engage in any pattern or practice which results in a denial of a borrower's
access to loans under the Higher Education Act because of the borrower's race,
sex, color, religion, national origin, age, handicap status, income, attendance
at a particular eligible institution within the area served by the Original
Issuer, length of the borrower's educational program, or the borrower's academic
year in school.
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The Higher Education Act also provides that no special allowance may
be paid for such loans unless the Original Issuer submitted to the Governor of
the State a plan for doing business, for approval by the Governor after
consultation with EAC. Such plan is required to contain provisions designed to
assure that:
(1) no eligible lender in the area served by the Original Issuer
will be excluded from participation in the program of the Original
Issuer and that all eligible lenders may participate in the program on
the same terms and conditions if eligible lenders are going to
participate in the program;
(2) no director or staff member of the Original Issuer who
receives compensation from the Original Issuer may own stock in, or
receive compensation from any agency that would contract to service
and collect the loans of the Original Issuer;
(3) the Original Issuer will not purchase student loans from
participating lenders at a premium amounting to more than 1% of the
unpaid principal amount borrowed plus accrued interest to the date of
acquisition, but the Original Issuer may pay reasonable loan transfer
fees;
(4) the Original Issuer will, within the limit of funds available
and subject to applicable State and federal law, make loans to, or
purchase loans incurred by, all eligible students who are residents of
or who attend an eligible institution within the area served by the
Original Issuer;
(5) the Original Issuer has a plan under which it will pursue the
development of new lender participation in a continuing program of
benefits to students together with assurances of existing lender
commitments to the program; and
(6) there will be an annual audit of the Original Issuer by a
certified public accounting firm which will include review of
compliance by the Original Issuer with the provisions of the plan.
The Governor of the State has approved the Original Issuer's most
recent Plan for Doing Business. Because the Original Issuer expects to terminate
its participation in the Federal Family Education Loan Program, the Original
Issuer will no longer be capable of carrying out certain provisions of such plan
for doing business. The Original Issuer, SLFC, and the Corporation will each
covenant to comply with the provisions of such plan for doing business that
apply to their respective operations.
The Department of Education's regulations impose various sanctions on
holders of such loans for failure to comply with the plan for doing business and
such regulations, including, without limitation, withholding or seeking
reimbursement of Special Allowance Payments.
The Higher Education Act provides that if Special Allowance Payments
or interest subsidy payments have not been made within 30 days after the
Secretary of Education receives an accurate, timely and complete request
therefor, the special allowance payable to such holder shall be increased by an
amount equal to the daily interest accruing on the special allowance and
interest subsidy payments due the holder.
Special Allowance Payments and interest subsidy payments are reduced
by the amount which the lender is authorized or required to charge as an
origination fee, as described above under "Loan Terms -- Fees -- Origination
Fee". In addition, the amount of the lender origination fee described above
under "Loan Terms -- Fees -- Lender Origination Fees" is collected by offset to
Special Allowance Payments and interest subsidy payments.
Federal Student Loan Insurance Fund
The Higher Education Act authorizes the establishment of a Student
Loan Insurance Fund by the Federal government for making the federal insurance
and the federal reimbursement payments on defaulted student loans to Guarantee
Agencies. If moneys in the fund are insufficient to make the federal payments on
defaults of such
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loans, the Secretary of Education is authorized, to the extent provided in
advance by appropriation acts, to issue to the Secretary of the Treasury
obligations containing terms and conditions prescribed by the Secretary of
Education and approved by the Secretary of the Treasury, bearing interest at a
rate determined by the Secretary of the Treasury. The Secretary of the Treasury
is authorized and directed by the Higher Education Act to purchase such
obligations.
Direct Loans
The 1993 Amendments authorized a program of "direct loans", to be
originated by schools with funds provided by the Secretary of Education. Under
the direct loan program, the Secretary of Education is directed to enter into
agreements with schools, or origination agents in lieu of schools, to disburse
loans with funds provided by the Secretary. Participation in the program by
schools is voluntary. The goals set forth in the 1993 Amendments call for the
direct loan program to constitute 5% of the total volume of loans made under the
Federal Family Education Loan Program and the direct loan program for academic
year 1994-1995, 40% for academic year 1995-1996, 50% for academic years 1996-
1997 and 1997-1998 and 60% for academic year 1998-1999. No provision is made for
the size of the direct loan program thereafter. Based upon information released
by the General Accounting Office, participation by schools in the direct loan
program has not been sufficient to meet the goals for the 1995-1996 or 1996-1997
academic years.
The loan terms are generally the same under the direct loan program as
under the Federal Family Education Loan Program, though more flexible repayment
provisions are available under the direct loan program. At the discretion of the
Secretary of Education, students attending schools that participate in the
direct loan program (and their parents) may still be eligible for participation
in the Federal Family Education Loan Program, though no borrower could obtain
loans under both programs.
It is difficult to predict the impact of the direct lending program.
There is no way to accurately predict the number of schools that will
participate in future years, or, if the Secretary authorizes students attending
participating schools to continue to be eligible for Federal Family Education
Loan Program loans, how many students will seek loans under the direct loan
program instead of the Federal Family Education Loan Program. In addition, it is
impossible to predict whether future legislation will eliminate, limit or expand
the direct loan program or the Federal Family Education Loan Program.
DESCRIPTION OF THE GUARANTEE AGENCIES
General
The Indenture permits the Financing of Eligible Loans guaranteed by
various Guarantee Agencies. The Corporation expects that of the Eligible Loans
to be Financed on the Date of Issuance with the proceeds of the Series 1997-1
Notes, approximately 59.0% will be guaranteed by Education Assistance
Corporation ("EAC"), approximately 34.7% will be guaranteed by Pennsylvania
Higher Education Assistance Agency ("PHEAA"), and the remainder will be
guaranteed by one of the following Guarantee Agencies: United Student Aid Funds,
Inc., the North Dakota Guaranteed Student Loan Program, Northstar Guarantee
Inc., Great Lakes Higher Education Corporation, or Educational Credit Management
Corporation (formerly known as Transitional Guaranty Agency, Inc.). The
Corporation expects that California Student Aid Commission also will be a
Guarantee Agency for Eligible Loans to be Financed following the Date of
Issuance. Any other state agency or private nonprofit institution or
organization which administers a Guarantee Program, may also be a Guarantee
Agency of Eligible Loans to be Financed, subject to confirmation of ratings on
any Outstanding Unenhanced Notes or, if no Unenhanced Notes are then Outstanding
but Other Obligations are Outstanding, consent of each Other Beneficiary holding
such Outstanding Other Obligations, as evidenced in writing to the Trustee by
each such Other Beneficiary.
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The Corporation expects that the percentage of Financed Eligible Loans
guaranteed by EAC will increase over time, while the percentage guaranteed by
PHEAA will decrease. However, actual amounts guaranteed by these Guarantee
Agencies may vary from the Corporation's expectations. Proceeds of Additional
Notes issued on a parity basis under the Indenture, moreover, may be used to
finance Eligible Loans guaranteed by these or other Guarantee Agencies in
amounts unrelated to the expected amount of loans guaranteed by a particular
Guarantee Agency that is Financed with the proceeds of the Series 1997-1 Notes.
(Any Additional Notes will not be issued and sold under the Registration
Statement filed with respect to the Series 1997-1 Notes.)
A Guarantee Agency guarantees loans made to students or parents of
students by lending institutions such as banks, credit unions, savings and loan
associations, certain schools, pension funds and insurance companies. A
Guarantee Agency generally purchases defaulted student loans which it has
guaranteed from its cash and reserves (generally referred to herein as its
"Guarantee Fund"). A lender may submit a default claim to the Guarantee Agency
after the student loan has been delinquent for at least 180 days. Under the
Guarantee Agencies' current procedures, assuming that the defaulted student loan
complies with the Guarantee Agency's loan procedures manual or regulations, the
Guarantee Agency pays the lender for a default claim within 90 days of the
lender's filing the claim with the Guarantee Agency. The Guarantee Agency will
pay the lender interest accrued on the loan for up to 360 days after
delinquency. The Guarantee Agency must file a reimbursement claim with the
Department of Education within 45 days after the Guarantee Agency has paid the
lender for the default claim.
In general, a Guarantee Agency's Guarantee Fund has been funded
principally by administrative cost allowances paid by the Secretary of
Education, guarantee fees paid by lenders (the cost of which may be passed on to
borrowers), investment income on moneys in the Guarantee Fund, and a portion of
the moneys collected from borrowers on Guaranteed Loans that have been
reimbursed by the Secretary of Education to cover the Guarantee Agency's
administrative expenses.
Various changes to the Higher Education Act have adversely affected
the receipt of revenues by the Guarantee Agencies and their ability to maintain
their Guarantee Funds at previous levels, and may adversely affect their ability
to meet their guarantee obligations. These changes include the reduction in
reinsurance payments from the Secretary of Education because of reduced
reimbursement percentages; the reduction in maximum permitted guarantee fees
from 3% to 1% for loans made on or after July 1, 1994; the reduction and
possible elimination of administrative expense allowances from the Secretary of
Education; the reduction in supplemental preclaims assistance payments from the
Secretary of Education; and the reduction in retention by a Guarantee Agency of
collections on defaulted loans from 30% to 27%. Additionally, the adequacy of a
Guarantee Agency's Guarantee Fund to meet its guarantee obligations with respect
to existing student loans depends, in significant part, on its ability to
collect revenues generated by new loan guarantees. The Federal Direct Student
Loan Program may adversely affect the volume of new loan guarantees. Pending
legislation and future legislation may make additional changes to the Higher
Education Act that would significantly affect the revenues received by Guarantee
Agencies and the structure of the guarantee agency program. For a more complete
description of provisions of the Higher Education Act that relate to payments
described in this paragraph or affect the funding of a Guarantee Fund, see
"Description of Federal Family Education Loan Program".
The Higher Education Act gives the Secretary of Education various
oversight powers over Guarantee Agencies. These include requiring a Guarantee
Agency to maintain its Guarantee Fund at certain required levels and taking
various actions relating to a Guarantee Agency if its administrative and
financial condition jeopardizes its ability to meet its obligations. These
actions include, among others, providing advances to the Guarantee Agency,
terminating the Guarantee Agency's Federal Reimbursement Contracts, assuming
responsibility for all functions of the Guarantee Agency, and transferring the
Guarantee Agency's guarantees to another guarantee agency or assuming such
guarantees. The Higher Education Act provides that a Guarantee Agency's
Guarantee Fund shall be considered to be the property of the United States to be
used in the operation of the Federal Family Education Loan Program or the
federal Direct Student Loan Program, and, under certain circumstances, the
Secretary of Education may demand payment of amounts in the Guarantee Fund.
There can be no assurance that relevant federal laws, including the Higher
Education Act, will not be further changed in a manner that may adversely affect
the
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ability of a Guarantee Agency to meet its guarantee obligations. See
"Description of Federal Family Education Loan Program".
There are no assurances as to the Secretary of Education's actions if
a Guarantee Agency encounters administrative or financial difficulties or that
the Secretary of Education will not demand that a Guarantee Agency transfer all
or a portion of its Guarantee Fund to the Secretary of Education.
Information relating to the particular Guarantee Agencies set forth in
this Prospectus has been provided by the respective Guarantee Agencies, and
neither such information nor information included in the reports referred to
herein has been verified by, or is guaranteed as to accuracy or completeness by,
the Original Issuer, the Corporation or the Underwriters. Such information
should not be construed as a representation by the Original Issuer, the
Corporation or the Underwriters. No representation is made by the Original
Issuer, the Corporation or the Underwriters as to the accuracy or adequacy of
such information or the absence of material adverse changes in such information
subsequent to the dates thereof.
Federal Agreements
Each Guarantee Agency and the Secretary of Education have entered into
Federal Reimbursement Contracts pursuant to Section 428(c) of the Higher
Education Act (which include, for older Guarantee Agencies, a supplemental
contract pursuant to former Section 428A of the Higher Education Act), which
provide for the Guarantee Agency to receive 80% to 100% reimbursement of
insurance payments that the Guarantee Agency makes to eligible lenders with
respect to loans guaranteed by the Guarantee Agency prior to the termination of
the Federal Reimbursement Contracts or the expiration of the authority of the
Higher Education Act. The 1993 Amendments reduced the reimbursement percentages
referred to above with respect to claims on most loans made on or after October
1, 1993. See "Effect of Annual Claims Rate" below. The Federal Reimbursement
Contracts provide for termination under certain circumstances and also provide
for certain actions short of termination by the Secretary of Education to
protect the federal interest. See "Description of Federal Family Education Loan
Program -- Contracts with Guarantee Agencies -- Federal Reimbursement".
In addition to guarantee benefits, qualified Student Loans acquired
under the Program benefit from certain federal subsidies. Each Guarantee Agency
and the Secretary of Education have entered into an interest subsidy agreement
under Section 428(b) of the Higher Education Act (as amended, the "Interest
Subsidy Agreement"), which entitles the holders of eligible loans guaranteed by
the Guarantee Agency to receive interest subsidy payments from the Secretary of
Education on behalf of certain students while the student is in school, during a
six to twelve month Grace Period after the student leaves school, and during
certain Deferment Periods, subject to the holders' compliance with all
requirements of the Higher Education Act. See "Description of Federal Family
Education Loan Program -- Contracts with Guarantee Agencies -- Federal Interest
Subsidy Payments" for a more detailed description of the interest subsidy
payments.
United States Courts of Appeals have held that the federal government,
through subsequent legislation, has the right unilaterally to amend the
contracts between the Secretary of Education and the Guarantee Agencies
described herein. Amendments to the Higher Education Act in 1986, 1987, 1992 and
1993, respectively (i) abrogated certain rights of guarantee agencies under
contracts with the Secretary of Education relating to the repayment of certain
advances from the Secretary of Education, (ii) authorized the Secretary of
Education to withhold reimbursement payments otherwise due to certain guarantee
agencies until specified amounts of such guarantee agencies' reserves had been
eliminated, (iii) added new reserve level requirements for guarantee agencies
and authorized the Secretary of Education to terminate the Federal Reimbursement
Contracts under circumstances that did not previously warrant such termination,
and (iv) expanded the Secretary of Education's authority to terminate such
contracts and to seize guarantee agencies' reserves. There can be no assurance
that future legislation will not further adversely affect the rights of the
Guarantee Agencies, or holders of loans guaranteed by a Guarantee Agency under
such contracts.
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Effect of Annual Claims Rate
A Guarantee Agency's ability to meet its obligation to pay default
claims on Financed Eligible Loans will depend on the adequacy of its Guarantee
Fund and, under the current federal reinsurance arrangement, the default
experience of all lenders under the Guarantee Agency's Guarantee Program. A high
default experience among lenders participating in a Guarantee Agency's Guarantee
Program may cause the Guarantee Agency's Claims Rate (as defined below) for its
Guarantee Program to exceed the 5% and 9% levels described below, and result in
the Secretary of Education reimbursing the Guarantee Agency at lower percentages
of default claims payments made by the Guarantee Agency.
Each Guarantee Agency is currently entitled to receive reimbursement
payments under the Federal Reimbursement Contracts in amounts that vary
depending on the Claims Rate experience of the Guarantee Agency. The "Claims
Rate" is computed by dividing total default claims since the previous September
30 by the total original principal amount of the Guarantee Agency's guaranteed
loans in repayment on such September 30. On October 1 of each year the Claims
Rate begins at zero, regardless of the experience in preceding years. For loans
made prior to October 1, 1993, if the Claims Rate remains equal to or below 5%
within a given federal fiscal year (October 1 through September 30), the
Secretary of Education is currently obligated to provide 100% reimbursement; if
and when the Claims Rate exceeds 5% and until such time, if any, as it exceeds
9% during the fiscal year, the reimbursement rate is at 90%; if and when the
Claims Rate exceeds 9% during the fiscal year, the reimbursement rate for the
remainder of the fiscal year is at 80%. For loans made prior to October 1, 1993,
each Guarantee Agency is currently entitled to at least 80% reimbursement from
the Secretary of Education on default claims that it purchases, regardless of
its Claims Rate. The reimbursement percentages for loans made on or after
October 1, 1993 are reduced from 100%, 90% and 80% to 98%, 88% and 78%,
respectively. See "Description of Federal Family Education Loan Program".
The Claims Rates for EAC and PHEAA for each of the last five federal
fiscal years is set forth in the table under "Certain Historical Information for
Guarantee Agencies -- Claims Rate" below.
Education Assistance Corporation - EAC
EAC is a South Dakota nonprofit corporation organized in 1978 to
administer the guaranteed loan program in the State. Since 1983, EAC also has
provided student loan guarantees and other services to certain lenders,
borrowers and schools in other states. EAC has no members. Two of the present
seven members of the Board of Directors of EAC are presently members of the
Boards of Directors of the Original Issuer, the Corporation and SLFC. EAC
presently employs a staff of 54 persons, plus part time help employed on a
periodic basis.
From January 16, 1979 through September 30, 1996, EAC had guaranteed
approximately $992,300,000 principal amount of loans under the Higher Education
Act, of which EAC estimates that approximately $480,293,000 aggregate unpaid
principal amount was outstanding as of September 30, 1996. As of September 30,
1996, EAC had total assets of approximately $22,368,000, total liabilities of
approximately $14,789,000, and a fund balance of approximately $7,579,000. On
May 21, 1997, EAC prepaid various long term borrowings in the aggregate
principal amount of $6,464,912, plus accrued interest in the amount of $122,745,
thus reducing its assets and liabilities as of such date by an aggregate amount
of $6,587,657. EAC will provide a copy of its most recent annual report upon
receipt of a written request directed to Education Assistance Corporation, 115
First Avenue, Southwest, Aberdeen, South Dakota 57401, Attention: President.
EAC ceased issuing new loan guarantees as of December 22, 1987 in
connection with the enactment of the Omnibus Budget Reconciliation Act of 1987
(the "1987 Budget Amendments") and EAC's related dispute with the Secretary of
Education concerning EAC's right to retain its reserves. In January 1988, EAC
entered into an arrangement with PHEAA, whereby EAC processed applications and
guarantee claims and undertook other administrative tasks with respect to loans
made after December 21, 1987 that EAC would otherwise have guaranteed, and PHEAA
guaranteed such loans. EAC recommenced guaranteeing student loans in July 1991,
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around which time PHEAA ceased guaranteeing South Dakota loans pursuant to
this arrangement. In May 1997, EAC recommenced guaranteeing loans to
borrowers neither resident in South Dakota nor attending school in South
Dakota, and ceased its arrangement with PHEAA with respect to such loans.
EAC has created Educational Assistance Service Company, Inc.
("EASCI"), a wholly-owned subsidiary of EAC, the primary purpose of which
is to furnish a complete range of loan origination, processing, monitoring
and related services with respect to student loans made under the federal
guaranteed student loan program. EASCI commenced operations on March 6,
1985. As of September 30, 1996, EASCI provided services to 136 lenders for
a portfolio of approximately $223,466,000 outstanding principal amount. The
persons that presently constitute EAC's Board of Directors also are the
Directors of EASCI. EAC shares some personnel, office space, overhead and
computer time with EASCI.
Pennsylvania Higher Education Assistance Agency - PHEAA
PHEAA is a body corporate and politic constituting a public
corporation and government instrumentality of the Commonwealth of
Pennsylvania (the "Commonwealth") created pursuant to the Act of August 7,
1963, P.L. 549 (as amended, the "PHEAA Act"). PHEAA's statutory purpose of
improving higher education opportunities by assisting students in meeting
their expenses involves a variety of activities, including administering
numerous grant programs, originating and purchasing student loans,
servicing student loans made by PHEAA and others and guaranteeing student
loans.
PHEAA is designated by the Secretary of Education as the Guarantee
Agency for the Commonwealth and for the States of West Virginia and
Delaware. PHEAA has approximately 2,100 employees. Its principal office
is located in Harrisburg, Pennsylvania, with six regional offices located
throughout Pennsylvania and additional offices located in California, West
Virginia and Delaware.
PHEAA's activities are subject to audit by the Commonwealth's
Department of the Auditor General, and PHEAA is required to make an annual
report to the Governor of the Commonwealth and the legislature showing its
condition at the end of the Commonwealth's fiscal year.
PHEAA will provide a copy of its most recent annual report upon
receipt of a written request directed to Pennsylvania Higher Education
Assistance Agency, 1200 North 7th Street, Harrisburg, Pennsylvania 17102-
1444, Attention: Timothy A. Guenther, Senior Vice President and Chief
Financial Officer.
The PHEAA Act created an educational loan assistance fund within the
State Treasury (the "Educational Loan Assistance Fund"). The PHEAA Act
provides that this fund is a continuing fund in which may be deposited
moneys received from repayments of principal on loans from the fund and
payments of interest and other fees and charges with respect to loans made
pursuant to the PHEAA Act, insurance premiums and charges assessed and
collected by PHEAA on loans made from the fund, appropriations made to the
fund by the legislature, proceeds of the sale of notes, bonds or other
indebtedness to the extent and in the manner provided by Board resolution,
other moneys received from any other source for the purpose of this fund,
and moneys received from the federal government for the purpose of this
fund or the PHEAA Act. The PHEAA Act further provides that, except as
otherwise provided for in any contracts with bondholders, all
appropriations and payments made into the Educational Loan Assistance Fund
are appropriated to the Board of Directors and may be applied and reapplied
as the Board shall direct and shall not be subject to lapsing.
PHEAA is authorized to issue bonds or notes, with the approval of the
Governor of the Commonwealth, for the purpose of purchasing, making or
guaranteeing loans to students or parents, or to lending institutions or
postsecondary institutions to make student or parent loans. The PHEAA Act
provides that all accrued and future earnings from funds invested by the
Board of Directors and such other accrued and future nonappropriated funds,
including, but not limited to, those funds obtained from the federal
government, insurance premiums, charges assessed by PHEAA, loan servicing
revenues, and contributions for the same purpose shall be available to
PHEAA
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and shall be deposited in the State Treasury and may be utilized at the
discretion of the Board of Directors for carrying out any of the corporate
purposes of PHEAA. Upon the dissolution of PHEAA or the cession of its
activities, all the property and moneys of PHEAA in excess of its
obligations shall become the property of the Commonwealth.
PHEAA has no power to pledge the credit or taxing power of the
Commonwealth or to make PHEAA debts payable out of any moneys except those
of PHEAA. Neither the faith and credit nor the taxing power of the
Commonwealth is pledged to the payment of any of PHEAA's obligations.
For accounting purposes, PHEAA has divided the Educational Loan
Assistance Fund into a Higher Education Assistance Fund (the "Assistance
Fund") and a Revenue Bond Fund (the "PHEAA Bond Fund"). Appropriations,
revenues and expenditures allocable to all PHEAA's programs, other than
assets and expenditures relating to its tax-exempt revenue bond financings,
are allocated to the Assistance Fund. All assets included in the PHEAA Bond
Fund are pledged to particular bond and note issues of PHEAA and are not
available to meet guarantee or other obligations of PHEAA related to its
other programs. As noted below, several obligations of PHEAA under certain
bond and note financings, though secured and collateralized by specified
assets in PHEAA's Bond Fund, are obligations not limited to such assets.
Under those financings, certain persons may seek recourse against the
Assistance Fund.
As of June 30, 1996, the Assistance Fund had total assets of
approximately $837 million, total liabilities of approximately $615
million, and fund equity of approximately $222 million. PHEAA estimates
that the portion of its fund equity that would be treated as its Guarantee
Fund under the Higher Education Act would be approximately $168 million.
The PHEAA Bond Fund had total assets of approximately $1.5 billion, total
liabilities of approximately $1.4 billion and fund equity of approximately
$54 million as of June 30, 1996.
Substantially all of PHEAA's expenditures relating to the various
grant programs that it administers (other than administrative expenses) are
derived from appropriations from the Commonwealth. In recent years, PHEAA
has not received any appropriations to cover its administrative expenses.
To meet PHEAA's obligations under its servicing and guarantee programs,
PHEAA has in the past relied, and expects in the future to continue to
rely, principally on servicing fee revenues; income on various investments
in the Assistance Fund (including various types of student loans); and
revenues generated by its activity as a guarantee agency under the Higher
Education Act, including federal reimbursement payments, administrative
cost allowances, student loan insurance premiums, and retentions from
collections on defaulted loans. The implementation of the new direct loan
program or other modifications to the Higher Education Act may reduce
certain servicing fee revenues or income generated by PHEAA's activity as a
guarantee agency.
PHEAA began guaranteeing student loans in 1964. As of June 30, 1996,
PHEAA had guaranteed a total of approximately $18.6 billion principal
amount of student loans under the Higher Education Act. Of that amount,
PHEAA estimates that approximately $11.7 billion original principal amount
of such loans was outstanding. PHEAA initially guaranteed loans only to
residents of the Commonwealth or persons who planned to attend or were
attending eligible educational institutions in the Commonwealth. In May
1986, PHEAA began guaranteeing loans to borrowers that did not meet these
residency requirements pursuant to its national guarantee program. Under
the PHEAA Act, guarantee payments on loans under PHEAA's national guarantee
program (including Financed Eligible Loans Guaranteed by PHEAA) may not be
paid from funds appropriated by the Commonwealth. The annual amount of
loans guaranteed by PHEAA pursuant to its Guarantee Program has increased
in each of the last three fiscal years. PHEAA's claims rate for purposes
of receiving federal reinsurance is described above under "Effect of Annual
Claims Rate".
In addition to guaranteeing loans under the Higher Education Act,
PHEAA also operates certain guarantee programs for which it receives no
federal reinsurance. PHEAA had outstanding guarantee obligations on such
loans in the amount of approximately $61 million as of June 30, 1996.
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PHEAA began servicing loans for lenders in 1973, under a contract with
Student Loan Marketing Association ("Sallie Mae") to service loans Sallie Mae
purchased from Pennsylvania banks and other lenders. In 1974, PHEAA was granted
legislative authority to market its servicing system to other states and
lenders. As a result, PHEAA now has contracts with Sallie Mae, state agencies
and commercial lenders throughout the United States. PHEAA's two principal
servicing products are its full-servicing operation and its remote servicing
operation. As of March 31, 1997, under PHEAA's full-servicing program, it
serviced over 1,300,000 accounts with a principal balance of approximately $11.1
billion for 320 customers; and under its remote servicing operation, it serviced
over 700,000 accounts in an aggregate principal amount of approximately $3.5
billion for four customers. Servicing revenue generated from PHEAA's servicing
of loans that it owns accounted for approximately 28% of servicing revenues for
the 12 months ended June 30, 1996. For the year then ended, one other customer
accounted for approximately 15% of servicing revenues. PHEAA's management
expects gross servicing revenues to continue to increase.
PHEAA's current servicing agreements have contractual terms at
inception ranging from three years to life of the loan. Under PHEAA's servicing
agreements, PHEAA generally has agreed to reimburse customers for any claims,
losses, liabilities or expenses which arise out of or relate to PHEAA's acts or
omissions with respect to services provided under such agreements where the
final determination of PHEAA's liability is established by an arbitrator, by a
court of law of competent jurisdiction, or by way of settlement. PHEAA must rely
on moneys in the Assistance Fund to cover expenditures necessary to meet its
contractual obligations under the servicing agreements, including any potential
liabilities. PHEAA has developed a new servicing system in consultation with the
consulting firm Deloitte & Touche, IBM and servicing clients. Conversion to the
new system began in the second quarter of 1995 and is ongoing.
PHEAA acts as an originator and secondary market for various types of
student loans, including loans it has guaranteed under the Higher Education Act,
loans insured by the United States Department of Health and Human Services under
the Health Education Assistance Loan Program, and loans which are insured by
PHEAA without any form of federal reinsurance. PHEAA has financed most of its
acquisitions and originations of student loans through the issuance of student
loan revenue bonds. PHEAA has, however, used moneys in the Assistance Fund to
finance student loans. As of June 30, 1996, the Assistance Fund contained the
following approximate outstanding principal amounts of student loans which are
not otherwise pledged to secure PHEAA's financings: $33 million of student loans
which are not insured or reinsured; $23.8 million of student loans guaranteed by
PHEAA under the Higher Education Act which are reinsured (approximately $9.6
million of which were consolidation loans); and $6.6 million of health education
assistance loans which are federally insured. Of those amounts, $4 million of
student loans guaranteed by PHEAA under the Higher Education Act which are
federally reinsured, are not eligible for federal interest subsidy payments or
Special Allowance Payments. Other student loans owned by PHEAA in the Assistance
Fund and the PHEAA Bond Fund are pledged to certain financings and unavailable
to meet PHEAA's guarantee obligations. As of such date, approximately $163.1
million of the Assistance Fund was deposited with and invested by the State
Treasurer.
PHEAA had outstanding debt and/or credit facilities (under which the
entire aggregate amount of funds available has not been drawn) in the amount of
approximately $2 billion as of June 30, 1996. Although most of PHEAA's debt
issues are limited obligations of PHEAA, under certain circumstances, PHEAA's
reimbursement obligations to certain credit facility providers are not limited
to the assets pledged to those debt issues. For instance, PHEAA is party to
several credit facilities relating to certain series of bonds requiring purchase
by PHEAA of specified student loans from the applicable trust estate when a
claim for insurance has been denied. Such covenants are sometimes general
obligations of PHEAA. Even if these financings are fully collateralized,
therefore, credit enhancement providers may be able to seek repayment from the
Assistance Fund. None of the above referenced indebtedness is general obligation
debt of, or is backed by the faith, credit and taxing power of, the Commonwealth
or any of its political subdivisions.
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PHEAA is also a party to various sublease agreements and lease
purchase agreements in connection with debt financings used to provide funds for
the acquisition of office buildings, parking facilities, and equipment for
PHEAA. PHEAA's financial obligations under such agreements are payable from the
Assistance Fund.
Certain Historical Information for Guarantee Agencies
Set forth below is certain historical information with respect to each
Guarantee Agency that is expected to guaranty 5% or more of the Financed
Eligible Loans as of the Date of Issuance (EAC and PHEAA) and with respect to
all guarantors of loans under the Federal Family Education Loan Program. Except
as otherwise indicated below, the information regarding each Guarantee Agency
has been obtained from the Department of Education's Federal Fiscal Year 1993
Loan Programs Data Book (the "DOE Data Book"). No independent verification of
such information has been or will be made by the Corporation, the Original
Issuer or the Underwriters.
Guarantee Volume. The following table sets forth the approximate
aggregate principal amount of loans under the Federal Family Education Loan
Program that have first become committed to be guaranteed by EAC and PHEAA and
by all guarantors of such loans in each of the five Federal Fiscal Years 1992
through 1996:*
<TABLE>
<CAPTION>
Stafford, Unsubsidized Stafford, SLS, PLUS and
Consolidated Loans Guaranteed
Federal Dollars in Millions
Fiscal All
Year EAC PHEAA Guarantors
------ --------- -------------------- ------------
<S> <C> <C> <C> <C>
1992 $ 66.7 $1,410.4 $16,114.0
1993 85.7 1,857.1 19,356.1
1994 120.3 2,003.4 **
1995 142.8 2,221.5 **
1996 128.2 2,227.7 **
</TABLE>
__________
* The information set forth in the table above has been obtained from
EAC, PHEAA and, as to All Guarantors, the DOE Data Book.
** Not available.
Reserve Ratio. Each Guarantee Agency's reserve ratio is determined by
dividing its cumulative cash reserves by the original principal amount of the
outstanding loans it has agreed to guarantee. The term "cumulative cash
reserves" refers to cash reserves plus (i) sources of funds (including insurance
premiums, state appropriations, federal advances, federal reinsurance payments,
administrative cost allowances, collections on claims paid and investment
earnings) minus (ii) uses of funds (including claims paid to lenders, operating
expenses, lender fees, the Department's share of collections on claims paid,
returned advances and reinsurance fees). The "original principal amount of
outstanding loans" consists of the original principal amount of loans guaranteed
by such Guarantee Agency minus (i) the original principal amount of loans
cancelled, claims paid, loans paid in full and loan guarantees transferred from
such Guarantee Agency to other guarantors, plus (ii) the original principal
amount of loan guarantees transferred to such Guarantee Agency from other
guarantors. The following table sets forth each EAC's and PHEAA's cumulative
cash reserves and their corresponding reserve ratios and the national average
reserve ratio for all guarantors for the five Federal Fiscal Years 1992 through
1996.* As discussed above under "Education Assistance Corporation -- EAC," on
May 21, 1997, EAC prepaid various long term borrowings in the aggregate
principal amount of $6,464,912, plus accrued interest in the amount of $122,745,
thus reducing its assets and liabilities as of such date by an aggregate amount
of $6,587,657. This will result in EAC's cumulative cash
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reserve being reduced by this amount and the Original Issuer's management
expects that it will result in a reduction of EAC's reserve ratio.
<TABLE>
<CAPTION>
EAC PHEAA
-------------------- -------------------- National
Federal Cumulative Cumulative Average
Fiscal Cash Reserve Cash Reserve Reserve
Year Reserves** Ratio Reserves** Ratio Ratio
------- ---------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1992 $ 9.2 2.6% $ 85.9 1.1% 1.4%
1993 12.1 3.1 100.9 1.1 1.7
1994 14.2 3.1 133.6 1.3 1.4
1995 15.7 2.9 166.3 1.5 1.6
1996 17.0 2.8 210.6 1.6 1.6
</TABLE>
_______________
* The information set forth in the table above has been obtained from
EAC, PHEAA and, as to the national average, the DOE Data Book (with
respect to fiscal years 1992 and 1993) and from the Department of
Education (with respect to fiscal years 1994, 1995 and 1996).
According to the Department of Education, available cash reserves may
not always be an accurate barometer of a guarantor's financial health.
** Dollars in millions.
Recovery Rates. A Guarantee Agency's recovery rate is determined by
dividing the amount recovered from borrowers by such Guarantee Agency by the
aggregate amount of default claims paid by such Guarantee Agency during the
applicable Federal Fiscal Year with respect to borrowers. The table below sets
forth the recovery rates for EAC and PHEAA and the national average recovery
rates for all guarantors with respect to Stafford Loans (the only type of
Student Loan for which the DOE Data Book discloses recovery rates) for the five
Federal Fiscal Years 1992 through 1996.* EAC's and PHEAA's recovery rates have
exceeded the national average recovery rate in each of the five Federal Fiscal
years shown in the Recovery Rate table below. The Original Issuer's management
does not believe that recovery rates provide an accurate indication of a
guarantor's financial health.
<TABLE>
<CAPTION>
Federal Recovery Rate
Fiscal --------------- National
Year EAC PHEAA Average
---- --- ----- ---------
<S> <C> <C> <C>
1992 93.48% 46.5% 35.1%
1993 98.04 48.2 38.1
1994 124.35 52.90 39.38
1995 53.66 53.29 40.67
1996 66.70 55.04 43.20**
</TABLE>
__________
* The information set forth in the table above has been obtained from
EAC, PHEAA and, as to the national average, the Department of
Education.
** 1996 national average does not include all guarantor data, as all
guarantors have not been processed.
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Loan Loss Reserve. The DOE Data Book does not disclose whether any
guarantor has established a segregated loan loss reserve with respect to its
student loan guarantee obligations. Accordingly, to the extent that a guarantor
has not established such a segregated loan loss reserve, if a guarantor receives
less than full reimbursement of its guarantee obligations from the Department of
Education, the guarantor would be forced to look to its existing assets to
satisfy any such guarantee obligations not so reimbursed.
Claims Rate. The following table sets forth the Claims Rate of EAC and
PHEAA and the national average for all guarantors for the last five Federal
Fiscal Years 1992 through 1996:*
<TABLE>
<CAPTION>
Federal Claims Rate National
Fiscal --------------------- ---------
Year EAC PHEAA Average
-------- ----- ------ ---------
<S> <C> <C> <C> <C>
1992 1.25% 2.84% 4.15%
1993 1.28 2.32 3.83
1994 1.43 2.18 3.44
1995 1.56 1.97 3.21
1996 1.54 1.58 3.25
</TABLE>
__________
* The information set forth in the table above has been obtained from
EAC, PHEAA and, as to the national average, the Department of
Education.
EAC's and PHEAA's Claims Rate have been lower than the national
average Claims Rate in each of the five Federal Fiscal Years shown in the
Claims Rate table above. Management of EAC and PHEAA have indicated to the
Corporation that they are currently unaware of any trends or conditions
which would cause their respective Claims Rate to exceed 5% and thereby
result in less than maximum reimbursement for reinsurance claims to the
Department of Education. Notwithstanding the above, no assurance can be
made that any such trends will continue or not deteriorate, or that any
Guarantee Agency will receive full reimbursement for reinsurance claims (or
the full 98% maximum reimbursement for loans first disbursed on or after
October 1, 1993).
TAX MATTERS
Tax Exempt Series 1997-1 Notes
In the opinion of Dorsey & Whitney LLP, as Bond Counsel, under laws,
regulations, rulings and decisions in effect on the Date of Issuance of the
Series 1997-1 Notes, interest on the Tax Exempt Series 1997-1 Notes is not
includable in gross income of the owners thereof for federal income tax
purposes. In rendering this opinion, Dorsey & Whitney LLP will rely upon
certifications by officers of the Original Issuer, SLFC and the Corporation and
certain covenants of the Original Issuer, SLFC and the Corporation contained in
the Indenture with respect to certain matters material to the exemption of
interest on the Tax Exempt Series 1997-1 Notes from federal income taxation,
including, without limitation, certifications and covenants as to the use of the
proceeds of the Tax Exempt Series 1997-1 Notes, and will assume that the
Original Issuer, SLFC and the Corporation will comply with applicable
requirements of the Code. In the opinion of Dorsey & Whitney LLP, interest on
the Tax Exempt Series 1997-1 Notes is an item of tax preference which is
included in "alternative minimum taxable income" for purposes of the federal
alternative minimum tax under Section 55 of the Code.
Provisions of the Code impose continuing requirements that must be met
after the issuance of the Tax Exempt Series 1997-1 Notes for interest thereon to
be and remain excludable from gross income for federal income
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tax purposes. Noncompliance with such requirements may cause the interest
on the Tax Exempt Series 1997-1 Notes to be includable in gross income for
such purposes, either prospectively or retroactively to the date of
issuance of the Tax Exempt Series 1997-1 Notes. These requirements include,
but are not limited to, provisions that prescribe that the proceeds of the
Tax Exempt Series 1997-1 Notes and certain other amounts are subject to
yield and other investment limits and provisions that require that certain
investment earnings be rebated on a periodic basis to the Treasury
Department of the United States.
The Code contains numerous provisions which could affect the federal
tax consequences of owning Tax Exempt Series 1997-1 Notes and receiving
interest thereon. The following is a brief summary of some of the
significant provisions applicable to particular Tax Exempt Series 1997-1
Noteholders, but is not intended to be an exhaustive discussion of
collateral tax consequences arising from ownership of the Tax Exempt Series
1997-1 Notes. Prospective Tax Exempt Series 1997-1 Noteholders should
consult their own tax advisers with respect to the impact of such
provisions on their own tax situations.
Interest on the Tax Exempt Series 1997-1 Notes is includable in "net
investment income" of foreign insurance companies for purposes of Section
842(b) of the Code, and may be included in the income of a foreign
corporation for purposes of the branch profits tax imposed by Section 884
of the Code. Additionally, interest on the Tax Exempt Series 1997-1 Notes
constitutes "passive investment income" for purposes of the tax imposed by
Section 1375 of the Code on such income of certain S corporations.
Section 265 of the Code denies a deduction for interest on
indebtedness incurred or continued to purchase or carry the Tax Exempt
Series 1997-1 Notes. Indebtedness may be allocated to the Tax Exempt
Series 1997-1 Notes for this purpose even though not directly traceable to
the purchase of the Tax Exempt Series 1997-1 Notes. The Code also
restricts the deductibility of other expenses allocable to the Tax Exempt
Series 1997-1 Notes. In the case of a financial institution described in
Section 265(b)(5) of the Code, no deduction is allowed under the Code for
that portion of the taxpayer's interest expense which is allocable to
interest on the Tax Exempt Series 1997-1 Notes within the meaning of
Section 265(b). In the case of an insurance company subject to the tax
imposed by Section 831 of the Code, the amount which otherwise would be
taken into account as "losses incurred" under Section 832(b)(5) is reduced
by an amount equal to 15% of the interest on the Tax Exempt Series 1997-1
Notes that is received or accrued during the taxable year.
Interest on the Tax Exempt Series 1997-1 Notes will be included in
calculating "modified adjusted gross income" under Section 86 of the Code
for purposes of determining whether, and the extent to which, a portion of
a taxpayer's "social security benefits" or "tier 1 railroad retirement
benefits" will be included in gross income for federal income tax.
Federal Income Tax Consequences
The following is a summary of the material federal income tax
consequences of the purchase, ownership and disposition of Notes for the
investors described below and is based on the advice of Dorsey & Whitney
LLP, as tax counsel to the Original Issuer and the Corporation. The
Original Issuer and the Corporation, as successor to the Original Issuer in
respect of the Notes, are hereinafter referred to collectively as the
"Issuer." This summary is based upon the Code and other laws, regulations,
rulings and decisions currently in effect, all of which are subject to
change. The discussion does not deal with all federal tax consequences
applicable to all categories of investors, some of which may be subject to
special rules. In addition, this summary is generally limited to investors
who will hold the Series 1997-1 Notes as "capital assets" (generally,
property held for investment) within the meaning of Section 1221 of the
Code. Investors should consult their own tax advisors to determine the
federal, state, local and other tax consequences of the purchase, ownership
and disposition of the Series 1997-1 Notes of any series. Prospective
investors should note that no rulings have been or will be sought from the
Internal Revenue Service (the "Service") with respect to any of the federal
income tax consequences discussed below, and since there are no cases or
rulings concerning similar transactions, there can be no assurance that the
Service will not take contrary positions.
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Characterization of the Trust Estate
Based upon certain assumptions and certain representations of the
Issuer, Dorsey & Whitney LLP will render its opinion to the effect that the
Series 1997-1 Notes will be treated as debt of the Issuer, rather than as
an interest in the Financed Eligible Loans and other assets of the Trust
Estate, for federal income tax purposes. Such opinion will not be binding
on the courts or the Service. It is possible that the Service could assert
that, for purposes of the Code, the transaction contemplated by this
Prospectus constitutes a sale of the assets comprising the Trust Estate (or
an interest therein) to the Holders or that the relationship which will
result from this transaction is that of a partnership, or an association
taxable as a corporation.
If, instead of treating the transaction as creating secured debt in
the form of the Series 1997-1 Notes issued by the Issuer as a corporate
entity, the transaction were treated as creating a partnership among the
Noteholders, the Servicer and the Issuer, which has purchased the
underlying Trust Estate assets, the resulting partnership would not be
subject to federal income tax. Rather, the Servicer, the Issuer and each
Noteholder would be taxed individually on their respective distributive
shares of the partnership's income, gain, loss, deductions and credits.
The amount and timing of items of income and deduction of the Noteholder
may differ if the Series 1997-1 Notes were held to constitute partnership
interests, rather than indebtedness.
If, alternatively, it were determined that this transaction created an
entity other than the Issuer which was classified as a corporation or a
publicly traded partnership taxable as a corporation and was treated as
having sold the assets comprising the Trust Estate, the Trust Estate would
be subject to federal income tax at corporate income tax rates on the
income it derives from the Financed Eligible Loans and other assets, which
would reduce the amounts available for payment to the Noteholders. Cash
payments to the Noteholders generally would be treated as dividends for tax
purposes to the extent of such corporation's earnings and profits. A
similar result would apply if the Noteholders were deemed to have acquired
stock or other equity interests in the Issuer. However, as noted above,
the Issuer has been advised that the Series 1997-1 Notes will be treated as
debt of the Issuer for federal income tax purposes.
Characterization of the Series 1997-1 Notes as Indebtedness
The Issuer and the Noteholders express in the Indenture their intent
that, for applicable tax purposes, the Series 1997-1 Notes will be
indebtedness of the Issuer secured by the Trust Estate. The Issuer and the
Noteholders, by accepting the Series 1997-1 Notes, have agreed to treat the
Series 1997-1 Notes as indebtedness of the Issuer for federal income tax
purposes. The Issuer intends to treat this transaction as a financing
reflecting the Series 1997-1 Notes as its indebtedness for tax and
financial accounting purposes.
In general, the characterization of a transaction as a sale of
property or a secured loan, for federal income tax purposes, is a question
of fact, the resolution of which is based upon the economic substance of
the transaction, rather than its form or the manner in which it is
characterized. While the Service and the courts have set forth several
factors to be taken into account in determining whether the substance of a
transaction is a sale of property or a secured indebtedness, the primary
factor in making this determination is whether the transferee has assumed
the risk of loss or other economic burdens relating to the property and has
obtained the benefits of ownership thereof. Notwithstanding the foregoing,
in some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of
the transaction does not accord with its form.
The Issuer believes that it has retained the preponderance of the
primary benefits and burdens associated with Financed Eligible Loans and
other assets comprising the Trust Estate and should, thus, be treated as
the owner of such assets for federal income tax purposes. If, however, the
Service were to successfully assert that this transaction should be treated
as a sale of the Trust Estate assets, the Service could further assert that
the entity created pursuant to the Indenture, as the owner of the Trust
Estate for federal income tax purposes, should be deemed engaged in a
business and, therefore, characterized as an association taxable as a
corporation.
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Taxation of Interest Income of Noteholders
In the opinion of Dorsey & Whitney LLP, payments of interest with
regard to the Taxable Series 1997-1 Notes will be includable as ordinary
income when received or accrued by the Holders thereof in accordance with
their respective methods of tax accounting and applicable provisions of the
Code. It is anticipated that the Taxable Series 1997-1 Notes will not be
issued with "original issue discount". There can be no assurance, however,
that the Service would not assert that the interest payable with respect to
the Series 1997-1 Subordinate Notes may not be qualified stated interest
because such payments are not unconditional and that the Series 1997-1
Subordinate Notes are issued with original issue discount.
Payments of interest received with respect to the Taxable Series 1997-
1 Notes may also constitute "investment income" for purposes of certain
limitations of the Code concerning the deductibility of investment interest
expense. Potential Holders should consult their own tax advisors
concerning the treatment of interest payments with regard to the Taxable
Series 1997-1 Notes.
A purchaser who buys a Series 1997-1 Note at a discount from its
principal amount or its adjusted issue price if issued with original issue
discount greater than a specified de minimis amount will be subject to the
market discount rules of the Code. In general, the market discount rules
of the Code treat principal payments and gain on disposition of a debt
instrument as ordinary income to the extent of accrued market discount.
Although the accrued market discount on debt instruments such as the Series
1997-1 Notes which are subject to prepayment based on the prepayment of
other debt instruments is to be determined under regulations yet to be
issued, the legislative history of these provisions of the Code indicate
that the same prepayment assumption used to calculate original issue
discount should be utilized. Each potential investor should consult his
tax advisor concerning the application of the market discount rules to the
Series 1997-1 Notes.
The annual statement regularly furnished to Holders for federal income
tax purposes will include information regarding payments of interest with
respect to the Series 1997-1 Notes. As noted above, the Issuer believes,
based on the advice of counsel, that it will retain ownership of the Trust
Estate assets for federal income tax purposes. In the event the Indenture
is deemed to create a pass-through entity as the owner of the Trust Estate
assets for federal income tax purposes instead of the Issuer (assuming such
entity is not, as a result, taxed as an association), the owners of the
Series 1997-1 Notes could be required to accrue payments of interest more
rapidly than otherwise would be required.
Backup Withholding
Certain purchasers may be subject to backup withholding at the rate of
31% with respect to interest paid with respect to the Taxable Series 1997-1
Notes if the purchasers, upon issuance, fail to supply the Trustee or their
brokers with their taxpayer identification numbers, furnish incorrect
taxpayer identification numbers, fail to report interest, dividends or
other "reportable payments" (as deemed in the Code) properly, or, under
certain circumstances, fail to provide the Trustee with a certified
statement, under penalty of perjury, that they are not subject to backup
withholding. Information returns will be sent annually to the Service and
to each purchaser setting forth the amount of interest paid with respect to
the Taxable Series 1997-1 Notes and the amount of tax withheld thereon.
The Issuer makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Series 1997-1 Notes under the tax
laws of any state, locality or foreign jurisdiction. Investors considering
an investment in the Series 1997-1 Notes should consult their own tax
advisors regarding such tax consequences.
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section 4975
of the Code imposes essentially the same prohibited transaction restrictions on
tax-qualified retirement plans described in Section 401(a) of the Code
("Qualified Retirement Plans") and on Individual Retirement Accounts ("IRAs")
described in Section 408(b) of the Code (collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA), are not
subject to ERISA requirements. Accordingly, assets of such plans may be invested
in Series 1997-1 Notes without regard to the ERISA considerations described
below, subject to the provisions of applicable federal and state law. Any such
plan which is a Qualified Retirement Plan and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in the Code.
In addition to the imposition of general fiduciary requirements,
including those of investment prudence and diversification and the requirement
that a plan's investment be made in accordance with the documents governing the
plan, Section 406 of ERISA and Section 4975 of the Code prohibit a broad range
of transactions involving assets of ERISA Plans and Tax-Favored Plans and
entities whose underlying assets include plan assets by reason of ERISA Plans or
Tax-Favored Plans investing in such entities (collectively, "Benefit Plans") and
persons who have certain specified relationships to the Benefit Plans ("Parties
in Interest" or "Disqualified Persons"), unless a statutory or administrative
exemption is available. Certain Parties in Interest (or Disqualified Persons)
that participate in a prohibited transaction may be subject to a penalty (or an
excise tax) imposed pursuant to Section 502(i) of ERISA (or Section 4975 of the
Code) unless a statutory or administrative exemption is available.
Certain transactions involving the purchase, holding or transfer of the
Series 1997-1 Notes might be deemed to constitute prohibited transactions under
ERISA and the Code if assets of the Original Issuer or the Corporation were
deemed to be assets of a Benefit Plan. Under a regulation issued by the United
States Department of Labor (the "Plan Assets Regulation"), the assets of the
Original Issuer or the Corporation would be treated as plan assets of a Benefit
Plan for the purposes of ERISA and the Code only if the Benefit Plan acquires an
"equity interest" in the Original Issuer or the Corporation and none of the
exceptions contained in the Plan Assets Regulation is applicable. An equity
interest is defined under the Plan Assets Regulation as an interest in an entity
other than an instrument which is treated as indebtedness under applicable local
law and which has no substantial equity features. Although there can be no
assurances in this regard, it appears that the Series 1997-1 Notes should be
treated as debt without substantial equity features for purposes of the Plan
Assets Regulation. However, without regard to whether the Series 1997-1 Notes
are treated as an equity interest for such purposes, the acquisition or holding
of Series 1997-1 Notes by or on behalf of a Benefit Plan could be considered to
give rise to a prohibited transaction if the Original Issuer, the Corporation or
the Trustee, or any of their respective affiliates, is or becomes a party in
interest or a disqualified person with respect to such Benefit Plan. In such
case, certain exemptions from the prohibited transaction rules could be
applicable depending on the type and circumstances of the plan fiduciary making
the decision to acquire a Note. Included among these exemptions are: Prohibited
Transaction Class Exemption ("PTCE") 96-23, regarding transactions effected by
"in-house asset managers"; PTCE 90-1, regarding investments by insurance company
pooled separate accounts; PTCE 95-60, regarding transactions effected by
"insurance company general account"; PTCE 91-38, regarding investments by bank
collective investment funds; and PTCE 84-14, regarding transactions effected by
"qualified professional assets managers."
Any ERISA Plan fiduciary considering whether to purchase Series 1997-1
Notes on behalf of an ERISA Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment and the availability of any
of the exemptions referred to above. Persons responsible for investing the
assets of Tax-Favored Plans that are not ERISA Plans should seek similar counsel
with respect to the prohibited transaction provisions of the Code.
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CERTAIN RELATIONSHIPS AMONG FINANCING PARTICIPANTS
As described under "The Original Issuer and the Corporation" and "The
Servicer", the Corporation will be a wholly-owned subsidiary of SLFC, which
in turn will initially be a wholly-owned subsidiary of the Original Issuer.
There is no assurance that the Original Issuer will continue to own all or
any of the stock of SLFC. The Original Issuer will have no obligations
with respect to the Notes or the Indenture after the transfers described
under "The Original Issuer and the Corporation." Except for its
obligations under the SLFC Servicing Agreement, SLFC will have no
obligations with respect to the Notes or the Indenture. The Corporation
will have no full-time employees, but will initially contract with SLFC to
perform the Corporation's obligations under the Indenture.
The boards of directors of the Original Issuer, the Corporation and
SLFC presently consist of the same four persons, and two of those persons
also are members of the boards of directors of EAC and EASCI.
The Trustee is also the trustee for the Original Issuer's outstanding
student loan revenue bond and student loan asset-backed note issues, which
will be refunded by the Series 1997-1 Notes. The Trustee has in the past
entered into student loan purchase agreements with the Original Issuer,
including Student Loan Purchase Agreements pursuant to which the Original
Issuer acquired as of ____________, 1997, approximately $__________
principal amount of Eligible Loans which will be Financed under the
Indenture. The Corporation expects that the Trustee will enter into
Student Loan Purchase Agreements providing for the sale of a substantial
amount of additional Eligible Loans. The Original Issuer also has obtained
(and the Corporation may in the future obtain) financial services from the
Trustee and related entities.
Foley & Lardner, counsel to the Underwriters, has from time to
time represented, and is currently representing, the Original Issuer in
connection with various matters (including matters relating to its transfer
of assets to SLFC). In addition, Foley & Lardner has from time to time
represented, and is currently representing, EAC in connection with various
matters.
For a discussion of certain relationships between Underwriters or
affiliates of Underwriters and the Original Issuer or the Corporation, see
"Plan of Distribution".
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement for the sale of the Series 1997-1 Notes, dated __________, 1997
(the "Underwriting Agreement"), the Original Issuer has agreed to sell and
the Underwriters have jointly and severally (subject to the limitations
discussed below) agreed to purchase all (but not less than all) of the
Series 1997-1 Notes. The obligations of FBS Investment Services, Inc. and
Norwest Investment Services, Inc. to purchase the Series 1997-1 Notes are
each limited to such principal amount of the Series 1997-1 Notes as does
not exceed 10% of the capital stock actually paid in and unimpaired and 10%
of the unimpaired surplus funds of the commercial banks which own such
Underwriters.
The Original Issuer has been advised by the Underwriters that the
Underwriters propose initially to offer the Series 1997-1 Notes to the
public at the public offering price with respect to each series set forth
on the cover page of this Prospectus, and to certain dealers at such price
less a concession not in excess of ____% of the principal amount of the
Series 1997-1 Notes. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of ____% of such principal amount to
certain other dealers. After the initial public offering, the public
offering price, the concession and discount may be changed.
The Original Issuer and SLFC have agreed to indemnify the Underwriters
against certain liabilities including liabilities under the Securities Act
of 1933, as amended, and the Original Issuer has agreed to reimburse the
Underwriters for the fees and expenses of counsel to the Underwriters.
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The Underwriters may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in
accordance with the Regulation M under the Exchange Act. Over-allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase
the underlying security so long as the stabilizing bids do not exceed a
specific maximum. Syndicate covering transactions involve purchases of the
Series 1997-1 Notes in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit
the Underwriters to reclaim a selling concession from a syndicate member
when the Series 1997-1 Notes originally sold by such syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions
and penalty bids may cause the price of the Series 1997-1 Notes to be
higher than it would otherwise be in the absence of such transactions.
Each Underwriter has represented and agreed that it has not offered or
sold, and will not offer or sell Series 1997-1 Notes to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted, and will not result in an offer to the public
in the United Kingdom within the meaning of the U.K. Regulations.
FBS Investment Services, Inc. is a wholly-owned subsidiary of First
Bank National Association, which is the Trustee. Norwest Investment
Services, Inc. is an affiliate of Norwest Bank of South Dakota, N.A., which
will act as a deposit agent for the receipt of certain funds credited to
the Revenue Fund. Smith Barney Inc. and FBS Investment Services, Inc. have
provided to the Original Issuer from time to time, and may provide to the
Corporation in the future, investment or commercial banking services, for
which such Underwriters have received or will receive customary fees and
commissions. First Bank National Association and banks that are affiliates
of Norwest Investment Services, Inc. have in the past entered into student
loan purchase agreements with the Original Issuer. The Corporation expects
that such banks will enter into Student Loan Purchase Agreements providing
for the sale of a substantial amount of additional Eligible Loans.
LEGAL MATTERS
Certain legal matters, including certain income tax matters, will be
passed upon for the Original Issuer and the Corporation by Dorsey & Whitney
LLP, Minneapolis, Minnesota, Bond Counsel and special counsel for the
Original Issuer and the Corporation. Certain legal matters will be passed
upon for the Underwriters by Foley & Lardner, Milwaukee, Wisconsin.
FINANCIAL INFORMATION
The Original Issuer and the Corporation have determined that their
financial statements are not material to the offering made hereby.
Immediately upon the issuance of the Series 1997-1 Notes, the Original
Issuer will be released from all its obligations with respect to the Series
1997-1 Notes and the Indenture. The Corporation will engage in no
activities other than as described herein. Accordingly, no financial
statements with respect to the Original Issuer or the Corporation are
included in this Prospectus.
RATINGS
It is a condition to the issuance of the Series 1997-1 Notes that the
Series 1997-1 Senior Notes each be rated "AAA" by Fitch Investors Service,
L.P. and "Aaa" by Moody's Investors Services, Inc., and that the Series
1997-1 Subordinate Notes be rated no less than "A" by Fitch Investors
Service, L.P. and "A" by Moody's Investors Services, Inc. The Original
Issuer has applied for ratings of the Series 1997-1 Notes from Moody's
Investors
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Services, Inc. and Fitch Investors Service, L.P.. No application was made
to any other rating agency for the purpose of obtaining additional ratings
of the Series 1997-1 Notes.
Any ratings, if assigned, reflect only the view of the Rating Agency.
Any explanation of the significance of the ratings may be obtained only
from the Rating Agency. The Original Issuer and the Corporation furnished
to the Rating Agencies certain information and materials, some of which may
not have been included in this Prospectus, relating to the Series 1997-1
Notes, the Original Issuer and the Corporation. Generally, rating agencies
base their ratings on such information and materials and on investigation,
studies and assumptions made by the rating agencies. There can be no
assurance that ratings when assigned will continue for any given period of
time or that they will not be lowered or withdrawn entirely by a Rating
Agency if in its judgment circumstances so warrant. If ratings are
assigned, any such downward change in or withdrawal of a rating may have an
adverse effect on the marketability or market price of the Series 1997-1
Notes.
Fitch Investors Service, L.P. has stated that its ratings on Series
1997-1 Notes do not address: (a) the market liquidity of the Series 1997-1
Notes or (b) any Carry-Over Amount that may accrue with respect to the
Taxable Series 1997-1 Notes.
The Corporation expects to furnish to each Rating Agency information
and materials that it may request. However, the Corporation assumes no
obligation to furnish requested information and materials, and may issue
additional obligations for which a rating is not requested. Failure to
furnish requested information and materials, or the issuance of debt for
which a rating is not requested, may result in the suspension or withdrawal
of a Rating Agency's ratings on the Series 1997-1 Notes.
A securities rating addresses the likelihood of the receipt by Holders
of the Series 1997-1 Notes of payments of principal and interest from
assets in the Trust Estate. The rating takes into consideration the
characteristics of the Financed Eligible Loans, and the structural, legal
and tax aspects associated with the Series 1997-1 Notes. A securities
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating
agency. Each securities rating should be evaluated independently of
similar ratings on different securities.
GLOSSARY OF CERTAIN DEFINED TERMS
In addition to the terms defined elsewhere in this Prospectus, the
following terms shall have the following respective meanings. Any term
used with an initial capital letter but not defined herein shall have the
meaning given such term in the Indenture.
"`AA' Composite Commercial Paper Rate" shall mean, with respect to a
series of Tax Exempt Series 1997-1 Senior Notes, (i) the interest
equivalent of the 30-day rate on commercial paper placed on behalf of
issuers whose corporate bonds are rated "AA" by S&P, or the equivalent of
such rating by S&P, as such 30-day rate is made available on a discount
basis or otherwise by the Federal Reserve Bank of New York for the Business
Day immediately preceding such date of determination, or (ii) if the
Federal Reserve Bank of New York does not make available any such rate,
then the arithmetic average of the interest equivalent of the 30-day rate
on commercial paper placed on behalf of such issuers, as quoted to the
Auction Agent on a discount basis or otherwise by the Commercial Paper
Dealers, as of the close of business on the Business Day immediately
preceding the date of determination. If, at the time quotations are
required, any Commercial Paper Dealer does not quote a commercial paper
rate required to determine the "`AA' Composite Commercial Paper Rate," or
if less than three Commercial Paper Dealers are then serving as such for
any reason, the "`AA' Composite Commercial Paper Rate" shall be determined
on the basis of such quotation or quotations furnished by the Commercial
Paper Dealer or Commercial Paper Dealers then serving as such and providing
a quotation. For purposes of this definition, the "interest equivalent" of
a rate stated on a discount basis (a "discount rate") for commercial paper
of a given day's maturity shall be equal
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to the product of (a) 100, times (b) the quotient (rounded upward to the
next higher .00001) of (1) the discount rate (expressed in decimals)
divided by (2) the difference between (A) 1.00, and (B) a fraction, the
numerator of which shall be the product of the discount rate (expressed in
decimals) times the number of days from (and including) the date of
determination to, but excluding, the date on which such commercial paper
matures, and the denominator of which shall be 360.
"Accountant" shall mean Eide Helmeke PLLP, Certified Public
Accountants, Aberdeen, South Dakota, or any other registered or certified
public accountant or firm of such accountants selected and paid by the
Corporation, who is Independent and not under the domination of the
Corporation, but who may be regularly retained to make annual or similar
audits of the books or records of the Corporation.
"Acting Beneficiaries Upon Default" shall mean:
(a) at any time that any Senior Obligations are Outstanding:
(i) with respect to directing the Trustee to accelerate
the maturity of Outstanding Notes as a result of an Event of
Default (other than an Event of Default described in paragraph
(L) under Appendix IX -- "Summary of the Indenture -- Events of
Default"): (x) the Holders of a majority in aggregate Principal
Amount of Senior Notes Outstanding; or (y) (unless the Trustee
shall, in its sole discretion, determine that acceleration of the
maturity of the Outstanding Notes is not in the overall interest
of the Senior Beneficiaries) any Other Senior Beneficiary;
(ii) with respect to directing the Trustee to accelerate
the maturity of the Outstanding Notes as a result of an Event of
Default described in paragraph (L) under Appendix IX -- "Summary
of the Indenture -- Events of Default": (x) the Holders of 100%
in aggregate Principal Amount of Senior Notes Outstanding; or (y)
(unless the Trustee shall, in its sole discretion, determine that
acceleration of the maturity of the Outstanding Notes is not in
the overall interest of the Senior Beneficiaries) all Other
Senior Beneficiaries;
(iii) with respect to requesting the Trustee to
exercise one or more of the rights and powers conferred by the
Indenture, directing the method and place of conducting
proceedings to be taken in connection with the enforcement of the
terms and conditions of the Indenture and requiring the Trustee
to waive Events of Default: (x) the Holders of a majority in
aggregate Principal Amount of the Senior Notes Outstanding,
unless the Trustee shall have received or shall thereafter
receive conflicting requests or directions from one or more Other
Senior Beneficiaries; or (y) any Other Senior Beneficiary, unless
the Trustee shall, in its sole discretion, determine that the
requested action is not in the overall interest of the Senior
Beneficiaries or shall have received or shall thereafter receive
conflicting requests or directions from one or more Other Senior
Beneficiaries or the Holders of a majority in aggregate Principal
Amount of the Senior Notes Outstanding; and
(iv) with respect to all other matters under the
Indenture, the Holders of a majority in aggregate Principal
Amount of Senior Notes Outstanding or any Other Senior
Beneficiary;
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(b) at any time that no Senior Obligations are Outstanding but
Subordinate Obligations are Outstanding:
(i) with respect to directing the Trustee to accelerate
the maturity of Outstanding Notes as a result of an Event of
Default (other than an Event of Default described in paragraph
(L) under Appendix IX -- "Summary of the Indenture -- Events of
Default" below): (x) the Holders of a majority in aggregate
Principal Amount of Subordinate Notes Outstanding; or (y) (unless
the Trustee shall, in its sole discretion, determine that
acceleration of the maturity of the Outstanding Notes is not in
the overall interest of the Subordinate Beneficiaries) any Other
Subordinate Beneficiary;
(ii) with respect to directing the Trustee to accelerate
the maturity of the Outstanding Notes as a result of an Event of
Default described in paragraph (L) under Appendix IX -- "Summary
of the Indenture -- Events of Default": (x) the Holders of 100%
in aggregate Principal Amount of Subordinate Notes Outstanding;
or (y) (unless the Trustee shall, in its sole discretion,
determine that acceleration of the maturity of the Outstanding
Notes is not in the overall interest of the Subordinate
Beneficiaries) all Other Subordinate Beneficiaries;
(iii) with respect to requesting the Trustee to exercise
one or more of the rights and powers conferred by the Indenture,
directing the method and place of conducting proceedings to be
taken in connection with the enforcement of the terms and
conditions of the Indenture and requiring the Trustee to waive
Events of Default, (x) the Holders of a majority in aggregate
Principal Amount of the Subordinate Notes Outstanding, unless the
Trustee shall have received or shall thereafter receive
conflicting requests or directions from one or more Other
Subordinate Beneficiaries; or (y) any Other Subordinate
Beneficiary, unless the Trustee shall, in its sole discretion,
determine that the requested action is not in the overall
interest of the Subordinate Beneficiaries or shall have received
or shall thereafter receive conflicting requests or directions
from one or more Other Subordinate Beneficiaries or the Holders
of a majority in aggregate Principal Amount of the Subordinate
Notes Outstanding; and
(iv) with respect to all other matters under the
Indenture, the Holders of a majority in aggregate Principal
Amount of Subordinate Notes Outstanding or any Other Subordinate
Beneficiary; and
(c) at any time that no Senior Obligations are Outstanding and no
Subordinate Obligations are Outstanding, the Holders of a majority in
aggregate Principal Amount of Class C Notes Outstanding.
"Additional Notes" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Administrative Cost and Note Fee Rate" shall mean a rate per annum
equal to the sum of (i) __%, (ii) the Auction Agent Fee Rate (initially
__%, but subject to change in accordance with the provisions of the Auction
Agent Agreement), and (iii) the Broker-Dealer Fee Rate (initially __%, but
subject to change in accordance with the provisions of the Auction Agent
Agreement).
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"Administrative Expenses" shall mean the Corporation's actual
expenses, excluding Note Fees but including Servicing Fees and any other
expenses of the Corporation incurred in connection with the servicing of
Financed Student Loans, of carrying out and administering its powers,
duties and functions under (1) its articles of incorporation, its bylaws,
the Student Loan Purchase Agreements, any Servicing Agreement, the
Contracts of Insurance, the Guarantee Agreements, the Program, the Higher
Education Act or any requirement of the laws of the United States or the
Statutes with respect to the Program, as such powers, duties and functions
relate to Financed Student Loans, (2) any Swap Agreements and any Credit
Enhancement Facilities (other than any amounts payable thereunder which
constitute Other Indenture Obligations), (3) any Remarketing Agreement,
Depositary Agreement, Auction Agent Agreement or Broker-Dealer Agreement,
and (4) the Indenture. Such expenses may include, without limiting the
generality of the foregoing, salaries, supplies, utilities, mailing, labor,
materials, office rent, maintenance, furnishings, equipment, machinery,
telephones, travel expenses, insurance premiums, and legal, accounting,
management, consulting and banking services and expenses, and payments for
pension, retirement, health and hospitalization and life and disability
insurance benefits; but shall not include (i) debt service on the Notes or
any other bonds, notes or other evidences of indebtedness of the
Corporation, (ii) amounts payable under any Other Indenture Obligations or
(iii) Costs of Issuance or the fees, costs or expenses of the Corporation
with respect to any other bonds, notes or indebtedness of the Corporation.
"After-Tax Equivalent" shall mean, with respect to a series of Tax
Exempt Series 1997-1 Senior Notes, the interest rate per annum equal to the
product of (i) 1.00 minus the Statutory Corporate Tax Rate and (ii) the
"AA" Composite Commercial Paper Rate.
"Aggregate Value" shall mean on any calculation date the sum of the
Values of all assets of the Trust Estate, less moneys in any Fund or
Account which the Corporation is then entitled to receive for deposit into
the Rebate Fund but has not yet removed from the Trust Estate, and less any
funds to be used to pay Costs of Issuance unless, under the provisions of a
Supplemental Indenture, such funds are not to be applied to the payment of
Costs of Issuance to the extent the Senior Asset Requirement would not be
met after such payment.
"All Hold Rate" shall mean (i) with respect to a series of Tax Exempt
Auction Rate Series 1997-1 Senior Notes, the interest rate per annum equal
to 85% (as such percentage may be adjusted pursuant to the provisions of
the First Supplemental Indenture described under Appendix VII -- "Auction
of the Auction Rate Series 1997-1 Senior Notes -- Changes in Auction Terms
-- Changes in Percentages Used in Determining All Hold Rate, Maximum
Auction Rate and Non-Payment Rate with respect to the Tax Exempt Auction
Rate Series 1997-1 Senior Notes") of the lesser of (a) the After-Tax
Equivalent and (b) the Index; provided that in no event shall the All Hold
Rate be greater than the Maximum Auction Rate, and (ii) with respect to a
series of Taxable Auction Rate Series 1997-1 Senior Notes, One-Month LIBOR
less __%.
"Applicable Percentage" shall mean, with respect to a series of Tax
Exempt Auction Rate Series 1997-1 Senior Notes, the percentage determined
(as such percentage may be adjusted pursuant to the provisions of the First
Supplemental Indenture described under Appendix VII -- "Auction of the
Auction Rate Series 1997-1 Senior Notes -- Changes in Auction Terms --
Changes in Percentages Used in Determining All Hold Rate, Maximum Auction
Rate and Non-Payment Rate with respect to the Tax Exempt Auction Rate
Series 1997-1 Senior Notes") based on the ratings of Moody's and Fitch of
the Series 1997-1 Senior Notes as set forth below:
Moody's Fitch's
Credit Rating Credit Rating Applicable Percentage
- ----------------------------------------------------------------------
"Aaa" "AAA" 175%
"Aa" "AA" 175%
"A" "A" 175%
"Baa" "BBB" 200%
Below "Baa" Below "BBB" 265%
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provided that if the Tax Exempt Auction Rate Series 1997-1 Senior Notes are
not then rated by both Moody's and Fitch, the "Applicable Percentage" shall
be 265%. In the event that one such Rating Agency has assigned a lower
credit rating to the Tax Exempt Auction Rate Series 1997-1 Senior Notes
than the other Rating Agency, the "Applicable Percentage" shall be based
upon such lower credit rating. All ratings referred to above shall be
without regard to the gradations within each rating category. For purposes
of the Auction Agent and the Auction Procedures, the ratings referred to in
this definition shall be the last ratings of which the Auction Agent shall
have been given notice pursuant to the Auction Agent Agreement.
"Assistance Fund" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Auction" shall mean the implementation of the Auction Procedures on
an Auction Date.
"Auction Agent" shall mean (i) with respect to the Auction Rate Series
1997-1 Senior Notes, _______________, as the initial Auction Agent under
the initial Auction Agent Agreement, unless and until a substitute Auction
Agent Agreement becomes effective, after which "Auction Agent" shall mean
the substitute Auction Agent, and (ii) with respect to any other series of
Notes, any bank, national banking association or trust company designated
as such with respect to such Notes pursuant to the provisions of a
Supplemental Indenture, and its successor or successors, and any bank,
national banking association or trust company at any time substituted in
its place pursuant to such Supplemental Indenture.
"Auction Agent Agreement" shall mean (i) with respect to the Auction
Rate Series 1997-1 Senior Notes, the Auction Agent Agreement, dated as of
________, 1997, among the Corporation, the Trustee and _______________,
unless and until a substitute Auction Agent Agreement is entered into,
after which "Auction Agent Agreement" shall mean such substitute Auction
Agent Agreement, including any supplement thereto or amendment thereof
entered into in accordance with the provisions thereof, and (ii) with
respect to any other series of Notes, an agreement among an Auction Agent,
the Trustee and the Corporation setting forth the rights and obligations of
the Auction Agent acting in such capacity with respect to such Notes under
the Indenture and the related Supplemental Indenture, including any
supplement thereto or amendment thereof entered into in accordance with the
provisions thereof.
"Auction Date" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Auction Period" shall mean the Interest Period applicable to the
Auction Rate Series 1997-1 Senior Notes, which Auction Period (after the
Initial Interest Period for each such series) initially shall consist
generally of 35 days (in the case of Tax Exempt Auction Rate Series 1997-1
Senior Notes) or 28 days (in the case of Taxable Auction Rate Series 1997-1
Senior Notes), as the same may be adjusted pursuant to the provisions of
the First Supplemental Indenture described under Appendix VII -- "Auction
of the Auction Rate Series 1997-1 Senior Notes -- Changes in Auction Terms
-- Changes in Auction Period or Periods".
"Auction Period Adjustment" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Auction Procedures" shall mean the procedures described under
"Auction of the Auction Rate Series 1997-1 Senior Notes" by which the
Auction Rate is determined with respect to the Auction Rate Series 1997-1
Senior Notes.
"Auction Rate" shall mean the rate of interest per annum that results
from implementation of the Auction Procedures and is determined with
respect to each series of Auction Rate Series 1997-1 Senior Notes as
described under Appendix VII -- "Auction of the Auction Rate Series 1997-1
Senior Notes".
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"Auction Rate Series 1997-1 Senior Note Interest Rate" shall mean the
rate of interest per annum borne by a series of Auction Rate Series 1997-1
Senior Notes during the Initial Interest Period for such series and each
Interest Period thereafter, including, without limitation, the Auction Rate
Series 1997-1 Senior Note Initial Interest Rate and the interest rate for
such series for each Auction Period determined in accordance with the
Auction Procedures and other provisions of the First Supplemental
Indenture; provided, however, that in the event of a Payment Default with
respect to a series, the Auction Rate Series 1997-1 Senior Note Interest
Rate for such series shall equal the Non-Payment Rate; and provided,
further, that such Auction Rate Series 1997-1 Senior Note Auction Rate
shall in no event exceed the Auction Rate Series 1997-1 Senior Note
Interest Rate Limitation.
"Auction Rate Series 1997-1 Senior Note Initial Interest Rate" shall
mean the interest rate to be borne by a series of Auction Rate Series 1997-
1 Senior Notes for the Initial Interest Period therefor, as set forth in
the First Supplemental Indenture.
"Auction Rate Series 1997-1 Senior Note Interest Rate Limitation"
shall mean a rate per annum equal to __%, in the case of the Tax Exempt
Auction Rate Series 1997-1 Senior Notes, or ___%, in the case of the
Taxable Auction Rate Series 1997-1 Senior Notes, or, if less than such
rate, the highest rate the Corporation may legally pay, from time to time,
as interest on such Auction Rate Series 1997-1 Senior Notes.
"Auction Rate Series 1997-1 Senior Notes" shall mean, collectively,
the Tax Exempt Auction Rate Series 1997-1 Senior Notes and the Taxable
Auction Rate Series 1997-1 Senior Notes.
"Authorized Denominations" shall mean (i) with respect to the Auction
Rate Series 1997-1 Notes and the Taxable LIBOR Rate Series 1997-1 Notes,
$100,000 and any multiple thereof, and (ii) with respect to the Tax Exempt
Fixed Rate Series 1997-1 Senior Notes and the Tax Exempt Fixed Rate Series
1997-1 Subordinate Notes, $5,000 and any multiple thereof.
"Authorized Officer", when used with reference to the Corporation,
shall mean the Chairman of the Board, the president, any vice president,
the secretary or other person designated in writing to the Trustee from
time to time by the Board.
"Available Auction Rate Series 1997-1 Senior Notes" shall have the
meaning assigned thereto on page [__] of this Prospectus.
"Balance", when used with reference to any Account or Fund, shall mean
the aggregate sum of all assets standing to the credit of such Account or
Fund, including, without limitation, Investment Securities computed at the
Value of Investment Securities; Notes purchased with moneys standing to the
credit of such Fund or Account computed at the Principal Amount of such
Notes; Financed Student Loans computed at the Principal Balance thereof;
and lawful money of the United States; provided, however, that (1) the
Balance of the Interest Account shall not include amounts standing to the
credit thereof which are being held therein for (A) the payment of past due
and unpaid interest on Notes, or (B) the payment of interest on Notes that
are deemed no longer Outstanding as a result of the defeasance thereof, and
(2) the Balances of the Principal Account and the Retirement Account shall
not include amounts standing to the credit thereof which are being held
therein for the payment of principal of or premium, if any, on Notes which
are deemed no longer Outstanding in accordance with the provisions of the
Indenture.
"Beneficial Owner" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Beneficiaries" shall mean, collectively, all Senior Beneficiaries,
all Subordinate Beneficiaries and all Holders of any Outstanding Class C
Notes.
"Benefit Plans" shall have the meaning assigned thereto on page [__]
of this Prospectus.
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"Bid" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Bid Auction Rate" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Bidder" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Bond Counsel" shall mean any Counsel of nationally recognized
standing in the field of law relating to municipal bonds.
"Book-Entry Form" or "Book-Entry System" shall mean a form or system
under which (i) the beneficial right to principal and interest may be
transferred only through a book entry, (ii) physical securities in
registered form are issued only to a Securities Depository or its nominee
as registered holder, with the securities "immobilized" to the custody of
the Securities Depository, and (iii) the book entry is the record that
identifies the owners of beneficial interests in that principal and
interest.
"Broker-Dealer" shall mean (i) with respect to the Auction Rate Series
1997-1 Senior Notes, Smith Barney Inc. or any other broker or dealer (each
as defined in the Exchange Act), commercial bank or other entity permitted
by law to perform the functions required of a Broker-Dealer set forth in
the Auction Procedures with respect to the Auction Rate Series 1997-1
Senior Notes that (a) is a Participant (or an affiliate of a Participant),
(b) has been appointed as such by the Corporation pursuant to the
provisions of the First Supplemental Indenture and (c) has entered into a
Broker-Dealer Agreement that is in effect on the date of reference, and
(ii) with respect to any other series of Notes, any broker or dealer (each
as defined in the Exchange Act), commercial bank or other entity permitted
by law to perform the functions required of a broker-dealer set forth in
the auction procedures relating to such Notes, designated as such with
respect to such Notes pursuant to the provisions of a Supplemental
Indenture, and its successor or successors, and any broker or dealer,
commercial bank or other entity at any time substituted in its place
pursuant to such Supplemental Indenture.
"Broker-Dealer Agreement" shall mean (i) with respect to the Auction
Rate Series 1997-1 Senior Notes, the Broker-Dealer Agreement, dated as of
__________, 1997, between Smith Barney Inc. and _______________, and each
other agreement between the Auction Agent and a Broker-Dealer, and approved
by the Corporation, pursuant to which the Broker-Dealer agrees to
participate in Auctions as set forth in the Auction Procedures with respect
to the Auction Rate Series 1997-1 Senior Notes, including any supplement
thereto or amendment thereof entered into in accordance with the provisions
thereof, and (ii) with respect to any other series of Notes, an agreement
between an Auction Agent and a Broker-Dealer, and approved by the
Corporation, setting forth the rights and obligations of the Broker-Dealer
acting in such capacity with respect to such Notes under the Indenture and
the related Supplemental Indenture, including any supplement thereto or
amendment thereof entered into in accordance with the provisions thereof.
"Budgeted Administrative Expenses" shall mean, with respect to each
Fiscal Year, subject to the provisions of the Indenture (see Appendix IX -
"Summary of the Indenture -- Covenants -- Limitations on Administrative
Expenses and Note Fees"), an amount of Administrative Expenses budgeted by
the Corporation for such Fiscal Year, as evidenced by a Board Resolution
adopted prior to the commencement of such Fiscal Year; provided that the
Budgeted Administrative Expenses for future months and Fiscal Years shall,
until the Trustee receives a new Board Resolution budgeting different
amounts, be assumed to be in amount equal to the Administrative Expenses
budgeted in the most recent applicable Board Resolution received by the
Trustee.
"Business Day" shall mean, except as otherwise provided in a
Supplemental Indenture, a day of the year other than a Saturday, a Sunday
or a day on which banks located in the city in which the Principal Office
of the Trustee is located, in the city in which the Principal Office of any
Authenticating Agent is located, in the city in which the Principal Office
of any Paying Agent (other than the Trustee) is located, in the city in
which the Principal
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Office of any Auction Agent is located, or the city in which the Principal
Office of any Depositary is located, are required or authorized by law to
remain closed, or on which The New York Stock Exchange is closed.
"Buyer's Broker-Dealer" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Carry-Over Amount" shall mean (i) with respect to a Taxable Auction
Rate Series 1997-1 Senior Note, the excess, if any, of (a) the amount of
interest on such Note that would have accrued with respect to the related
Interest Period at the Auction Rate over (b) the amount of interest on such
Note actually accrued with respect to such Interest Period based on the Net
Loan Rate, together with the unpaid portion of any such excess from prior
Interest Periods, (ii) with respect to a Taxable LIBOR Rate Series 1997-1
Note, the excess, if any, of (a) the amount of interest on such Note that
would have accrued with respect to the related Interest Period at the
Taxable LIBOR Rate Series 1997-1 Note Interest Rate over (b) the amount of
interest on such Note actually accrued with respect to such Interest Period
based on the Net Loan Rate, together with the unpaid portion of any such
excess from prior Interest Periods, and (iii) if and to the extent
specifically provided for as such in a Supplemental Indenture with respect
any other series of Variable Rate Notes, the amount, if any, by which (a)
the interest payable on such series with respect to a given interest period
is exceeded by (b) the interest that otherwise would have been payable with
respect to such interest period but for a limitation on the interest rate
for such interest period based upon the anticipated return on Financed
Student Loans, together with the unpaid portion of any such excess from
prior interest periods. To the extent required by a Supplemental Indenture
providing for any Carry-Over Amount (including, in the case of the Taxable
Auction Rate Series 1997-1 Senior Notes and the Taxable LIBOR Rate Series
1997-1 Notes, the First Supplemental Indenture), interest will accrue on
such Carry-Over Amount until paid. Any reference to "principal" or
"interest" in the Indenture and in the related Notes shall not include,
within the meanings of such words, any Carry-Over Amount or any interest
accrued on any Carry-Over Amount.
"Cash Flow Projection" shall mean a projection as to future revenues
and cash flow through the final Stated Maturity of the Outstanding Notes
based upon existing facts and, to the extent not so based, upon assumptions
accepted by each Rating Agency (including, without limitation, assumptions
relating to variable rates of interest under Swap Agreements and any Notes)
and the following assumptions: (1) a thirty-day lag in receipt of borrower
payments, and a sixty-day lag in receipt of federal payments, with respect
to Financed Student Loans; (2) no prepayments of principal of Financed
Student Loans; (3) bond-equivalent rates of 91-day or 52-week U.S. Treasury
bills (for purposes of determining returns on Financed Student Loans that
are based upon such rates or averages thereof) equal to known rates (or
averages) for such time as they are known, and thereafter equal to ___% per
annum; and (4) a reinvestment rate of ___% per annum. The foregoing
assumptions may, pursuant to a Supplemental Indenture (see "Supplemental
Indentures" below), be replaced with or supplemented by such other
reasonable assumptions as will not result in the withdrawal or reduction of
the then-current rating of any of the Outstanding Unenhanced Notes, as
evidenced by written confirmation to that effect from each Rating Agency
or, if no Unenhanced Notes are then Outstanding but Other Indenture
Obligations are Outstanding, such other assumptions as are acceptable to
the Other Beneficiaries entitled to such Other Indenture Obligations, as
evidenced in writing to the Trustee by each such Other Beneficiary.
"Cede & Co." shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Cedel" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Cedel Participants" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Change of Tax Law" shall mean, with respect to the Tax Exempt Auction
Rate Series 1997-1 Senior Notes, any amendment to the Code or other statute
enacted by the Congress of the United States, or any temporary, proposed or
final regulation promulgated by the United States Treasury, after the date
of issuance of the Tax Exempt Auction Rate Series 1997-1 Senior Notes,
which (i) changes or would change any deduction, credit or other allowance
allowable in computing liability for any federal tax with respect to, or
(ii) imposes or would impose or
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reduces or would reduce or increases or would increase any federal tax
(including, but not limited to, preference or excise taxes) upon, any
interest earned by the owner of a Tax Exempt Series 1997-1 Senior Note the
interest on which is excludable from gross income for federal income tax
purposes under Section 103 of the Code.
"Class C Notes" shall mean any Notes designated in a Supplemental
Indenture as Class C Notes, which are secured under the Indenture on a
basis subordinate to any Senior Obligations and any Subordinate
Obligations.
"Closing Cash Flow Projection" shall mean the Cash Flow Projection
delivered in conjunction with the issuance of the Series 1997-1 Notes.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealer" shall mean Smith Barney Inc., its successors
and assigns, and any other commercial paper dealer appointed pursuant to
the provisions of the First Supplemental Indenture described under Appendix
VII -- "Auction of the Auction Rate Series 1997-1 Senior Notes -- Auction
Procedures -- General".
"Commission" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Commonwealth" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Consolidation Loan" shall mean a Student Loan made pursuant to
Section 428C of the Higher Education Act.
"Contract of Insurance" shall mean the Contract of Federal Loan
Insurance, dated January 28, 1981, entered into between the Trustee and the
Secretary of Education, and any other document evidencing the eligibility
of the Trustee to receive payments of principal and interest from the
Secretary of Education with respect to Insured Loans Financed hereunder
(or, in the event a co-trustee has been appointed pursuant to the
Indenture, such Contract of Federal Loan Insurance and other documentation
relating to such co-trustee), and any amendment thereof which is hereafter
entered into.
"Cooperative" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Corporation" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Corporation Student Loan Purchase Agreements" shall have the meaning
assigned thereto on page [__] of this Prospectus.
"Corporation Swap Payment" shall mean a payment due to a Swap
Counterparty from the Corporation pursuant to the applicable Swap Agreement
(including, but not limited to, payments in respect of any early
termination of such Swap Agreement).
"Corporation Trusts" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Costs of Issuance" shall mean all items of expense directly or
indirectly payable by or reimbursable to the Corporation and related to the
authorization, sale and issuance of a series of Notes, including, but not
limited to, printing costs, costs of preparation and reproduction of
documents, filing fees, initial fees and charges of the Trustee, any
Authenticating Agent, any Deposit Agent, any Remarketing Agent, any
Depositary, any Auction Agent or any Broker-Dealer, legal fees and charges,
fees and disbursements of underwriters, consultants and professionals,
underwriters' discount, costs of credit ratings, fees and charges for
preparation, execution, transportation and safekeeping of such Notes, other
costs incurred by the Corporation in anticipation of the issuance of such
Notes and any other cost, charge or fee in connection with the issuance of
such Notes.
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"Counsel" shall mean a person, or firm of which such a person is a
member, authorized in any state to practice law.
"Counterparty Swap Payment" shall mean a payment due to or received by
the Corporation from a Swap Counterparty pursuant to a Swap Agreement
(including, but not limited to, payments in respect of any early
termination of such Swap Agreement).
"Credit Enhancement Facility" shall mean, if and to the extent
provided for in a Supplemental Indenture (see Appendix IX -- "Summary of
the Indenture -- Supplemental Indentures"), with respect to Notes of one
or more series, an insurance policy insuring, or a letter of credit or
surety bond providing a direct or indirect source of funds for, the timely
payment of principal of and interest on such Notes (but not necessarily
principal due upon acceleration thereof), or any or all of the credit
facilities, reimbursement agreements, standby purchase agreements and the
like pertaining to Notes issued with a tender right granted to or tender
obligation imposed on the Holder thereof.
"Credit Facility Provider" shall mean, if and to the extent provided
for in a Supplemental Indenture (see Appendix IX - "Summary of the
Indenture -- Supplemental Indentures"), any institution or institutions
engaged by the Corporation pursuant to a Credit Enhancement Facility to
provide credit enhancement or liquidity for the payment of the principal of
and interest on, or for the Corporation's obligation to repurchase or
redeem, Notes of one or more series.
"Date of Issuance" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Debt Service" shall mean, as of any particular date and with respect
to any particular period, the aggregate of the moneys to be paid or set
aside on such date or during such period for the payment (or retirement) of
the principal of, premium, if any, and interest on Notes, after giving
effect to any Corporation Swap Payments and Counterparty Swap Payments.
"Deemed Tendered" shall mean, with respect to any Note, a Note deemed
tendered in accordance with the provisions of the Supplemental Indenture
providing for the issuance thereof.
"Defaulted Interest" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Deferment Periods" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Demand Note" shall mean a Note required to be purchased by or on
behalf of the Corporation, at the option of the Holder thereof, upon
receipt of a purchase demand.
"Department of Education" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Deposit Agent" shall mean any bank or banking association having
trust powers or trust company designated as such pursuant to the Indenture
and its successor or successors and any other bank or banking association
having trust powers or trust company at any time substituted in its place
pursuant to the Indenture.
"Depositary" shall mean, with respect to any series of Notes, any
commercial bank or banking association having trust powers or trust company
designated as such with respect to such Notes pursuant to the provisions of
the Indenture and its successor or successors and any other commercial bank
or banking association having trust powers or trust company at any time
substituted in its place pursuant to the Indenture.
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"Depositary Agreement" shall mean an agreement among a Depositary, the
Trustee, the Corporation, any Remarketing Agent and/or any related Credit
Facility Provider setting forth the rights and obligations of the
Depositary acting in such capacity under the Indenture, including any
supplement thereto or amendment thereof entered into in accordance with the
provisions thereof.
"Depositories" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Disqualified Person" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"DOE Data Book" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"DTC" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"DTC Participant" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"EAC" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"EASCI" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Educational Loan Assistance Fund" shall have the meaning assigned
thereto on page [__] of this Prospectus.
"Eligible Borrower" shall mean a borrower who is eligible under the
Higher Education Act to be the obligor of a loan for financing a program of
post-secondary education, including a borrower who is eligible under the
Higher Education Act to be an obligor of a Plus Loan.
"Eligible Carry-Over Make-Up Amount" shall mean, (i) with respect to
each Interest Period relating to a series of Taxable Auction Rate Series
1997-1 Senior Notes as to which, as of the first day of such Interest
Period, there is any unpaid Carry-Over Amount, an amount equal to the
lesser of (a) interest computed on the principal balance of such series in
respect of such Interest Period at a per annum rate equal to the excess, if
any, of the Net Loan Rate over the Taxable Auction Rate Series 1997-1
Senior Note Interest Rate, and (b) the aggregate Carry-Over Amount
remaining unpaid as of the first day of such Interest Period together with
interest accrued and unpaid thereon through the end of such Interest
Period, and (ii) with respect to each Interest Period relating to a series
of Taxable LIBOR Rate Series 1997-1 Notes as to which, as of the first day
of such Interest Period, there is any unpaid Carry-Over Amount, an amount
equal to the lesser of (a) interest computed on the principal balance of
such series in respect of such Interest Period at a per annum rate equal to
the excess, if any, of the Net Loan Rate over the Series 1997-1 Note LIBOR-
Based Rate, and (b) the aggregate Carry-Over Amount remaining unpaid as of
the first day of such Interest Period together with interest accrued and
unpaid thereon through the end of such Interest Period. The Eligible
Carry-Over Make-Up Amount shall be $0.00 for any Interest Period with
respect to which the Net Loan Rate equals or exceeds (1) the Taxable
Auction Rate Series 1997-1 Senior Note Interest Rate, in the case of a
series of Taxable Auction Rate Series 1997-1 Senior Notes, or (2) the
Taxable LIBOR Rate Series 1997-1 Interest Rate, in the case of a series of
Taxable LIBOR Rate Series 1997-1 Notes.
"Eligible Loan" shall mean: (A) a Student Loan which: (1) has been or
will be made to an Eligible Borrower for post-secondary education; (2) is
Guaranteed by a Guarantee Agency to the extent of not less than ninety-
eight percent (98%) of the principal thereof and all accrued interest
thereon; (3) is an "eligible loan" as defined in Section 438 of the Higher
Education Act for purposes of receiving Special Allowance Payments (other
than Nonsubsidized Stafford Loans originally financed by the Original
Issuer); and (4) bears interest at a rate per annum not less than or in
excess of the applicable rate of interest provided by the Higher Education
Act, or such lesser rates as may be approved by each Rating Agency; or (B)
any other Student Loan if the Corporation shall have caused to be provided
to the Trustee: (1) written advice from each Rating Agency that treating
such type of loan
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as an Eligible Loan will not adversely affect any rating or ratings then
applicable to any of the Unenhanced Notes or, if no Unenhanced Notes are
then Outstanding but Other Indenture Obligations are Outstanding, the Other
Beneficiaries entitled to such Other Indenture Obligations consent to the
treatment of such type of loan as an Eligible Loan, as evidenced in writing
to the Trustee by each such Other Beneficiary, and (2) a written opinion of
Bond Counsel to the effect that treating such type of loan as an Eligible
Loan will not, under then existing law, affect the exclusion from gross
income for federal income tax purposes of interest on any Tax-Exempt Notes
then outstanding.
"Euroclear Operator" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Euroclear Participants" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Excess Earnings" shall mean, with respect to the Tax Exempt Series
1997-1 Notes and any other series of Tax-Exempt Notes, the amount, if any,
which, if applied to reduce the yield on all Student Loans Financed, in
whole or in part, with amounts allocated to such Notes, would be necessary
to reduce such yield to the yield on such Notes plus such additional spread
as would not cause such Notes to be "arbitrage bonds" under Section 148 of
the Code.
"ERISA" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"ERISA Plans" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Exchange Act" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Existing Holders" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"FDIC" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Federal Reimbursement Contracts" shall mean any agreement between a
Guarantee Agency and the Secretary of Education, providing for the payment
by the Secretary of Education of amounts authorized to be paid pursuant to
the Higher Education Act, including (but not necessarily limited to)
reimbursement of amounts paid or payable upon defaulted Financed Student
Loans and other student loans guaranteed or insured by the Guarantee Agency
and interest subsidy payments to Holders of qualifying student loans
guaranteed or insured by the Guarantee Agency.
"Financed", when used with respect to Student Loans or Eligible Loans,
shall mean Student Loans or Eligible Loans, as the case may be, acquired by
the Corporation with moneys in the Acquisition Fund or the Surplus Account,
any Eligible Loans received in exchange for Financed Student Loans upon the
sale thereof or substitution therefor in accordance with the Indenture and
any other Student Loans deemed to be "Financed" with moneys in the
Acquisition Fund and the Surplus Account pursuant to the Indenture, but
does not include Student Loans released from the lien of the Indenture and
sold, as permitted in the Indenture, to any purchaser, including a trustee
for the holders of the Corporation's bonds, notes or other evidences of
indebtedness.
"First Supplemental Indenture" shall mean the First Supplemental
Indenture of Trust, dated as of _______ 1, 1997, between the Corporation
and the Trustee, setting forth the terms of the Series 1997-1 Notes.
"Fitch" shall mean Fitch Investors Service, L.P., its successors and
their assigns, and, if such partnership shall be dissolved or liquidated or
shall no longer perform the functions of a securities rating agency,
"Fitch" shall be deemed to refer to any other nationally recognized
securities rating agency designated by the Trustee, at the written
direction of the Corporation.
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"Government Obligations" shall mean direct obligations of, or
obligations the full and timely payment of the principal of and interest on
which are unconditionally guaranteed by, the United States of America.
"Grace Periods" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Gramm-Rudman Law" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Guarantee" or "Guaranteed" shall mean, with respect to a Student
Loan, the insurance or guarantee by a Guarantee Agency, to the extent
provided in the Higher Education Act, of the principal of and accrued
interest on such Student Loan, and the coverage of such Student Loan by one
or more Federal Reimbursement Contracts providing, among other things, for
reimbursement to the Guarantee Agency for losses incurred by it on
defaulted Financed Student Loans insured or guaranteed by the Guarantee
Agency to the extent provided in the Higher Education Act.
"Guarantee Agency" shall mean (1) Education Assistance Corporation,
and its successors and assigns, including, without limitation, the
Secretary of Education, (2) Pennsylvania Higher Education Assistance
Agency, and its successors and assigns, including, without limitation, the
Secretary of Education, (3) United Student Aid Funds, Inc., and its
successors and assigns, including, without limitation, the Secretary of
Education, (4) the North Dakota Guaranteed Student Loan Program, and its
successors and assigns, including, without limitation, the Secretary of
Education, (5) Northstar Guarantee Inc., and its successors and assigns,
including, without limitation, the Secretary of Education, (6) Great Lakes
Higher Education Corporation, and its successors and assigns, including,
without limitation, the Secretary of Education, (7) Educational Credit
Management Corporation (formerly known as Transitional Guaranty Agency,
Inc.), and its successors and assigns, including, without limitation, the
Secretary of Education, or (8) any other state agency or private nonprofit
institution or organization which administers a Guarantee Program, subject
to confirmation of ratings on any Outstanding Unenhanced Notes or, if no
Unenhanced Notes are then Outstanding but Other Obligations are
Outstanding, consent of each Other Beneficiary holding such Outstanding
Other Obligations, as evidenced in writing to the Trustee by each such
Other Beneficiary.
"Guarantee Agreements" shall mean (1) that certain Lender Agreement
for Guarantee of Student Loans With Federal Reinsurance, dated February 17,
1993, between the Trustee and Education Assistance Corporation, (2) that
Lender Agreement for Guarantee of Student Loans With Federal Reinsurance,
dated April 14, 1988, between the Trustee and Pennsylvania Higher Education
Assistance Agency, (3) that certain Agreement to Guarantee Loans, dated
October 4, 1988, between the Trustee and United Student Aid Funds, Inc.,
(4) that certain Lender Participation Agreement for Insurance, dated
January 12, 1989, between the Trustee and the North Dakota Guaranteed
Student Loan Program, (5) that certain Lender Agreement for Guarantee of
Student Loans With Federal Reinsurance, dated September 11, 1992, between
the Trustee and Northstar Guarantee Inc., (6) that certain Student Loan
Guaranty, dated September 11, 1992, between the Trustee and Great Lakes
Higher Education Corporation, (7) that certain Agreement for Payment on
Guarantee of Student Loans With Federal Reinsurance, dated November 21,
1995, between the Trustee and Educational Credit Management Corporation
(formerly known as Transitional Guaranty Agency, Inc.) and, (8) any other
agreement between a Guarantee Agency and the Trustee providing for the
insurance or guarantee by such Guarantee Agency, to the extent provided in
the Higher Education Act, of the principal of and accrued interest on
Student Loans acquired by the Trustee from time to time, including any
supplement thereto or amendment thereof entered into in accordance with the
provisions thereof and of the Indenture.
"Guarantee Fund" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Guarantee Payments" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Guarantee Program" shall mean a Guarantee Agency's student loan
insurance program pursuant to which such Guarantee Agency guarantees or
insures Student Loans.
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"Guaranteed Loan" shall mean a Student Loan which is Guaranteed.
"Higher Education Act" shall mean the Higher Education Act of 1965, as
amended or supplemented from time to time, and all regulations promulgated
thereunder.
"Hold Order" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Holder", when used with respect to a Note, shall mean the Person in
whose name such Note is registered in the Note Register maintained by the
Trustee.
"Independent", when used with respect to any specified Person, shall
mean such a Person who (i) is in fact independent; (ii) does not have any
direct financial interest or any material indirect financial interest in
the Corporation, other than the payment to be received under a contract for
services to be performed by such Person; and (iii) is not connected with
the Corporation as an official, officer, employee, promoter, underwriter,
trustee, partner, affiliate, subsidiary, director or Person performing
similar functions.
"Indenture" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Indenture Obligations" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Indirect Participants" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Insolvency Laws" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Index" shall mean, with respect to a series of Tax Exempt Auction
Rate Series 1997-1 Senior Notes on any Interest Rate Determination Date,
(i) for Auction Periods of 60 days or less, the PSA Index, or, if such rate
is not published by PSA, the Index so determined by the Market Agent, which
shall equal the prevailing rate for bonds rated in the highest short-term
rating category by Moody's and Fitch in respect of issuers most closely
resembling the "high grade" component issuers selected by PSA that are
subject to tender by the holders thereof for purchase on not more than
seven days' notice and the interest on which is (a) variable on a weekly
basis, (b) excludable from gross income for federal income tax purposes,
and (c) not subject to an "alternative minimum tax" or similar tax under
the Code, unless all tax-exempt bonds are subject to such tax, and (ii) for
Auction Periods of more than 60 days, the Index so determined by the Market
Agent, which shall equal the average yield on no less than three publicly
offered securities selected by the Market Agent which are offered at par,
have substantially the same underlying security, bear interest determined
for approximately the same period as the relevant Interest Period on the
Tax Exempt Auction Rate Series 1997-1 Senior Notes, bear interest not
subject to the alternative minimum tax, and are rated no lower than "Aa" by
Moody's or "AA" by Fitch. If the Index cannot be determined as provided
above, a comparable substitute index selected by the Market Agent with the
approval of an Authorized Officer of the Corporation may be used.
"Initial Interest Period" shall mean, as to a series of Auction Rate
Series 1997-1 Senior Notes or Taxable LIBOR Rate Series 1997-1 Notes, the
period commencing on the date of issuance thereof and continuing through
the day immediately preceding the Initial Interest Rate Adjustment Date for
such series.
"Initial Interest Rate Adjustment Date" shall mean (i) with respect to
the Series 1997-1A Notes, ________, 1997, (ii) with respect to the Series
1997-1B Notes, ________, 1997, (iii) with respect to the Series 1997-1C
Notes, ________, 1997, (iv) with respect to the Series 1997-1D Notes,
______, 1997, (v) with respect to the Series 1997-1E Notes, ______, 1997,
(vi) with respect to the Series 1997-1G Notes, ______, 1997, (vii) with
respect to the Series 1997-1H Notes, ______, 1997, (viii) with respect to
the Series 1997-1I Notes, ______, 1997, (ix) with respect to the Series
1997-1J Notes, ______, 1997, and (x) with respect to the Series 1997-1L
Notes, ________, 1997.
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"In-State Loans" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Interest Payment Date" shall mean each regularly scheduled interest
payment date on the Notes which, except in the case of any series of
Variable Rate Notes (as to which such dates shall be specified in the
Supplemental Indenture providing for the issuance thereof), shall be each
June 1 and December 1 or, with respect to the payment of interest upon
redemption or acceleration of a Note, purchase of a Note by the Trustee on
a Mandatory Tender Date (to the extent such Mandatory Tender Date is
designated as an Interest Payment Date in the related Supplemental
Indenture) or the payment of Defaulted Interest, such dates on which such
interest is payable under the Indenture. The regularly scheduled interest
payment dates on the Series 1997-1 Notes shall be (i) with respect to a
series of Taxable Auction Rate Series 1997-1 Senior Notes, the Business Day
immediately following the expiration of the Initial Interest Period for
such series and each related Auction Period thereafter, (ii) with respect
to a series of Taxable LIBOR Rate Series 1997-1 Notes, the first day of
each calendar month, commencing ____________, 1997, and (iii) with respect
to the Tax Exempt Series 1997-1 Notes, each June 1 and December 1,
commencing December 1, 1997.
"Interest Period" shall mean, with respect to a series of Auction Rate
Series 1997-1 Senior Notes or Taxable LIBOR Rate Series 1997-1 Notes, the
Initial Interest Period and each period commencing on an Interest Rate
Adjustment Date for such series and ending on the last day before (i) the
next Interest Rate Adjustment Date for such series or (ii) the Stated
Maturity of such series, as applicable.
"Interest Rate Adjustment Date" shall mean the date on which the
interest rate on a series of Auction Rate Series 1997-1 Senior Notes or
Taxable LIBOR Rate Series 1997-1 Notes is effective, which (i) with respect
to a series of Auction Rate Series 1997-1 Senior Notes, shall be the date
of commencement of each Auction Period, and (ii) with respect to a series
of Taxable LIBOR Rate Series 1997-1 Notes, shall be each Interest Payment
Date.
"Interest Rate Determination Date" shall mean (i) with respect to a
series of Auction Rate Series 1997-1 Senior Notes, the Auction Date, or, if
no Auction Date is applicable to such series, the Business Day immediately
preceding the date of commencement of an Auction Period, and (ii) with
respect to a series of Taxable LIBOR Rate Series 1997-1 Notes, the second
Business Day immediately preceding the date of commencement of an Interest
Period (other than the Initial Interest Period).
"Interest Subsidy Agreements" shall have the meaning assigned thereto
on page [__] of this Prospectus.
"Investment Provider" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"IRAs" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Lender" shall mean any "eligible lender" (as defined in the Higher
Education Act) permitted to participate as a seller of Student Loans to the
Corporation under the Program and which has received an eligible lender
designation from a Guarantee Agency.
"Loan Rates" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Mandatory Tender Date" shall mean, with respect to any Note, a date
on which such Note is required to be tendered for purchase by or on behalf
of the Corporation in accordance with the provisions in the Supplemental
Indenture providing for the issuance thereof.
"Market Agent" shall mean Smith Barney Inc., New York, New York, in
such capacity under the First Supplemental Indenture, or any successor to
it in such capacity.
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"Maximum Auction Rate" shall mean (i) with respect to a series of Tax
Exempt Auction Rate Series 1997-1 Senior Notes, the interest rate per annum
equal to the lesser of (a) the product of the Applicable Percentage and the
greater of (1) the After-Tax Equivalent and (2) the Index, and (b) ___%,
(ii) with respect to a series of Taxable Auction Rate Series 1997-1 Senior
Notes: (a) for Auction Periods of 35 days or less, either (1) One-Month
LIBOR plus 1.50% (if the ratings assigned by Moody's and Fitch to the
Taxable Auction Rate Series 1997-1 Senior Notes are at least "Aa3" and
"AA-", respectively), (2) One-Month LIBOR plus 2.50% (if any one of the ratings
assigned by Moody's and Fitch to the Taxable Auction Rate Series 1997-1
Senior Notes is less than "Aa3" or "AA-", respectively, but is at least
"A") or (3) One-Month LIBOR plus 3.50% (if any one of the ratings assigned
by Moody's and Fitch to the Taxable Auction Rate Series 1997-1 Senior Notes
is less than "A"); or (b) for Auction Periods of greater than 35 days,
either (1) the greater of One-Month LIBOR or Three-Month LIBOR, plus, in
either case, 1.50% (if the ratings assigned by Moody's and Fitch to the
Taxable Auction Rate Series 1997-1 Senior Notes are at least "Aa3", and
"AA-", respectively), (2) the greater of One-Month LIBOR or Three-Month
LIBOR, plus, in either case, 2.50% (if any one of the ratings assigned by
Moody's and Fitch to the Taxable Auction Rate Series 1997-1 Senior Notes is
less than "Aa3" or "AA-", respectively, but is at least "A") or (3) the
greater of One-Month LIBOR or Three-Month LIBOR, plus, in either case,
3.50% (if any one of the ratings assigned by Moody's and Fitch to the
Taxable Auction Rate Series 1997-1 Senior Notes is less than "A"). For
purposes of the Auction Agent and the Auction Procedures, the ratings
referred to in this definition shall be the last ratings of which the
Auction Agent shall have been given notice pursuant to the Auction Agent
Agreement.
"Monthly Payment Date" shall mean the _____ Business Day of each
calendar month; provided that any transfers to be made from the Revenue
Fund on a Monthly Payment Date shall, as to amounts therein constituting
payments in respect of Financed Student Loans, include only such payments
as have been deposited in the Revenue Fund as of the last day of the
preceding calendar month.
"Monthly Servicing Report" shall mean the monthly report prepared by
the Corporation or the Servicer in accordance with the Indenture.
"Moody's" shall mean Moody's Investors Service, Inc., its successors
and their assigns, and, if such corporation shall no longer perform the
functions of a securities rating agency, a successor designated by the
Trustee at the direction of the Corporation.
"Net Loan Rate" shall mean, with respect to a series of Taxable
Auction Rate Series 1997-1 Senior Notes or Taxable LIBOR Rate Series 1997-1
Notes, the rate of interest per annum (rounded to the next highest .01%)
equal to (i) the Ninety-one Day United States Treasury Bill Rate plus ____%
less (ii) the Administrative Cost and Note Fee Rate.
"New Borrower" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"1933 Act" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"1980 Amendments" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"1981 Amendments" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"1986 Amendments" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"1987 Amendments" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"1987 Budget Amendments" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"1989 Amendments" shall have the meaning assigned thereto on page [__]
of this Prospectus.
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"1992 Amendments" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"1993 Amendments" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"1993 Technical Amendments" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"91-day T-Bill Rate" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Ninety-one Day United States Treasury Bill Rate" shall mean, for
purposes of computing the Net Loan Rate with respect to a series of Taxable
Auction Rate Series 1997-1 Senior Notes or Taxable LIBOR Rate Series 1997-1
Notes, that rate of interest per annum equal to the average of the Bond
Equivalent Yields-91-Day T-Bill on the 91-day United States Treasury Bills
sold at auction thereof during the four week-period that immediately
preceded the Interest Rate Adjustment Date with respect to which such Net
Loan Rate is being computed.
"Non-Payment Rate" shall mean (i) with respect to a series of Tax
Exempt Auction Rate Series 1997-1 Senior Notes, the interest rate per annum
equal to the lesser of (a) 265% (as such percentage may be adjusted
pursuant to the provisions of the First Supplemental Indenture described
under Appendix VII - "Auction of the Auction Rate Series 1997-1 Senior
Notes -- Changes in Auction Terms -- Changes in Percentages Used in
Determining All Hold Rate, Maximum Auction Rate and Non-Payment Rate with
respect to the Tax Exempt Auction Rate Series 1997-1 Senior Notes") of the
Index and (b) ___%, and (ii) with respect to a series of Taxable Auction
Rate Series 1997-1 Senior Notes, the lesser of (a) One-Month LIBOR plus
1.50% and (b) 18%.
"Note Fees" shall mean the fees, costs and expenses, excluding Costs
of Issuance, of the Trustee and any Paying Agents, Authenticating Agent,
Remarketing Agents, Depositaries, Auction Agents, Broker-Dealers, Deposit
Agents, Bond Counsel, Note Registrar or Accountants incurred by the
Corporation in carrying out and administering its powers, duties and
functions under (1) its articles of incorporation, its bylaws, the Student
Loan Purchase Agreements, any Servicing Agreement, the Contracts of
Insurance, the Guarantee Agreements, the Program, the Higher Education Act
or any requirement of the laws of the United States or the State with
respect to the Program, as such powers, duties and functions relate to
Financed Student Loans, (2) any Swap Agreements and any Credit Enhancement
Facilities (other than any amounts payable thereunder which constitute
Other Indenture Obligations), (3) any Remarketing Agreement, Depositary
Agreement, Auction Agent Agreement or Broker-Dealer Agreement and (4) the
Indenture.
"Notes" shall mean the Series 1997-1 Notes and any additional notes
hereafter issued under the Indenture.
"One-Month LIBOR" shall mean, with respect to a series of Taxable
Auction Rate Series 1997-1 Senior Notes or Taxable LIBOR Rate Series 1997-1
Notes, the rate of interest per annum equal to the rate per annum at which
United States dollar deposits having a maturity of one month are offered to
prime banks in the London interbank market which appear on the Reuters
Screen LIBOR Page as of approximately 11:00 a.m., London time, on the
applicable Interest Rate Determination Date. If at least two such
quotations appear, One-Month LIBOR will be the arithmetic mean (rounded
upwards, if necessary, to the nearest .01%) of such offered rates. If
fewer than two such quotes appear, One-Month LIBOR will be determined at
approximately 11:00 a.m., London time, on the applicable Interest Rate
Determination Date on the basis of the rate at which deposits in United
States dollars having a maturity of one month are offered to prime banks in
the London interbank market by four major banks in the London interbank
market selected by (i) the Auction Agent after consultation with the
Trustee or (ii) the Trustee, as applicable, and in a principal amount of
not less than U.S. $1,000,000 and that is representative for a single
transaction in such market at such time. The Auction Agent or the Trustee,
as applicable, will request the principal London office of each such bank
to provide a quotation of its rate. If at least two quotations are
provided, One-Month LIBOR will be the arithmetic mean (rounded upwards, if
necessary, to the nearest .01%) of such offered rates. If fewer than two
quotations are provided, One-Month LIBOR will be the arithmetic mean
(rounded upwards, if necessary, to the nearest .01%) of the rates quoted at
approximately 11:00 a.m., New York City time, on the
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applicable Interest Rate Determination Date by three major banks in New
York, New York, selected by (x) the Auction Agent after consultation with
the Trustee or (y) the Trustee, as applicable, for loans in United States
dollars to leading European banks having a maturity of one month and in a
principal amount equal to an amount of not less than U.S. $1,000,000 and
that is representative for a single transaction in such market at such
time; provided, however, that if the banks selected as aforesaid are not
quoting as mentioned in this sentence, One-Month LIBOR will be the One-
Month LIBOR in effect for the immediately preceding Interest Period.
"Original Issuer" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Original Issuer Student Loan Purchase Agreements" shall have the
meaning assigned thereto on page [__] of this Prospectus.
"Order" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Other Beneficiary" shall mean an Other Senior Beneficiary or an Other
Subordinate Beneficiary.
"Other Indenture Obligations" shall mean, collectively, the Other
Senior Obligations and Other Subordinate Obligations.
"Other Senior Beneficiary" shall mean a Person who is a Senior
Beneficiary other than as a result of ownership of Senior Notes.
"Other Senior Obligations" shall mean the Corporation's obligations to
pay any amounts under any Senior Swap Agreements and any Senior Credit
Enhancement Facilities.
"Other Subordinate Beneficiary" shall mean a Person who is a
Subordinate Beneficiary other than as a result of ownership of Subordinate
Notes.
"Other Subordinate Obligations" shall mean the Corporation's
obligations to pay any amounts under any Subordinate Swap Agreements and
any Subordinate Credit Enhancement Facilities.
"Outstanding" shall mean (i) when used with respect to Notes, all
Notes other than (a) any Notes deemed no longer Outstanding as a result of
the purchase, payment or defeasance thereof as described under Appendix IX
-- "Summary of the Indenture -- Discharge of Notes and the Indenture", (b)
any Notes surrendered for transfer or exchange for which another Note has
been issued under the Indenture, (c) with respect to any request, demand,
authorization, direction, notice, consent or waiver under the Indenture,
Notes owned by the Corporation to the extent the Trustee knows that such
Notes are so owned, or (d) any Notes Deemed Tendered, and (ii) when used
with respect to Other Indenture Obligations, all Other Indenture
Obligations which have become, or may in the future become, due and payable
and which have not been paid or otherwise satisfied.
"Participant" shall mean a member of, or participant in, the
Securities Depository.
"Parties in Interest" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Payment Default" shall mean, with respect to a series of Auction Rate
Series 1997-1 Senior Notes, (i) a default in the due and punctual payment
of any installment of interest on such series, or (ii) a default in the due
and punctual payment of any interest on and principal of such series at
maturity.
"Person" shall mean any individual, corporation, partnership, joint
venture, association, joint stock company, trust, incorporated organization
or government or any agency or political subdivision thereof.
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"PHEAA" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"PHEAA Act" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"PHEAA Bond Fund" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Plan Assets Regulation" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Pledged Funds and Accounts" shall have the meaning assigned thereto
on page [__] of this Prospectus.
"Pledged Revenues" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Plus Loan" shall mean a Student Loan made pursuant to Section 428B of
the Higher Education Act.
"Potential Holders" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Prepayment Date", when used with respect to any Note, a portion of
the Principal Amount of which is to be paid prior to its Stated Maturity,
shall mean the date fixed for such prepayment by or pursuant to the
Indenture.
"Principal Amount", when used with respect to a Note, shall mean the
original principal amount of such Note less all payments previously made to
the Holder thereof in respect of principal.
"Principal Balance", when used with respect to a Student Loan, shall
mean the unpaid principal amount thereof (including any unpaid capitalized
interest thereon that is authorized to be capitalized under the Higher
Education Act for purposes of Special Allowance Payments, federal interest
subsidy payments, a borrower's liability to a lender and the amount of the
lender's loss on a guarantee or insurance claim) as of a given date.
"Principal Office" shall mean (i) when used with respect to the
Trustee, the principal corporate trust office of the Trustee, and (ii) when
used with respect to a Paying Agent (other than the Trustee), an
Authenticating Agent, the Note Registrar, a Depositary, a Remarketing
Agent, an Auction Agent or a Broker-Dealer, such office designated in
writing to the Trustee and the Corporation as the location of its principal
office for the performance of its duties as Paying Agent, Authenticating
Agent, Note Registrar, Depositary, Remarketing Agent, Auction Agent or
Broker-Dealer, as the case may be, under the Indenture.
"Principal Payment Date" shall mean the Stated Maturity of principal
of any Serial Note and the Sinking Fund Payment Date for any Term Note,
which, unless otherwise specified with respect to any series of Variable
Rate Notes in the Supplemental Indenture providing for the issuance
thereof, shall occur on a June 1 or a December 1.
"Program" shall mean the program to be administered by the Original
Issuer (or, after the Section 150(d)(3) Transfer, the Servicer) for the
purchase of Student Loans from Lenders or origination of Student Loans in
order to increase the supply of moneys available for new Student Loans,
thereby assisting students in obtaining a post-secondary school education.
"PSA" shall mean the Public Securities Association, its successors and
assigns.
"PSA Index" shall mean, with respect to a series of the Tax Exempt
Auction Rate Series 1997-1 Senior Notes, a rate determined on the basis of
the seven-day high grade market index of tax-exempt variable rate demand
obligations, as produced by Municipal Market Data and published or made
available by the PSA or any Person acting in cooperation with or under the
sponsorship of PSA and acceptable to the Market Agent.
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"PTCE" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Purchase Date" shall mean, with respect to a Demand Note, the date
specified in a purchase demand (provided that such date is prior to any
applicable conversion date and is not less than the required number of
calendar days after receipt of such purchase demand by the Depositary) as
the date on which the Holder of the Demand Note identified in such purchase
demand is demanding purchase of such Note, or a specified portion thereof,
in accordance with the applicable provisions of the related Supplemental
Indenture, or the next preceding or succeeding Business Day, as provided
for in such Supplemental Indenture, if such date is not a Business Day.
"Qualified Retirement Plans" shall have the meaning assigned thereto
on page [__] of this Prospectus.
"Rating Agency" shall mean any rating agency that shall have an
outstanding rating on any of the Notes pursuant to request by the
Corporation.
"Rating Category" shall mean one of the general rating categories of a
Rating Agency, without regard to any refinement or gradation of such rating
category by a numerical modifier or otherwise.
"Rebate Amount" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Remarketing Agent" shall mean, with respect to any series of Notes,
any securities dealer designated as such with respect to such Notes
pursuant to the provisions of the Indenture and its successor or successors
and any securities dealer at any time substituted in its place pursuant to
the Indenture.
"Remarketing Agreement" shall mean an agreement between a Remarketing
Agent and the Corporation setting forth the rights and obligations of the
Remarketing Agent acting in such capacity under the Indenture, including
any supplement thereto or amendment thereof entered into in accordance with
the provisions thereof.
"Repeat Borrower" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Reserve Fund Requirement" shall mean, at any time, an amount equal to
the greater of (1) 2.00% of the aggregate Principal Amount of Senior Notes
and Subordinate Notes then Outstanding, and (2) $500,000; or, as determined
upon the issuance of any Senior Notes or any Subordinate Notes, such lesser
or greater amount as will not cause any Rating Agency to lower or withdraw
any rating on any Outstanding Unenhanced Notes, as confirmed in writing to
the Trustee by each Rating Agency, or, if no Unenhanced Notes are then
Outstanding but Other Indenture Obligations are Outstanding and the Reserve
Fund Requirement is to be reduced, such lesser amount as is acceptable to
the Other Beneficiaries entitled to such Other Indenture Obligations, as
evidenced in writing to the Trustee by each such Other Beneficiary. In
calculating the Reserve Fund Requirement, all Notes to be defeased by a
series of refunding Notes shall be deemed not Outstanding as of the date of
calculation.
"Reuters Screen LIBOR Page" shall mean the display designated as page
"LIBOR" on the Reuters Monitor Money Rates Service (or such other page as
may replace the LIBOR page for the purposes of displaying London interbank
offered rates of major banks).
"Sallie Mae" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"S&P" shall mean Standard & Poor's, a division of McGraw-Hill Inc.,
its successors and assigns.
"Secretary of Education" shall mean the Commissioner of Education,
Department of Health, Education and Welfare of the United States, and the
Secretary of the United States Department of Education (who succeeded to
the functions of the Commissioner of Education pursuant to the Department
of Education Organization Act), or any
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other officer, board, body, commission or agency succeeding to the
functions thereof under the Higher Education Act.
"Section 150(d)(3) Transfer" shall mean the transfer of all of the
right, title and interest in and to the Trust Estate from the Original
Issuer to SLFC, and from SLFC to the Corporation, together with the
assumption by the Corporation of all of the obligations and liabilities of
the Original Issuer under the Indenture and under the Notes and any Other
Obligations, all in accordance with Section 150(d)(3) of the Code.
"Securities Depository" shall mean The Depository Trust Company, New
York, New York, as depository of the Series 1997-1 Notes, and its
successors and assigns, or, if (i) the then-existing Securities Depository
resigns from its functions as depository of the Series 1997-1 Notes or (ii)
the Corporation discontinues use of the Securities Depository pursuant to
the provisions of the First Supplemental Indenture, then any other
securities depository which agrees to follow the procedures required to be
followed by a securities depository in connection with the Series 1997-1
Notes and which is selected by the Corporation with the consent of the
Trustee.
"Sell Order" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Seller's Broker-Dealer" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Senior Asset Requirement" shall mean, as of the date of
determination, that:
(a) the Senior Percentage is at least equal to ___% (or such
lower percentage specified in a Corporation certificate delivered to
the Trustee which, if Unenhanced Senior Notes are Outstanding, shall
not result in the lowering or withdrawal of the outstanding rating
assigned by any Rating Agency to any of the Unenhanced Senior Notes
Outstanding, as evidenced in writing to the Trustee by each such
Rating Agency, or, if no Unenhanced Senior Notes are Outstanding but
Other Senior Obligations are Outstanding, is acceptable to the Other
Senior Beneficiaries entitled to such Other Senior Obligations, as
evidenced in writing to the Trustee by each such Other Senior
Beneficiary), and
(b) the Subordinate Percentage is at least equal to ___% (or such
lower percentage specified in a Corporation certificate delivered to
the Trustee which, if Unenhanced Subordinate Notes are Outstanding,
shall not result in the lowering or withdrawal of the outstanding
rating assigned by any Rating Agency to any of the Unenhanced
Subordinate Notes Outstanding, as evidenced in writing to the Trustee
by each such Rating Agency, or, if no Unenhanced Subordinate Notes are
Outstanding but Other Subordinate Obligations are Outstanding, is
acceptable to the Other Subordinate Beneficiaries entitled to such
Other Subordinate Obligations, as evidenced in writing to the Trustee
by each such Other Subordinate Beneficiary).
"Senior Beneficiaries" shall mean (i) the Holders of any Outstanding
Senior Notes, and (ii) any Senior Credit Facility Provider and any Senior
Swap Counterparty entitled to Other Senior Obligations then Outstanding.
"Senior Credit Enhancement Facility" shall mean a Credit Enhancement
Facility designated as a Senior Credit Enhancement Facility in the
Supplemental Indenture pursuant to which such Credit Enhancement Facility
is furnished by the Corporation.
"Senior Credit Facility Provider" shall mean any Person who provides a
Senior Credit Enhancement Facility.
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"Senior Notes" shall mean the Series 1997-1 Senior Notes and any other
Notes designated in a Supplemental Indenture as Senior Notes, which are secured
under the Indenture on a basis senior to any Subordinate Obligations and any
Class C Notes, and on a parity with other Senior Obligations.
"Senior Obligations" shall mean, collectively, the Senior Notes and
the Other Senior Obligations.
"Senior Percentage" shall mean, as of the date of determination, the
percentage resulting by dividing the Aggregate Value by the sum of (i) the
aggregate Principal Amount of Outstanding Senior Notes plus accrued interest
thereon, (ii) accrued Corporation Swap Payments under Senior Swap Agreements and
(iii) other payments accrued and owing by the Corporation on Other Senior
Obligations.
"Senior Swap Agreement" shall mean a Swap Agreement designated as a
Senior Swap Agreement in the Supplemental Indenture pursuant to which such Swap
Agreement is furnished by the Corporation. "Senior Swap Counterparty" shall mean
any Person who provides a Senior Swap Agreement.
"Series 1997-1 Notes" shall mean, collectively, the Series 1997-1
Senior Notes and the Series 1997-1 Subordinate Notes.
"Series 1997-1 Senior Notes" shall mean, collectively, the Series
1997-1A Notes, the Series 1997-1B Notes, the Series 1997-1C Notes, the Series
1997-1D Notes, the Series 1997-1E Notes, the Series 1997-1F Notes, the Series
1997-1G Notes, the Series 1997-1H Notes, the Series 1997-1I Notes and the Series
1997-1J Notes.
"Series 1997-1 Subordinate Notes" shall mean, collectively, the Series
1997-1K Notes and the Series 1997-1L Notes.
"Series 1997-1A Notes" shall mean the Corporation's Tax Exempt Auction
Rate Student Loan Asset-Backed Notes, Senior Series 1997-1A, issued under the
Indenture.
"Series 1997-1B Notes" shall mean the Corporation's Tax Exempt Auction
Rate Student Loan Asset-Backed Notes, Senior Series 1997-1B, issued under the
Indenture.
"Series 1997-1C Notes" shall mean the Corporation's Tax Exempt Auction
Rate Student Loan Asset-Backed Notes, Senior Series 1997-1C, issued under the
Indenture.
"Series 1997-1D Notes" shall mean the Corporation's Tax Exempt Auction
Rate Student Loan Asset-Backed Notes, Senior Series 1997-1D, issued under the
Indenture.
"Series 1997-1E Notes" shall mean the Corporation's Tax Exempt Auction
Rate Student Loan Asset-Backed Notes, Senior Series 1997-1E, issued under the
Indenture.
"Series 1997-1F Notes" shall mean the Corporation's Tax Exempt Fixed
Rate Student Loan Asset-Backed Notes, Senior Series 1997-1F, issued under the
Indenture.
"Series 1997-1G Notes" shall mean the Corporation's Taxable Auction
Rate Student Loan Asset-Backed Notes, Senior Series 1997-1G, issued under the
Indenture.
"Series 1997-1H Notes" shall mean the Corporation's Taxable Auction
Rate Student Loan Asset-Backed Notes, Senior Series 1997-1H, issued under the
Indenture.
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"Series 1997-1I Notes" shall mean the Corporation's Taxable LIBOR Rate
Student Loan Asset-Backed Notes, Senior Series 1997-1I, issued under the
Indenture.
"Series 1997-1J Notes" shall mean the Corporation's Taxable LIBOR Rate
Student Loan Asset-Backed Notes, Senior Series 1997-1J, issued under the
Indenture.
"Series 1997-1K Notes" shall mean the Corporation's Tax Exempt Fixed
Rate Student Loan Asset-Backed Notes, Subordinate Series 1997-1K, issued under
the Indenture.
"Series 1997-1L Notes" shall mean the Corporation's Taxable LIBOR Rate
Student Loan Asset-Backed Notes, Subordinate Series 1997-1L, issued under the
Indenture.
"Service" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Servicer" shall mean SLFC and any other organization with which the
Corporation and the Trustee have entered into a Servicing Agreement, subject to
confirmation of ratings on any Outstanding Unenhanced Notes or, if no Unenhanced
Notes are then Outstanding but Other Indenture Obligations are Outstanding,
consent of each Other Beneficiary entitled to such Other Indenture Obligations.
"Servicing Agreement" shall mean the SLFC Servicing Agreement, and any
other agreement among the Corporation, the Trustee and a Servicer under which
the Servicer agrees to act as the Corporation's and/or the Trustee's agent or
provides services or facilities (including, without limitation, computer
hardware or software) in connection with the administration and collection of
Financed Student Loans in accordance with the Indenture.
"Servicing Fees" shall mean any fees payable by the Corporation to a
Servicer in respect of Financed Student Loans pursuant to the provisions of a
Servicing Agreement.
"Sinking Fund Payment Date" shall mean the date on which any Term Note
is to be called for redemption pursuant to the sinking fund redemption
provisions of the Supplemental Indenture providing for the issuance thereof, or,
if not so redeemed, the Stated Maturity thereof.
"SLFC" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"SLFC Servicing Agreement" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"SLS Loan" shall mean a Student Loan made pursuant to former Section
428A of the Higher Education Act.
"Special Allowance Payments" shall mean special allowance payments
authorized to be made by the Secretary of Education by Section 438 of the Higher
Education Act, or similar allowances authorized from time to time by federal law
or regulation.
"Special Prepayment Amount" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Special Redemption and Prepayment Account Requirement" (i) with
respect to the Taxable LIBOR Rate Series 1997-1 Notes, shall mean an amount
equal to the Special Prepayment Amount, and (ii) with respect to any other
series of Notes, shall mean the amount described in the Supplemental Indenture
providing for the issuance thereof.
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"Specific Rating Category" shall mean a specific rating category of a
Rating Agency, taking into account any refinement or gradation of a Rating
Category by a numerical or other qualifier. For so long as any of the Notes are
rated by Moody's: (a) references to the highest applicable Specific Rating
Category shall be, with respect to obligations or investments having a term of
less than one year, to a rating of "P-1" (or such rating as Moody's shall advise
the Trustee is comparable to "P-1" under any revised rating schedule), and with
respect to obligations or investments having a term of one year or longer, to a
rating of "Aaa" (or such rating as Moody's shall advise the Trustee is
comparable to "Aaa" under any revised rating schedule); and (b) references to
the third highest applicable Specific Rating Category shall be, with respect to
obligations or investments having a term of one year or longer, to a rating of
"Aa2" (or such rating as Moody's shall advise the Trustee is comparable to "Aa2"
under any revised rating schedule). For so long as any of the Notes are rated by
Fitch: (a) references to the highest applicable Specific Rating Category shall
be, with respect to obligations or investments having a term of less than one
year, to a rating of "F-1+" (or, if Fitch revises its rating schedule from time
to time, such rating as Fitch shall advise the Trustee in writing is comparable
to "F-1+" under such revised rating schedule), and with respect to obligations
or investments having a term of one year or longer, to a rating of "AAA" (or, if
Fitch revises its rating schedule from time to time, such rating as Fitch shall
advise the Trustee in writing is comparable to "AAA" under such revised rating
schedule); and (b) references to the third highest applicable Specific Rating
Category shall be, with respect to obligations or investments having a term of
one year or longer, to a rating of "AA" (or, if Fitch revises its rating
schedule from time to time, such rating as Fitch shall advise the Trustee in
writing is comparable to "AA" under such revised rating schedule).
"Statutory Corporate Tax Rate" shall mean, with respect to a series of
Tax Exempt Auction Rate Series 1997-1 Senior Notes, the highest tax bracket
(expressed in decimals) applicable at the time of determination of the After-Tax
Equivalent on the income tax of any corporation, as set forth in Section 11 of
the Code or any successor section, without regard to any minimum additional tax
provision. The "Statutory Corporate Tax Rate", as of _________, 1997, is .35.
"Student Loan" shall mean a loan to a borrower for post-secondary
education.
"Student Loan Portfolio" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Student Loan Purchase Agreements" shall mean all agreements between
the Original Issuer or the Corporation and a Lender providing for the sale by
such Lender to the Corporation or the Trustee on behalf of the Corporation (or
to the Original Issuer prior to the Date of Issuance) of Student Loans Financed
or to be Financed under the Indenture and substantially in the forms which are
on file with the Trustee, including amendments thereto made in accordance with
the Indenture.
"Submitted Bid" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Submitted Hold Order" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Submitted Orders" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Submitted Sell Order" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Subordinate Beneficiaries" shall mean (i) the Holders of any
Outstanding Subordinate Notes, and (ii) any Subordinate Credit Facility Provider
and any Subordinate Swap Counterparty entitled to any Other Subordinate
Obligations then Outstanding.
"Subordinate Credit Enhancement Facility" shall mean a Credit
Enhancement Facility designated as a Subordinate Credit Enhancement Facility in
the Supplemental Indenture pursuant to which such Credit Enhancement Facility is
furnished by the Corporation.
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"Subordinate Credit Facility Provider" shall mean any Person who
provides a Subordinate Credit Enhancement Facility.
"Subordinate Notes" shall mean the Series 1997-1 Subordinate Notes and
any other Notes designated in a Supplemental Indenture as Subordinate Notes,
which are secured under the Indenture on a basis subordinate to any Senior
Obligations, on a parity with other Subordinate Obligations and on a basis
senior to any Class C Notes.
"Subordinate Obligations" shall mean, collectively, the Subordinate
Notes and the Other Subordinate Obligations.
"Subordinate Percentage" shall mean, as of the date of determination,
the percentage resulting by dividing the Aggregate Value by the sum of (i) the
aggregate Principal Amount of Outstanding Senior Notes and Subordinate Notes
plus accrued interest thereon, (ii) accrued Corporation Swap Payments and (iii)
other payments accrued and owing by the Corporation on Other Indenture
Obligations.
"Subordinate Swap Agreement" shall mean a Swap Agreement designated as
a Subordinate Swap Agreement in the Supplemental Indenture pursuant to which
such Swap Agreement is furnished by the Corporation.
"Subordinate Swap Counterparty" shall mean any Person who provides a
Subordinate Swap Agreement.
"Sufficient Bids" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Supplemental Indenture" shall mean any amendment of or supplement to
the Indenture made in accordance with the provisions thereof. (See Appendix
IX -- "Summary of the Indenture -- Supplemental Indentures".)
"Swap Agreement" shall mean, collectively, (a) an interest rate
exchange agreement between the Corporation and a Swap Counterparty, as
originally executed and as amended or supplemented, or other interest rate hedge
agreement between the Corporation and a Swap Counterparty, as originally
executed and as amended or supplemented, in each case approved by each Rating
Agency, for the purpose of converting, in whole or in part, (i) the
Corporation's fixed interest rate liability on all or a portion of any Notes to
a variable rate liability, (ii) the Corporation's variable rate liability on all
or a portion of the Notes to a fixed rate liability, or (iii) the Corporation's
variable rate liability on all or a portion of the Notes to a different variable
rate liability, and (b) any guarantee of the Swap Counterparty's obligations
under such interest rate exchange agreement.
"Swap Counterparty" shall mean any Person with whom the Corporation
shall, from time to time, enter into a Swap Agreement.
"Tax-Exempt Notes" shall mean the Tax Exempt Series 1997-1 Notes and
each other series of Notes that is issued with the intent that interest thereon
be excludable from gross income for purposes of federal income taxation, as
evidenced by an opinion of Bond Counsel to that effect delivered upon issuance
of such series of Notes.
"Tax Exempt Auction Rate Series 1997-1 Senior Notes" shall mean,
collectively, the Series 1997-1A Notes, the Series 1997-1B Notes, the Series
1997-1C Notes, the Series 1997-D Notes and the Series 1997-E Notes.
"Tax Exempt Fixed Rate Series 1997-1 Senior Notes" shall mean the
Series 1997-1F Notes.
"Tax Exempt Fixed Rate Series 1997-1 Subordinate Notes" shall mean the
Series 1997-1K Notes.
"Tax-Favored Plans" shall have the meaning assigned thereto on page
[__] of this Prospectus.
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"Tax Matters Certificate" shall mean, with respect to a series of Tax-
Exempt Notes, the applicable Original Issuer or Corporation certificate or
certificates relating to arbitrage and other tax matters delivered in connection
with the issuance of such series of Notes, as the same may be amended or
supplemented in accordance with its or their terms.
"Taxable Auction Rate Series 1997-1 Senior Notes" shall mean,
collectively, the Series 1997-1G Notes and the Series 1997-1H Notes.
"Taxable LIBOR Rate Series 1997-1 Notes" shall mean, collectively, the
Taxable LIBOR Rate Series 1997-1 Senior Notes and the Taxable LIBOR Rate Series
1997-1 Subordinate Notes.
"Taxable LIBOR Rate Series 1997-1 Senior Note Initial Interest Rate"
shall mean the interest rate to be borne by a series of Taxable LIBOR Rate
Series 1997-1 Senior Notes for the Initial Interest Period therefor, as set
forth in the First Supplemental Indenture.
"Taxable LIBOR Rate Series 1997-1 Senior Note Interest Rate" shall
mean the rate of interest per annum borne by a series of Taxable LIBOR Rate
Series 1997-1 Senior Notes, which, during the Initial Interest Period for such
series, shall be the Taxable LIBOR Rate Series 1997-1 Senior Note Initial
Interest rate, and during each Interest Period thereafter, shall be One-Month
LIBOR plus the Taxable LIBOR Rate Series 1997-1 Senior Note Spread.
"Taxable LIBOR Rate Series 1997-1 Senior Note LIBOR-Based Rate" shall
have the meaning assigned thereto on page [__] of this Prospectus.
"Taxable LIBOR Rate Series 1997-1 Senior Note Spread" shall mean ___%
per annum, with respect to the Series 1997-1I Notes, and ___% per annum, with
respect to the Series 1997-1J Notes.
"Taxable LIBOR Rate Series 1997-1 Senior Notes" shall mean,
collectively, the Series 1997-1I Notes and the Series 1997-1J Notes.
"Taxable LIBOR Rate Series 1997-1 Subordinate Note Initial Interest
Rate" shall mean the interest rate to be borne by the Taxable LIBOR Rate Series
1997-1 Subordinate Notes for the Initial Interest Period therefor, as set forth
in the First Supplemental Indenture.
"Taxable LIBOR Rate Series 1997-1 Subordinate Note Interest Rate"
shall mean the rate of interest per annum borne by the Taxable LIBOR Rate Series
1997-1 Subordinate Notes, which, during the Initial Interest Period for such
series, shall be the Taxable LIBOR Rate Series 1997-1 Subordinate Note Initial
Interest Rate, and during each Interest Period thereafter, shall be One-Month
LIBOR plus the Taxable LIBOR Rate Series 1997-1 Subordinate Note Spread.
"Taxable LIBOR Rate Series 1997-1 Subordinate Note LIBOR-Based Rate"
shall have the meaning assigned thereto on page [__] of this Prospectus.
"Taxable LIBOR Rate Series 1997-1 Subordinate Note Spread" shall mean
___% per annum.
"Taxable LIBOR Rate Series 1997-1 Subordinate Notes" shall mean the
Series 1997-1L Notes.
"Terms and Conditions" shall have the meaning assigned thereto on page
[__] of this Prospectus.
-127-
<PAGE>
"Three-Month LIBOR" shall mean, with respect to a series of Taxable
Auction Rate Series 1997-1 Senior Notes, the rate of interest per annum equal to
the rate per annum at which United States dollar deposits having a maturity of
three months are offered to prime banks in the London interbank market which
appear on the Reuters Screen LIBOR Page as of approximately 11:00 a.m., London
time, on the applicable Interest Rate Determination Date. If at least two such
quotations appear, Three-Month LIBOR will be the arithmetic mean (rounded
upwards, if necessary, to the nearest .01%) of such offered rates. If fewer than
two such quotes appear, Three-Month LIBOR will be determined at approximately
11:00 a.m., London time, on the applicable Interest Rate Determination Date on
the basis of the rate at which deposits in United States dollars having a
maturity of three months are offered to prime banks in the London interbank
market by four major banks in the London interbank market selected by (i) the
Auction Agent after consultation with the Trustee or (ii) the Trustee, as
applicable, and in a principal amount of not less than U.S. $1,000,000 and that
is representative for a single transaction in such market at such time. The
Auction Agent or the Trustee, as applicable, will request the principal London
office of each of such banks to provide a quotation of its rate. If at least two
quotations are provided, Three-Month LIBOR will be the arithmetic mean (rounded
upwards, if necessary, to the nearest .01%) of such offered rates. If fewer than
two quotations are provided, Three-Month LIBOR will be the arithmetic mean
(rounded upwards, if necessary, to the nearest .01%) of the rates quoted at
approximately 11:00 a.m., New York City time on the applicable Interest Rate
Determination Date by three major banks in New York, New York, selected by (x)
the Auction Agent after consultation with the Trustee or (y) the Trustee, as
applicable, for loans in United States dollars to leading European banks having
a maturity of three months and in a principal amount equal to an amount of not
less than U.S. $1,000,000 and that is representative for a single transaction in
such market at such time; provided, however, that if the banks selected as
aforesaid are not quoting as mentioned in this sentence, Three-Month LIBOR will
be the Three-Month LIBOR in effect for the immediately preceding Interest
Period.
"Trust Estate" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Trust Funds" shall mean, in the aggregate, all of the Funds and
Accounts.
"Trustee" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"U.K. Regulations" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Underwriters" shall mean Smith Barney Inc., FBS Investment Services,
Inc., Dougherty Dawkins LLC, Miller & Schroeder Financial, Inc. and Norwest
Investment Services, Inc.
"Underwriting Agreement" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Unenhanced Note" shall mean, with respect to a Senior Note or a
Subordinate Note, a Note the payment of the principal of and interest on which
is not secured by a Credit Enhancement Facility.
"Value" shall mean, on any calculation date when required under the
Indenture, the value of the Trust Estate calculated by the Corporation in
accordance with the following:
(1) with respect to any Eligible Loan, the Principal Balance
thereof, plus any unamortized premiums, accrued interest and Special
Allowance Payments thereon;
(2) with respect to any funds of the Corporation on deposit in
any commercial bank or as to any banker's acceptance or repurchase
agreement or investment agreement, the amount thereof plus accrued interest
thereon;
(3) with respect to any Investment Securities of an investment
company, the bid price of the shares as reported by the investment company;
-128-
<PAGE>
(4) as to other investments (i) the bid price published by a
nationally recognized pricing service, or (ii) if the bid and asked prices
thereof are published on a regular basis in The Wall Street Journal (or, if
not there, then in The New York Times), the average of the bid and asked
prices for such investments so published on or most recently prior to such
time of determination, in each case plus accrued interest thereon;
(5) as to investments the bid prices of which are not published by a
nationally recognized pricing service and the bid and asked prices of which
are not published on a regular basis in The Wall Street Journal or The New
York Times, the lower of the bid prices at such time of determination for
such investments by any two nationally recognized government securities
dealers (selected by the Corporation in its absolute discretion) at the
time making a market in such investments, plus accrued interest thereon;
and
(6) any accrued but unpaid Swap Counterparty Payments under a Swap
Agreement, unless the Swap Counterparty is in default of its obligations
thereunder.
"Value of Investment Securities" shall mean (i) as to demand bank deposits,
bank time deposits which may be withdrawn without penalty by the depositor upon
14 days' or less notice and Investment Securities which mature not more than six
months from the date of computation, the amount of such deposits and the par
value of such Investment Securities, and (ii) as to Investment Securities, other
than demand bank deposits and bank time deposits described in clause (i), which
mature more than six months after the date of computation, the par value thereof
or, if purchased at more or less than par, the cost thereof adjusted to reflect
the amortization or premium or discount, as the case may be, paid upon their
purchase. The computation made under this paragraph shall included accrued
interest.
"Variable Rate Notes" shall mean Notes whose interest rate is not fixed but
varies on a periodic basis as specified in the Supplemental Indenture providing
for the issuance thereof.
-129-
<PAGE>
Appendix I
TERMS OF THE TAX EXEMPT AUCTION RATE SERIES 1997-1 SENIOR NOTES
Generally
The Tax Exempt Auction Rate Series 1997-1 Senior Notes will be dated
as of the date of their initial issuance and, subject to the redemption
provisions referred to below, will mature on June 1, 2020. The Tax Exempt
Auction Rate Series 1997-1 Senior Notes will bear interest, payable on each
June 1 and December 1, commencing December 1, 1997, at rates determined as
described below under "Interest Rate on the Tax Exempt Auction Rate Series
1997-1 Senior Notes". The Tax Exempt Auction Rate Series 1997-1 Senior
Notes will be issued in fully registered form, without coupons, and when
issued will be registered in the name of Cede & Co., as nominee of DTC. DTC
will act as securities depository for the Tax Exempt Auction Rate Series
1997-1 Senior Notes. Individual purchases of the Tax Exempt Auction Rate
Series 1997-1 Senior Notes will be made in book-entry form only in the
principal amount of $100,000 or multiples thereof. Purchasers of the Tax
Exempt Auction Rate Series 1997-1 Senior Notes will not receive
certificates representing their interest in the Tax Exempt Auction Rate
Series 1997-1 Senior Notes purchased. See "Description of Series 1997-1
Notes - Book-Entry-Only System".
Interest Rate on the Tax Exempt Auction Rate Series 1997-1 Senior Notes
The Initial Interest Rate Adjustment Dates for the Tax Exempt Auction
Rate Series 1997-1 Senior Notes will be as follows:
<TABLE>
<CAPTION>
Initial Interest Rate
Series Adjustment Date
- --------- ---------------------
<S> <C>
1997-1A _________, 1997
1997-1B _________, 1997
1997-1C _________, 1997
1997-1D _________, 1997
1997-1E _________, 1997
</TABLE>
During the Initial Interest Period, each series of the Tax Exempt Auction
Rate Series 1997-1 Senior Notes will bear interest at the Series 1997-1
Senior Note Initial Interest Rate for such series. Thereafter, the Tax
Exempt Auction Rate Series 1997-1 Senior Notes of each series will bear
interest at a Tax Exempt Auction Rate Series 1997-1 Senior Note Interest
Rate based on an Auction Period of 35 days, subject to adjustment as
described in Appendix VII-"Auction of the Auction Rate Series 1997-1 Senior
Notes-Changes in Auction Terms - Changes in Auction Period or Periods". In
no event will the Tax Exempt Auction Rate Series 1997-1 Senior Note
Interest Rate exceed the Tax Exempt Auction Rate Series 1997-1 Senior Note
Interest Rate Limitation of ___% per annum.
For each series of the Tax Exempt Auction Rate Series 1997-1 Senior
Notes during the Initial Interest Period and each Auction Period
thereafter, interest at the Tax Exempt Auction Rate Series 1997-1 Senior
Note Interest Rate will accrue daily and will be computed for the actual
number of days elapsed on the basis of a year consisting of 360 days.
Interest due on the Tax Exempt Auction Rate Series 1997-1 Senior Notes on
any Interest Payment Date will be calculated on a per unit basis, based on
a unit of $100,000.
The Series 1997-1 Senior Note Auction Rate to be borne by each series
of the Tax Exempt Auction Rate Series 1997-1 Senior Notes after the Initial
Interest Period for each Auction Period until an Auction Period Adjustment,
if any, will be determined as hereinafter described. Each such Auction
Period will commence on and include the _________ following the expiration
of the immediately preceding Auction Period and terminate on and include
the __________ immediately preceding the __________ of the fifth following
week; provided, however, that in the case of the Auction Period that
immediately follows the Initial Interest Period for a series of the Tax
Exempt Auction Rate Series 1997-1 Senior Notes, such Auction Period will
commence on the Initial Interest Rate
I-1
<PAGE>
Adjustment Date for such series. The Series 1997-1 Senior Note Auction Rate on
each series of the Tax Exempt Auction Rate Series 1997-1 Senior Notes for each
Auction Period will be the Auction Rate in effect for such Auction Period as
determined in accordance with the Auction Procedures described in Appendix VII-
"Auction of the Series 1997-1 Senior Notes"; provided that if, on any Interest
Rate Determination Date, an Auction is not held with respect to a series of Tax
Exempt Auction Rate Series 1997-1 Senior Notes for any reason, then the Series
1997-1 Senior Note Auction Rate on such series for the next succeeding Auction
Period will be the Maximum Tax Exempt Auction Rate.
Notwithstanding the foregoing:
(A) if the ownership of a series of Tax Exempt Auction Rate Series
1997-1 Senior Notes is no longer maintained in book-entry form, the Series
1997-1 Senior Note Auction Rate on the Tax Exempt Auction Rate Series 1997-
1 Senior Notes of such series for any Interest Period commencing after the
delivery of certificates representing the Tax Exempt Auction Rate Series
1997-1 Senior Notes of such series will equal the Maximum Tax Exempt
Auction Rate on the Business Day immediately preceding the first day of
such subsequent Interest Period; or
(B) if a Payment Default has occurred with respect to a series of Tax
Exempt Auction Rate Series 1997-1 Senior Notes, the Series 1997-1 Senior
Note Auction Rate on such series for the Interest Period for such series
commencing on or immediately after such Payment Default and for each
Interest Period thereafter, to and including the Interest Period, if any,
during which, or commencing less than two Business Days after, such Payment
Default is cured in accordance with the First Supplemental Indenture, will
equal the Tax Exempt Non-Payment Rate on the first day of each such
Interest Period.
In any event, no Auction will be held on any Auction Date under the First
Supplemental Indenture during the continuance of a Payment Default.
The Auction Agent is to promptly give written notice to the Trustee and the
Corporation of each Series 1997-1 Senior Note Auction Rate (unless the Series
1997-1 Senior Note Auction Rate is the Tax Exempt Non-Payment Rate) applicable
to each series of the Tax Exempt Auction Rate Series 1997-1 Senior Notes. The
Trustee is to notify the Holders of Tax Exempt Auction Rate Series 1997-1 Senior
Notes of the Series 1997-1 Senior Note Auction Rate applicable to each such
series of Tax Exempt Auction Rate Series 1997-1 Senior Notes for each Auction
Period on the second Business Day of such Auction Period.
If the Auction Agent no longer determines, or fails to determine, when
required, the Series 1997-1 Senior Note Auction Rate with respect to a series of
Tax Exempt Auction Rate Series 1997-1 Senior Notes, or if, for any reason, such
manner of determination is held to be invalid or unenforceable, the Series 1997-
1 Senior Note Auction Rate for the next succeeding Interest Period (which period
will be an Auction Period for such series of the Tax Exempt Auction Rate Series
1997-1 Senior Notes) will be the Maximum Tax Exempt Auction Rate as determined
by the Auction Agent for such next succeeding Auction Period, and if the Auction
Agent fails or refuses to determine said Maximum Tax Exempt Auction Rate, the
Maximum Tax Exempt Auction Rate is to be determined by a securities dealer
appointed by the Corporation capable of making such a determination in
accordance with the provisions of the Indenture, and written notice of such
determination is to be given by such securities dealer to the Trustee.
Interest Limited to the Extent Permissible by Law
In no event shall the cumulative amount of interest paid or payable on a
series of Tax Exempt Auction Rate Series 1997-1 Senior Notes exceed the amount
permitted by applicable law. If the applicable law is ever judicially
interpreted so as to render usurious any amount called for under the Tax Exempt
Auction Rate Series 1997-1 Senior Notes of a series or related documents or
otherwise contracted for, charged, reserved, taken or received in connection
with the Tax Exempt Auction Rate Series 1997-1 Senior Notes of such series, or
if the redemption or
I-2
<PAGE>
acceleration of the maturity of the Tax Exempt Auction Rate Series 1997-1 Senior
Notes of such series results in payment to or receipt by the Holder or any
former Holder of the Tax Exempt Auction Rate Series 1997-1 Senior Notes of such
series of any interest in excess of that permitted by applicable law, then,
notwithstanding any provision of the Tax Exempt Auction Rate Series 1997-1
Senior Notes of such series or related documents to the contrary, all excess
amounts theretofore paid or received with respect to the Tax Exempt Auction Rate
Series 1997-1 Senior Notes of such series shall be credited on the principal
balance of the Tax Exempt Auction Rate Series 1997-1 Senior Notes of such series
(or, if the Tax Exempt Auction Rate Series 1997-1 Senior Notes of such series
have been paid or would thereby be paid in full, refunded by the recipient
thereof), and the provisions of the Tax Exempt Auction Rate Series 1997-1 Senior
Notes of such series and related documents shall automatically and immediately
be deemed reformed and the amounts thereafter collectible thereunder reduced,
without the necessity of the execution of any new document, so as to comply with
the applicable law, but so as to permit the recovery of the fullest amount
otherwise called for under the Tax Exempt Auction Rate Series 1997-1 Senior
Notes of such series and under the related documents.
Redemption of Tax Exempt Auction Rate Series 1997-1 Senior Notes
The Tax Exempt Auction Rate Series 1997-1 Series Notes will be subject to
redemption as described in the Prospectus under the captions "Description of
Series 1991-1 Notes - Special Redemption and Prepayment" and "- Optional
Redemption."
I-3
<PAGE>
Appendix II
TERMS OF THE TAX EXEMPT FIXED RATE
SERIES 1997-1 SENIOR NOTES
The Tax Exempt Fixed Rate Series 1997-1 Senior Notes will be dated as of
____________, 1997 and, subject to the redemption provisions referred to below,
will mature on the dates, and in the respective principal amounts, and will bear
interest from their date at the respective rates per annum, set forth in the
table below:
<TABLE>
<CAPTION>
Date Principal Amount Interest Rate
-------------- ---------------- --------------
<S> <C> <C>
June 1, 2010 ___________ ____%
June 1, 2020 ___________ ____%
</TABLE>
Interest on the Tax Exempt Series 1997-1 Senior Notes will be payable
semiannually on each June 1 and December 1, commencing December 1, 1997. The Tax
Exempt Series 1997-1 Senior Notes will be issued in fully registered form,
without coupons, and when issued will be registered in the name of Cede & Co.,
as nominee of DTC, New York, New York. DTC will act as securities depository for
the Tax Exempt Series 1997-1 Senior Notes. Individual purchases of the Tax
Exempt Series 1997-1 Senior Notes will be made in book-entry form only in the
principal amount of $5,000 or multiples thereof. Purchasers of the Tax-Exempt
Series 1997-1 Senior Notes will not receive certificates representing their
interest in the Tax-Exempt Series 1997-1 Senior Notes purchased. See
"Description of the Series 1997-1 Notes- Book-Entry-Only System."
The Tax Exempt Fixed Rate Series 1997-1 Senior Notes will be subject to
redemption as described in the Prospectus under the captions "Description of the
Series 1997-1 Notes - Special Redemption and Prepayment" and "- Optional
Redemption."
<PAGE>
Appendix III
TERMS OF THE TAXABLE AUCTION RATE SERIES 1997-1 SENIOR NOTES
Generally
The Taxable Auction Rate Series 1997-1 Senior Notes will be dated as of the
date of their initial issuance and, subject to the tender provisions set forth
below and the redemption provisions referred to below, will mature on June 1,
2020. The Taxable Auction Rate Series 1997-1 Senior Notes will bear interest,
payable on the Business Day following the expiration of each Auction Period, at
rates determined as described below under "Interest Rate on the Taxable Auction
Rate Series 1997-1 Senior Notes." The Taxable Auction Rate Series 1997-1 Senior
Notes will be issued in fully registered form, without coupons, and when issued
will be registered in the name of Cede & Co., as nominee of DTC. DTC will act as
securities depository for the Taxable Auction Rate Series 1997-1 Senior Notes.
Individual purchases of the Taxable Auction Rate Series 1997-1 Senior Notes will
be made in book-entry form only in the principal amount of $100,000 or multiples
thereof. Purchasers of the Taxable Auction Rate Series 1997-1 Senior Notes will
not receive certificates representing their interest in the Taxable Auction Rate
Series 1997-1 Senior Notes purchased. See "Description of Series 1997-1 Notes -
Book-Entry-Only System".
Interest Rate on the Taxable Auction Rate Series 1997-1 Senior Notes
The Initial Interest Rate Adjustment Date for the Taxable Auction Rate
Series 1997-1 Senior Notes will be as follows:
<TABLE>
<CAPTION>
Initial Interest Rate
Series Adjustment Date
--------- ---------------------
<S> <C>
1997-1G __________, 1997
1997-1H __________, 1997
</TABLE>
During the Initial Interest Period, each series of the Taxable Auction Rate
Series 1997-1 Senior Notes will bear interest at the Series 1997-1 Senior Note
Initial Interest Rate for such series. Thereafter, except with respect to an
Auction Period Adjustment as described in Appendix VII --"Auction of the Auction
Rate Series 1997-1 Senior Notes", the Taxable Auction Rate Series 1997-1 Senior
Notes will bear interest at a Series 1997-1 Senior Note Interest Rate based on
an Auction Period. In no event will the Series 1997-1 Senior Note Interest Rate
exceed the Taxable Auction Rate Series 1997-1 Senior Note Interest Rate
Limitation of ___% per annum.
Interest on each series of the Taxable Auction Rate Series 1997-1 Senior
Notes will be paid on the Business Day following each Auction Period for such
series. For each series of the Taxable Auction Rate Series 1997-1 Senior Notes
during the Initial Interest Period and each Auction Period thereafter, interest
at the Series 1997-1 Senior Note Interest Rate will accrue daily and will be
computed for the actual number of days elapsed on the basis of a year consisting
of 360 days.
The Taxable Auction Rate Series 1997-1 Senior Note Interest Rate to be
borne by each series of the Taxable Auction Rate Series 1997-1 Senior Notes
after the Initial Interest Period for each Auction Period until an Auction
Period Adjustment, if any, will be determined as hereinafter described. Each
such Auction Period will commence on and include the __________________
following the expiration of the immediately preceding Auction Period and
terminate on and include the _____ immediately preceding the __________________
of the fourth following week; provided, however, that in the case of the Auction
Period that immediately follows the Initial Interest Period for a series of the
Taxable Auction Rate Series 1997-1 Senior Notes, such Auction Period will
commence on the Initial Interest Rate Adjustment Date for such series. The
Taxable Auction Rate Series 1997-1 Senior Note Auction Rate on each series of
the Taxable Auction Rate Series 1997-1 Senior Notes for each Auction Period will
be the lesser of (i) the Net Loan Rate in effect for such Auction Period and
(ii) the Auction Rate in
<PAGE>
effect for such Auction Period as determined in accordance with the Auction
Procedures described in Appendix VII - "Auction of the Auction Rate Series
1997-1 Senior Notes"; provided that if, on any Interest Rate Determination
Date, an Auction is not held with respect to a series of the Taxable
Auction Rate Series 1997-1 Senior Notes for any reason, then the Series
1997-1 Senior Note Auction Rate on such series for the next succeeding
Auction Period will be the Net Loan Rate (subject to the Series 1997-1
Senior Note Interest Rate Limitation of ___%).
Notwithstanding the foregoing:
(A) if the ownership of a series of the Taxable Auction Rate
Series 1997-1 Senior Notes is no longer maintained in book-entry form,
the Series 1997-1 Senior Note Auction Rate on the Taxable Auction Rate
Series 1997-1 Senior Notes of such series for any Interest Period
commencing after the delivery of certificates representing the Taxable
Auction Rate Series 1997-1 Senior Notes of such series will equal the
lesser of (i) the Maximum Taxable Auction Rate and (ii) the Net Loan
Rate on the Business Day immediately preceding the first day of such
subsequent Interest Period; or
(B) if a Payment Default has occurred with respect to a series
of the Taxable Auction Rate Series 1997-1 Senior Notes, the Series
1997-1 Senior Note Auction Rate on such series for the Interest Period
for such series commencing on or immediately after such Payment
Default and for each Interest Period thereafter, to and including the
Interest Period, if any, during which, or commencing less than two
Business Days after, such Payment Default is cured in accordance with
the First Supplemental Indenture, will equal the Taxable Non-Payment
Rate on the first day of each such Interest Period.
In any event, no Auction will be held on any Auction Date under the
First Supplemental Indenture on which there are insufficient moneys in the
Note Fund to pay, or otherwise held by the Trustee under the Indenture and
available to pay, the principal, if any, of and interest due on the Taxable
Auction Rate Series 1997-1 Senior Notes on the Interest Payment Date
immediately following such Auction Date.
The Auction Agent is to promptly give written notice to the Trustee
and the Corporation of each Series 1997-1 Senior Note Auction Rate (unless
the Series 1997-1 Senior Note Auction Rate is the Taxable Non-Payment Rate)
and either the Auction Rate or the Net Loan Rate, as the case may be, when
such rate is not the Series 1997-1 Senior Note Auction Rate, applicable to
each series of the Taxable Auction Rate Series 1997-1 Senior Notes. The
Trustee is to notify the Holders of Taxable Auction Rate Series 1997-1
Senior Notes of the Series 1997-1 Senior Note Auction Rate applicable to
each such series of Taxable Auction Rate Series 1997-1 Senior Notes for
each Auction Period on the second Business Day of such Auction Period.
If the Auction Agent no longer determines, or fails to determine, when
required, the Series 1997-1 Senior Note Auction Rate with respect to a
series of Taxable Auction Rate Series 1997-1 Senior Notes, or, if for any
reason, such manner of determination is held to be invalid or
unenforceable, the Series 1997-1 Senior Note Auction Rate for the next
succeeding Interest Period (which period will be an Auction Period for such
series of the Taxable Auction Rate Series 1997-1 Senior Notes) will be the
Net Loan Rate as determined by the Auction Agent for such next succeeding
Auction Period, and if the Auction Agent fails or refuses to determine said
Net Loan Rate, the Net Loan Rate is to be determined by a securities dealer
appointed by the Corporation capable of making such a determination in
accordance with the provisions of the Indenture and written notice of such
determination is to be given by such securities dealer to the Trustee.
III-2
<PAGE>
Carry-Over Amounts on the Taxable Auction Rate Series 1997-1 Senior Notes
If the Auction Rate for a series of the Taxable Auction Rate Series
1997-1 Senior Notes is greater than the Net Loan Rate, then the Series
1997-1 Senior Note Auction Rate applicable to such series for that Interest
Period will be the Net Loan Rate. If the Series 1997-1 Senior Note Auction
Rate for a series of Taxable Auction Rate Series 1997-1 Senior Notes for
any Interest Period is the Net Loan Rate, the Trustee shall determine the
Carry-Over Amount, if any, with respect to such series for such Interest
Period. Such determination of the Carry-Over Amount shall be made
separately for each series of Taxable Auction Rate Series 1997-1 Senior
Notes. Each Carry-Over Amount shall bear interest calculated at a rate
equal to One-Month LIBOR (as determined by the Auction Agent, provided the
Trustee has received notice of One-Month LIBOR from the Auction Agent, and,
if the Trustee shall not have received such notice from the Auction Agent,
then as determined by the Trustee) from the Interest Payment Date for the
Interest Period with respect to which such Carry-Over Amount was
calculated, until paid. Any payment in respect of Carry-Over Amount shall
be applied, first, to any accrued interest payable thereon and, thereafter,
in reduction of such Carry-Over Amount. For purposes of the Indenture and
the Taxable Auction Rate Series 1997-1 Senior Notes, any reference to
"principal" or "interest" therein shall not include, within the meaning of
such words, Carry-Over Amount or any interest accrued on any such Carry-
Over Amount. Such Carry-Over Amount shall be separately calculated for
each Taxable Auction Rate Series 1997-1 Senior Note of such series by the
Trustee during such Interest Period in sufficient time for the Trustee to
give notice to each Holder of such Carry-Over Amount as required in the
next succeeding sentence. On the Interest Payment Date for an Interest
Period with respect to which such Carry-Over Amount has been calculated by
the Trustee, the Trustee shall give written notice to each Holder of the
Carry-Over Amount applicable to such Holder's Taxable Auction Rate Series
1997-1 Senior Note, which written notice may accompany the payment of
interest by check made to each such Holder on such Interest Payment Date or
otherwise shall be mailed on such Interest Payment Date by first-class
mail, postage prepaid, to each such Holder at such Holder's address as it
appears on the registration books maintained by the Note Registrar. Such
notice shall state, in addition to such Carry-Over Amount, that, unless and
until a Taxable Auction Rate Series 1997-1 Senior Notes has been redeemed
or has been deemed no longer Outstanding under the Indenture (after which
all accrued Carry-Over Amount with respect to such Taxable Auction Rate
Series 1997-1 Senior Note (and all accrued interest thereon) that remains
unpaid shall be cancelled and no Carry-Over Amount (or interest accrued
thereon) shall be paid with respect to such Taxable Auction Rate Series
1997-1 Senior Note), (i) the Carry-Over Amount (and interest accrued
thereon) shall be paid by the Trustee on such Taxable Auction Rate Series
1997-1 Senior Note on the first occurring Interest Payment Date for a
subsequent Interest Period if and to the extent that (l) the Eligible
Carry-Over Make-Up Amount with respect to such Interest Period is greater
than zero, and (2) moneys are available pursuant to the terms of the First
Supplemental Indenture to pay such Carry-Over Amount (and interest accrued
thereon), and (ii) interest shall accrue on the Carry-Over Amount at a per
annum rate equal to One-Month LIBOR until such Carry-Over Amount is paid in
full or is cancelled.
The Carry-Over Amount (and interest accrued thereon) for a series of
the Taxable Auction Rate Series 1997-1 Senior Notes shall be paid by the
Trustee on Outstanding Taxable Auction Rate Series 1997-1 Senior Notes of
such series on the first occurring Interest Payment Date for a subsequent
Interest Period if and to the extent that (i) the Eligible Carry-Over Make-
Up Amount with respect to such Interest Period is greater than zero, and
(ii) moneys in the Surplus Account are available on such Interest Payment
Date for transfer to the Interest Account for such purpose in accordance
with the priorities described in the second paragraph under Appendix IX --
"Summary of the Indenture -- Funds and Accounts -- Surplus Fund", after
taking into account all other amounts payable from the Surplus Fund in
accordance with such paragraph on such Interest Payment Date. Any Carry-
Over Amount (and any interest accrued thereon) with respect to any Taxable
Auction Rate Series 1997-1 Senior Note which is unpaid as of an Interest
Payment Date, which Taxable Auction Rate Series 1997-1 Senior Note is to be
redeemed or deemed no longer Outstanding under the First Supplemental
Indenture on such Interest Payment Date, shall be paid to the Holder
thereof on such Interest Payment Date to the extent that moneys are
available therefor in accordance with the provisions of the preceding
sentence; provided, however, that any Carry-Over Amount (and any interest
accrued thereon) which is not so paid on such Interest Payment Date shall
be cancelled with respect to such Taxable Auction Rate Series 1997-1 Senior
Note on such Interest Payment Date and shall not be paid on any
succeeding
III-3
<PAGE>
Interest Payment Date. To the extent that any portion of the Carry-Over
Amount (and any interest accrued thereon) remains unpaid after payment of a
portion thereof, such unpaid portion shall be paid in whole or in part
until fully paid by the Trustee on the next occurring Interest Payment Date
or Dates, as necessary, for a subsequent Interest Period or Periods, if and
to the extent that the conditions in the first sentence of this paragraph
are satisfied. On any Interest Payment Date on which the Trustee pays less
than all of the Carry-Over Amount (and any interest accrued thereon) with
respect to a Taxable Auction Rate Series 1997-1 Senior Note, the Trustee
shall give written notice in the manner set forth in the immediately
preceding paragraph to the Holder of such Taxable Auction Rate Series 1997-
1 Senior Note of the Carry-Over Amount remaining unpaid on such Taxable
Auction Rate Series 1997-1 Senior Note.
The Interest Payment Date on which any Carry-Over Amount for a series
of the Taxable Auction Rate Series 1997-1 Senior Notes will be paid is to
be determined by the Trustee as described in the immediately preceding
paragraph, and the Trustee is to make payment of the Carry-Over Amount in
the same manner as, and from the same Account from which, it pays interest
on the Taxable Auction Rate Series 1997-1 Senior Notes on an Interest
Payment Date. ANY UNPAID CARRY-OVER AMOUNT, INCLUDING ANY ACCRUED AND
UNPAID INTEREST THEREON, ON A TAXABLE AUCTION RATE SERIES 1997-1 SENIOR
NOTE NOT PAYABLE ON ANY REDEMPTION DATE WITH RESPECT TO SUCH TAXABLE
AUCTION RATE SERIES 1997-1 SENIOR NOTE WILL BE FORFEITED UPON THE
REDEMPTION (WHETHER MANDATORY, OPTIONAL OR SPECIAL) OR AT MATURITY OF SUCH
TAXABLE AUCTION RATE SERIES 1997-1 SENIOR NOTE, OR ON SUCH EARLIER INTEREST
PAYMENT DATE, IF ANY, ON WHICH SUCH TAXABLE AUCTION RATE SERIES 1997-1
SENIOR NOTE CEASES TO BE OUTSTANDING UNDER THE FIRST SUPPLEMENTAL
INDENTURE. FITCH'S RATING ON THE TAXABLE AUCTION RATE SERIES 1997-1 SENIOR
NOTES WILL NOT APPLY TO ANY CARRY-OVER AMOUNT THAT MAY ACCRUE ON THE
TAXABLE AUCTION RATE SERIES 1997-1 SENIOR NOTES.
Interest Limited to the Extent Permissible by Law
In no event shall the cumulative amount of interest paid or payable on
a series of Taxable Auction Rate Series 1997-1 Senior Notes exceed the
amount permitted by applicable law. If the applicable law is ever
judicially interpreted so as to render usurious any amount called for under
the Taxable Auction Rate Series 1997-1 Senior Notes of a series or related
documents or otherwise contracted for, charged, reserved, taken or received
in connection with the Taxable Auction Rate Series 1997-1 Senior Notes of
such series, or if the redemption or acceleration of the maturity of the
Taxable Auction Rate Series 1997-1 Senior Notes of such series results in
payment to or receipt by the Holder or any former Holder of the Taxable
Auction Rate Series 1997-1 Senior Notes of such series of any interest in
excess of that permitted by applicable law, then, notwithstanding any
provision of the Taxable Auction Rate Series 1997-1 Senior Notes of such
series or related documents to the contrary, all excess amounts theretofore
paid or received with respect to the Taxable Auction Rate Series 1997-1
Senior Notes of such series shall be credited on the principal balance of
the Taxable Auction Rate Series 1997-1 Senior Notes of such series (or, if
the Taxable Auction Rate Series 1997-1 Senior Notes of such series have
been paid or would thereby be paid in full, refunded by the recipient
thereof), and the provisions of the Taxable Auction Rate Series 1997-1
Senior Notes of such series and related documents shall automatically and
immediately be deemed reformed and the amounts thereafter collectible
thereunder reduced, without the necessity of the execution of any new
document, so as to comply with the applicable law, but so as to permit the
recovery of the fullest amount otherwise called for under the Taxable
Auction Rate Series 1997-1 Senior Notes of such series and under the
related documents.
Redemption of the Taxable Auction Rate Series 1997-1 Senior Notes
The Taxable Auction Rate Series 1997-1 Senior Notes will be subject to
redemption as described in the Prospectus under the captions "Description
of Series 1997-1 Notes - Special Redemption and Prepayment" and "-Optional
Redemption."
III-4
<PAGE>
Appendix IV
TERMS OF THE TAXABLE LIBOR RATE SERIES 1997-1 SENIOR NOTES
Generally
The Taxable LIBOR Rate Series 1997-1 Senior Notes will be dated as of
the date of their initial issuance and, subject to the redemption and
prepayment provisions referred below, will mature on June 1, 2020. The
Taxable LIBOR Rate Series 1997-1 Senior Notes will bear interest, payable
on the first day of each month, commencing ________, 1997, at rates
determined as described below under "Interest Rate on the Taxable LIBOR
Rate Series 1997-1 Senior Notes." The Taxable Series 1997-1 Senior Notes
will be issued in fully registered form, without coupons, and when issued
will be registered in the name of Cede & Co., as nominee of DTC, New York,
New York. DTC will act as securities depository for the Taxable LIBOR Rate
Series 1997-1 Senior Notes. Individual purchases of the Taxable LIBOR Rate
Series 1997-1 Senior Notes will be made in book-entry form only in the
principal amount of $5,000 or multiples thereof. Purchasers of the Taxable
LIBOR Rate Series 1997-1 Senior Notes will not receive certificates
representing their interest in the Taxable LIBOR Rate Series 1997-1 Senior
Notes purchased. See "Description of the Series 1997-1 Notes - Book-Entry-
Only System."
Interest Rate on the Taxable LIBOR Rate Series 1997-1 Senior Notes
During the Initial Interest Period for the Taxable LIBOR Rate Series
1997-1 Senior Notes, being the period from the date of delivery through
____________, 1997, the Taxable LIBOR Rate Series 1997-1 Senior Notes of
each series will bear interest at the Initial Interest Rate for such
series. The Taxable LIBOR Rate Series 1997-1 Senior Note Interest Rate for
each Interest Period after the Initial Interest Period will be the Taxable
LIBOR Rate Series 1997-1 Senior Note LIBOR-Based Rate based upon One-Month
LIBOR plus the Taxable LIBOR Rate Series 1997-1 Senior Note Spread,
determined and subject to certain limitations as hereinafter described.
Interest on the Taxable LIBOR Rate Series 1997-1 Senior Notes shall be
computed on the basis of actual days elapsed and accrue daily from the date
thereof (on the basis of a 360-day year), and shall be payable on each
regularly scheduled Interest Payment Date with respect thereto (which shall
be the first day, whether or not a Business Day, of each calendar month,
commencing ____________, 1997) prior to the maturity thereof and at the
maturity thereof. The interest payable on each Interest Payment Date for
the Taxable LIBOR Rate Series 1997-1 Senior Notes shall be that interest
which has accrued through the last day of the last complete Interest Period
immediately preceding the Interest Payment Date or, in the case of the
maturity thereof, the last day preceding the date of such maturity. Each
such Interest Period (other than the Initial Interest Period) will commence
on and include the first day of a calendar month and terminate on and
include the last day preceding the next Interest Rate Adjustment Date.
Each Interest Rate Adjustment Date shall be the Interest Payment Date for
the preceding Interest Period. The Taxable LIBOR Rate Series 1997-1 Senior
Note Interest Rate shall be effective as of and on the Interest Rate
Adjustment Date of the applicable Interest Period and be in effect
thereafter through the end of such Interest Period.
The interest rate to be borne by the Taxable LIBOR Rate Series 1997-1
Notes during each Interest Period after the Initial Interest Period shall
be determined on the related Interest Rate Determination Date and shall be
equal to the lesser of (i) the sum of One-Month LIBOR determined with
respect to such Interest Rate Determination Date plus the Series 1997-1I
Note Spread of ___% per annum or the Series 1997-1J Note Spread of ___% per
annum (which is herein referred to as the "Taxable LIBOR Rate Series 1997-1
Senior Note LIBOR-Based Rate"), and (ii) the Net Loan Rate determined with
respect to such Interest Rate Determination Date. The Trustee shall
determine such interest rate on each Interest Rate Determination Date and
shall give the Corporation written notice thereof prior to 2:00 p.m., New
York City time, on such Interest Rate Determination Date. The Net Loan
Rate with respect to each Interest Rate Determination Date shall be
determined by or on behalf of the Corporation and written notice thereof
given to the Trustee prior to 10:00 a.m., New York City time, on such
Interest Rate Determination Date. See "Carry-Over Amounts on the Taxable
LIBOR Rate Series 1997-1 Senior Notes" below.
IV-1
<PAGE>
In the event that the Trustee no longer determines, or fails to
determine, when required, the LIBOR-Based Rate with respect to an Interest
Rate Determination Date, or if, for any reason, such manner of
determination shall be held to be invalid or unenforceable, the LIBOR-Based
Rate for the related Interest Period shall be the Net Loan Rate as
determined with respect to such Interest Rate Determination Date, and if
the Corporation shall fail or refuse to determine such Net Loan Rate, the
Net Loan Rate shall be determined by a securities dealer appointed by the
Trustee capable of making such a determination in accordance with the
provisions of the First Supplemental Indenture and written notice of such
determination shall be given by such securities dealer to the Trustee.
Carry-Over Amounts on the Taxable LIBOR Rate Series 1997-1 Senior Notes
If the LIBOR-Based Rate determined with respect to a given Interest
Rate Determination Date is greater than the Net Loan Rate, then the Taxable
LIBOR Rate Series 1997-1 Senior Note Interest Rate for the related Interest
Period will be the Net Loan Rate. If the Taxable LIBOR Rate Series 1997-1
Senior Note Interest Rate for any Interest Period is the Net Loan Rate, the
Trustee shall determine the Carry-Over Amount, if any, with respect to the
Taxable LIBOR Rate Series 1997-1 Senior Notes for such Interest Period.
Each such Carry-Over Amount shall bear interest calculated at a rate equal
to the LIBOR-Based Rate (as determined by the Trustee) from the Interest
Payment Date for the Interest Period with respect to which such Carry-Over
Amount was calculated, until paid. Any payment in respect of Carry-Over
Amount shall be applied, first, to any accrued interest payable thereon
and, thereafter, in reduction of such Carry-Over Amount. For purposes of
the Indenture and the Taxable LIBOR Rate Series 1997-1 Senior Notes, any
reference to "principal" or "interest" therein shall not include, within
the meaning of such words, Carry-Over Amount or any interest accrued on any
such Carry-Over Amount. Such Carry-Over Amount shall be separately
calculated for each Taxable LIBOR Rate Series 1997-1 Senior Note by the
Trustee during such Interest Period in sufficient time for the Trustee to
give notice to each Holder of such Carry-Over Amount as required in the
next succeeding sentence. On the Interest Payment Date for an Interest
Period with respect to which such Carry-Over Amount has been calculated by
the Trustee, the Trustee shall give written notice to each Holder of the
Carry-Over Amount applicable to such Holder's Taxable LIBOR Rate Series
1997-1 Senior Note, which written notice may accompany the payment of
interest by check made to each such Holder on such Interest Payment Date or
otherwise shall be mailed on such Interest Payment Date by first-class
mail, postage prepaid, to each such Holder at such Holder's address as it
appears on the registration books maintained by the Note Registrar. Such
notice shall state, in addition to such Carry-Over Amount, that, unless and
until a Taxable LIBOR Rate Series 1997-1 Senior Note has been redeemed or
has been deemed no longer Outstanding under the Indenture (after which all
accrued Carry-Over Amount with respect to such Taxable LIBOR Rate Series
1997-1 Senior Note (and all accrued interest thereon) that remains unpaid
shall be cancelled and no Carry-Over Amount (or interest accrued thereon)
shall be paid with respect to such Taxable LIBOR Rate Series 1997-1 Senior
Note), (i) the Carry-Over Amount (and interest accrued thereon) shall be
paid by the Trustee on such Taxable LIBOR Rate Series 1997-1 Senior Note on
the first occurring Interest Payment Date for a subsequent Interest Period
if and to the extent that (a) the Eligible Carry-Over Make-Up Amount with
respect to such Interest Period is greater than zero, and (b) moneys are
available pursuant to the terms of the Third Supplemental Indenture to pay
such Carry-Over Amount (and interest accrued thereon), and (ii) interest
shall accrue on the Carry-Over Amount at a per annum rate equal to the
Taxable LIBOR Rate Series 1997-1 Senior Note LIBOR-Based Rate until such
Carry-Over Amount is paid in full or is cancelled.
The Carry-Over Amount (and interest accrued thereon) for the Taxable
LIBOR Rate Series 1997-1 Senior Notes shall be paid by the Trustee on
Outstanding Taxable LIBOR Rate Series 1997-1 Senior Notes on the first
occurring Interest Payment Date for a subsequent Interest Period if and to
the extent that (a) the Eligible Carry-Over Make-Up Amount with respect to
such Interest Period is greater than zero, and (b) moneys in the Surplus
Account are available on such Interest Payment Date for transfer to the
Interest Account for such purpose in accordance with the second paragraph
under Appendix IX -- "Summary of the Indenture -- Funds and Accounts --
Surplus Account", after taking into account all other amounts payable from
the Surplus Fund in accordance with such paragraph on such Interest Payment
Date. Any Carry-Over Amount (and any interest accrued thereon) with
respect to any Taxable LIBOR Rate Series 1997-1 Senior Note which is unpaid
as of an Interest Payment Date, which Taxable LIBOR Rate Series 1997-1
Senior Note is to be redeemed or deemed no longer Outstanding under the
First
IV-2
<PAGE>
Supplemental Indenture on such Interest Payment Date, shall be paid to the
Holder thereof on such Interest Payment Date to the extent that moneys are
available therefor in accordance with the provisions of the preceding
clauses (a) and (b); provided, however, that any Carry-Over Amount (and any
interest accrued thereon) which is not so paid on such Interest Payment
Date shall be cancelled with respect to such Taxable LIBOR Rate Series
1997-1 Senior Note on such Interest Payment Date and shall not be paid on
any succeeding Interest Payment Date. To the extent that any portion of
the Carry-Over Amount (and any interest accrued thereon) remains unpaid
after payment of a portion thereof, such unpaid portion shall be paid in
whole or in part until fully paid by the Trustee on the next occurring
Interest Payment Date or Dates, as necessary, for a subsequent Interest
Period or Periods, if and to the extent that the conditions in the first
sentence of this paragraph are satisfied. On any Interest Payment Date on
which the Trustee pays less than all of the Carry-Over Amount (and any
interest accrued thereon) with respect to a Taxable LIBOR Rate Series 1997-
1 Senior Note, the Trustee shall give written notice in the manner set
forth in the immediately preceding paragraph to the Holder of such Taxable
LIBOR Rate Series 1997-1 Senior Note of the Carry-Over Amount remaining
unpaid on such Taxable LIBOR Rate Series 1997-1 Senior Note.
The Interest Payment Date on which any Carry-Over Amount (or any
interest accrued thereon) for the Taxable LIBOR Rate Series 1997-1 Senior
Notes shall be paid shall be determined by the Trustee in accordance with
the provisions of the immediately preceding paragraph, and the Trustee
shall make payment of the Carry-Over Amount (and any interest accrued
thereon) in the same manner as, and from the same Account from which, it
pays interest on the Taxable LIBOR Rate Series 1997-1 Senior Notes on an
Interest Payment Date. ANY UNPAID CARRY-OVER AMOUNT, INCLUDING ANY ACCRUED
AND UNPAID INTEREST THEREON, ON A TAXABLE LIBOR RATE SERIES 1997-1 SENIOR
NOTE NOT PAYABLE ON ANY REDEMPTION DATE WITH RESPECT TO SUCH TAXABLE LIBOR
RATE SERIES 1997-1 SENIOR NOTE WILL BE FORFEITED UPON THE REDEMPTION
(WHETHER OPTIONAL OR SPECIAL) OR AT MATURITY OF SUCH TAXABLE LIBOR RATE
SERIES 1997-1 SENIOR NOTE, OR ON SUCH EARLIER INTEREST PAYMENT DATE, IF
ANY, ON WHICH SUCH TAXABLE LIBOR RATE SERIES SENIOR NOTE CEASES TO BE
OUTSTANDING UNDER THE FIRST SUPPLEMENTAL INDENTURE. FITCH'S RATING ON THE
TAXABLE LIBOR RATE SERIES 1997-1 SENIOR NOTES WILL NOT APPLY TO ANY CARRY-
OVER AMOUNT THAT MAY ACCRUE ON THE TAXABLE LIBOR RATE SERIES 1997-1 SENIOR
NOTES.
Interest Limited to the Extent Permissible by Law
In no event shall the cumulative amount of interest paid or payable on
the Taxable LIBOR Rate Series 1997-1 Senior Notes exceed the amount
permitted by applicable law. If the applicable law is ever judicially
interpreted so as to render usurious any amount called for under the
Taxable LIBOR Rate Series 1997-1 Senior Notes or related documents or
otherwise contracted for, charged, reserved, taken or received in
connection with the Taxable LIBOR Rate Series 1997-1 Senior Notes, or if
the redemption or acceleration of the maturity of the Taxable LIBOR Rate
Series 1997-1 Senior Notes results in payment to or receipt by the Holder
or any former Holder of the Taxable LIBOR Rate Series 1997-1 Senior Notes
of any interest in excess of that permitted by applicable law, then,
notwithstanding any provision of the Taxable LIBOR Rate Series 1997-1
Senior Notes or related documents to the contrary, all excess amounts
theretofore paid or received with respect to the Taxable LIBOR Rate Series
1997-1 Senior Notes shall be credited on the principal balance of the
Taxable LIBOR Rate Series 1997-1 Senior Notes (or, if the Taxable LIBOR
Rate Series 1997-1 Senior Notes have been paid or would thereby be paid in
full, refunded by the recipient thereof), and the provisions of the Taxable
LIBOR Rate Series 1997-1 Senior Notes and related documents shall
automatically and immediately be deemed reformed and the amounts thereafter
collectible thereunder reduced, without the necessity of the execution of
any new document, so as to comply with the applicable law, but so as to
permit the recovery of the fullest amount otherwise called for under the
Taxable LIBOR Rate Series 1997-1 Senior Notes and under the related
documents.
IV-3
<PAGE>
Redemption and Prepayment of Taxable Taxable LIBOR Rate Series 1997-1
Senior Notes
The Taxable Taxable LIBOR Rate Series 1997-1 Senior Notes will be
subject to redemption and prepayment as described in the Prospectus under
the caption "Description of the Series 1997-1 Notes - Special Redemption
and Prepayment."
IV-4
<PAGE>
Appendix V
TERMS OF THE TAX EXEMPT FIXED RATE SERIES 1997-1 SUBORDINATE NOTES
The Tax Exempt Fixed Rate Series 1997-1 Subordinate Notes will be
dated as of ____________, 1997 and, subject to the redemption provisions
referred to below, will mature on June 1, 2020, and will bear interest from
their date at the rate of __% per annum. Interest on the Tax Exempt Series
1997-1 Subordinate Notes will be payable semiannually on each June 1 and
December 1, commencing December 1, 1997. The Tax Exempt Fixed Rate Series
1997-1 Subordinate Notes will be issued in fully registered form, without
coupons, and when issued will be registered in the name of Cede & Co., as
nominee of DTC, New York, New York. DTC will act as securities depository
for the Tax Exempt Series 1997-1 Subordinate Notes. Individual purchases
of the Tax Exempt Series 1997-1 Subordinate Notes will be made in book-
entry form only in the principal amount of $5,000 or multiples thereof.
Purchasers of the Tax-Exempt Series 1997-1 Subordinate Notes will not
receive certificates representing their interest in the Tax-Exempt Series
1997-1 Subordinate Notes purchased. See "Description of the Series 1997-1
Notes - Book-Entry-Only System."
The Tax Exempt Fixed Rate Series 1997-1 Subordinate Notes will be
subject to redemption as described in the Prospectus under the captions
"Description of the Series 1997-1 Notes - Special Redemption and
Prepayment" and "- Optional Redemption."
<PAGE>
Appendix VI
TERMS OF THE TAXABLE LIBOR RATE SERIES 1997-1 SUBORDINATE NOTES
Generally
The Taxable LIBOR Rate Series 1997-1 Subordinate Notes will be dated
as of the date of their initial issuance and, subject to the redemption and
prepayment provisions referred below, will mature on June 1, 2020. The
Taxable LIBOR Rate Series 1997-1 Subordinate Notes will bear interest,
payable on the first day of each month, commencing ________, 1997, at rates
determined as described below under "Interest Rate on the Taxable LIBOR
Rate Series 1997-1 Subordinate Notes." The Taxable Series 1997-1
Subordinate Notes will be issued in fully registered form, without coupons,
and when issued will be registered in the name of Cede & Co., as nominee of
DTC, New York, New York. DTC will act as securities depository for the
Taxable LIBOR Rate Series 1997-1 Subordinate Notes. Individual purchases
of the Taxable LIBOR Rate Series 1997-1 Subordinate Notes will be made in
book-entry form only in the original principal amount of $100,000 or
multiples thereof. Purchasers of the Taxable LIBOR Rate Series 1997-1
Subordinate Notes will not receive certificates representing their interest
in the Taxable LIBOR Rate Series 1997-1 Subordinate Notes purchased. See
"Description of the Series 1997-1 Notes -Book-Entry-Only System."
Interest Rate on the Taxable LIBOR Rate Series 1997-1 Subordinate Notes
During the Initial Interest Period for the Taxable LIBOR Rate Series
1997-1 Subordinate Notes, being the period from the date of delivery
through _____________, 1997, the Taxable LIBOR Rate Series 1997-1
Subordinate Notes will bear interest at the Initial Interest Rate for such
series. The Taxable LIBOR Rate Series 1997-1 Subordinate Note Interest
Rate for each Interest Period after the Initial Interest Period for the
Taxable LIBOR Rate Series 1997-1 Subordinate Notes will be the Taxable
LIBOR Rate Series 1997-1 Subordinate Note LIBOR-Based Rate based upon One-
Month LIBOR plus the Taxable LIBOR Rate Series 1997-1 Subordinate Note
Spread, determined and subject to certain limitations as hereinafter
described.
Interest on the Taxable LIBOR Rate Series 1997-1 Subordinate Notes
shall be computed on the basis of actual days elapsed and accrue daily from
the date thereof (on the basis of a 360-day year), and shall be payable on
each regularly scheduled Interest Payment Date with respect thereto (which
shall be the first day, whether or not a Business Day, of each calendar
month, commencing ____________ 1, 1997) prior to the maturity thereof and
at the maturity thereof. The interest payable on each Interest Payment
Date for the Taxable LIBOR Rate Series 1997-1 Subordinate Notes shall be
that interest which has accrued through the last day of the last complete
Interest Period immediately preceding the Interest Payment Date or, in the
case of the maturity thereof, the last day preceding the date of such
maturity. Each such Interest Period (other than the Initial Interest
Period) will commence on and include the first day of a calendar month and
terminate on and include the last day preceding the next Interest Rate
Adjustment Date. Each Interest Rate Adjustment Date shall be the Interest
Payment Date for the preceding Interest Period. The Taxable LIBOR Rate
Series 1997-1 Subordinate Note Interest Rate shall be effective as of and
on the Interest Rate Adjustment Date of the applicable Interest Period and
be in effect thereafter through the end of such Interest Period.
The interest rate to be borne by the Taxable LIBOR Rate Series 1997-1
Subordinate Notes during each Interest Period after the Initial Interest
Period shall be determined on the related Interest Rate Determination Date
and shall be equal to the lesser of (i) the sum of One-Month LIBOR
determined with respect to such Interest Rate Determination Date plus the
Taxable LIBOR Rate Series 1997-1 Subordinate Note Spread of ____% per annum
(which is herein referred to as the "Taxable LIBOR Rate Series 1997-1
Subordinate Note LIBOR-Based Rate"), and (ii) the Net Loan Rate determined
with respect to such Interest Rate Determination Date. The Trustee shall
determine such interest rate on each Interest Rate Determination Date and
shall give the Issuer written notice thereof prior to 2:00 p.m., New York
City time, on such Interest Rate Determination Date. The Net Loan Rate
with
<PAGE>
respect to each Interest Rate Determination Date shall be determined by or
on behalf of the Issuer and written notice thereof given to the Trustee
prior to 10:00 a.m., New York City time, on such Interest Rate
Determination Date.
In the event that the Trustee no longer determines, or fails to
determine, when required, the Taxable LIBOR Rate Series 1997-1 Subordinate
Note LIBOR-Based Rate with respect to an Interest Rate Determination Date,
or if, for any reason, such manner of determination shall be held to be
invalid or unenforceable, the Taxable LIBOR Rate Series 1997-1 Subordinate
Note LIBOR-Based Rate for the related Interest Period shall be the Net Loan
Rate as determined with respect to such Interest Rate Determination Date,
and if the Issuer shall fail or refuse to determine such Net Loan Rate, the
Net Loan Rate shall be determined by a securities dealer appointed by the
Trustee capable of making such a determination in accordance with the
provisions of the First Supplemental Indenture and written notice of such
determination shall be given by such securities dealer to the Trustee.
Carry-Over Amounts on the Taxable LIBOR Rate Series 1997-1 Subordinate
Notes
If the Taxable LIBOR Rate Series 1997-1 Subordinate Notes LIBOR-Based
Rate determined with respect to a given Interest Rate Determination Date is
greater than the Net Loan Rate, then the Taxable LIBOR Rate Series 1997-1
Subordinate Note Interest Rate for the related Interest Period will be the
Net Loan Rate. If the Taxable LIBOR Rate Series 1997-1 Subordinate Note
Interest Rate for any Interest Period is the Net Loan Rate, the Trustee
shall determine the Carry-Over Amount, if any, with respect to the Taxable
LIBOR Rate Series 1997-1 Subordinate Notes for such Interest Period. Each
such Carry-Over Amount shall bear interest calculated at a rate equal to
the Taxable LIBOR Rate Series 1997-1 Subordinate Note LIBOR-Based Rate (as
determined by the Trustee) from the Interest Payment Date for the Interest
Period with respect to which such Carry-Over Amount was calculated, until
paid. Any payment in respect of Carry-Over Amount shall be applied, first,
to any accrued interest payable thereon and, thereafter, in reduction of
such Carry-Over Amount. For purposes of the Indenture and the Taxable
LIBOR Rate Series 1997-1 Subordinate Notes, any reference to "principal" or
"interest" therein shall not include, within the meaning of such words,
Carry-Over Amount or any interest accrued on any such Carry-Over Amount.
Such Carry-Over Amount shall be separately calculated for each Taxable
LIBOR Rate Series 1997-1 Subordinate Note by the Trustee during such
Interest Period in sufficient time for the Trustee to give notice to each
Holder of such Carry-Over Amount as required in the next succeeding
sentence. On the Interest Payment Date for an Interest Period with respect
to which such Carry-Over Amount has been calculated by the Trustee, the
Trustee shall give written notice to each Holder of the Carry-Over Amount
applicable to such Holder's Taxable LIBOR Rate Series 1997-1 Subordinate
Note, which written notice may accompany the payment of interest by check
made to each such Holder on such Interest Payment Date or otherwise shall
be mailed on such Interest Payment Date by first-class mail, postage
prepaid, to each such Holder at such Holder's address as it appears on the
registration books maintained by the Note Registrar. Such notice shall
state, in addition to such Carry-Over Amount, that, unless and until a
Taxable LIBOR Rate Series 1997-1 Subordinate Note has been redeemed or has
been deemed no longer Outstanding under the Indenture (after which all
accrued Carry-Over Amount with respect to such Taxable LIBOR Rate Series
1997-1 Subordinate Note (and all accrued interest thereon) that remains
unpaid shall be cancelled and no Carry-Over Amount (or interest accrued
thereon) shall be paid with respect to such Taxable LIBOR Rate Series 1997-
1 Subordinate Note), (i) the Carry-Over Amount (and interest accrued
thereon) shall be paid by the Trustee on such Taxable LIBOR Rate Series
1997-1 Subordinate Note on the first occurring Interest Payment Date for a
subsequent Interest Period if and to the extent that (a) the Eligible
Carry-Over Make-Up Amount with respect to such Interest Period is greater
than zero, and (b) moneys are available pursuant to the terms of the First
Supplemental Indenture to pay such Carry-Over Amount (and interest accrued
thereon), and (ii) interest shall accrue on the Carry-Over Amount at a per
annum rate equal to the Taxable LIBOR Rate Series 1997-1 Subordinate Note
LIBOR-Based Rate until such Carry-Over Amount is paid in full or is
cancelled.
The Carry-Over Amount (and interest accrued thereon) for the Taxable
LIBOR Rate Series 1997-1 Subordinate Notes shall be paid by the Trustee on
Outstanding Taxable LIBOR Rate Series 1997-1 Subordinate Notes on the first
occurring Interest Payment Date for a subsequent Interest Period if and to
the extent that (a) the Eligible Carry-Over Make-Up Amount with respect to
such Interest Period is greater than zero, and (b) moneys in the Surplus
Account are available on such Interest Payment Date for transfer to the
Interest Account for such
VI-2
<PAGE>
purpose in accordance with the second paragraph under Appendix IX --
"Summary of the Indenture -- Funds and Accounts -- Surplus Account", after
taking into account all other amounts payable from the Surplus Fund in
accordance with such paragraph on such Interest Payment Date. Any Carry-
Over Amount (and any interest accrued thereon) with respect to any Taxable
LIBOR Rate Series 1997-1 Subordinate Note which is unpaid as of an Interest
Payment Date, which Taxable LIBOR Rate Series 1997-1 Subordinate Note is to
be redeemed or deemed no longer Outstanding under the First Supplemental
Indenture on such Interest Payment Date, shall be paid to the Holder
thereof on such Interest Payment Date to the extent that moneys are
available therefor in accordance with the provisions of the preceding
clauses (a) and (b); provided, however, that any Carry-Over Amount (and any
interest accrued thereon) which is not so paid on such Interest Payment
Date shall be cancelled with respect to such Taxable LIBOR Rate Series
1997-1 Subordinate Note on such Interest Payment Date and shall not be paid
on any succeeding Interest Payment Date. To the extent that any portion of
the Carry-Over Amount (and any interest accrued thereon) remains unpaid
after payment of a portion thereof, such unpaid portion shall be paid in
whole or in part until fully paid by the Trustee on the next occurring
Interest Payment Date or Dates, as necessary, for a subsequent Interest
Period or Periods, if and to the extent that the conditions in the first
sentence of this paragraph are satisfied. On any Interest Payment Date on
which the Trustee pays less than all of the Carry-Over Amount (and any
interest accrued thereon) with respect to a Taxable LIBOR Rate Series 1997-
1 Subordinate Note, the Trustee shall give written notice in the manner set
forth in the immediately preceding paragraph to the Holder of such Taxable
LIBOR Rate Series 1997-1 Subordinate Note of the Carry-Over Amount
remaining unpaid on such Taxable LIBOR Rate Series 1997-1 Subordinate Note.
The Interest Payment Date on which any Carry-Over Amount (or any
interest accrued thereon) for the Taxable LIBOR Rate Series 1997-1
Subordinate Notes shall be paid shall be determined by the Trustee in
accordance with the provisions of the immediately preceding paragraph, and
the Trustee shall make payment of the Carry-Over Amount (and any interest
accrued thereon) in the same manner as, and from the same Account from
which, it pays interest on the Taxable LIBOR Rate Series 1997-1 Subordinate
Notes on an Interest Payment Date. ANY UNPAID CARRY-OVER AMOUNT, INCLUDING
ANY ACCRUED AND UNPAID INTEREST THEREON, ON A TAXABLE LIBOR RATE SERIES
1997-1 SUBORDINATE NOTE NOT PAYABLE ON ANY REDEMPTION DATE WITH RESPECT TO
SUCH TAXABLE LIBOR RATE SERIES 1997-1 SUBORDINATE NOTE WILL BE FORFEITED
UPON THE REDEMPTION (WHETHER OPTIONAL OR SPECIAL) OR AT MATURITY OF SUCH
TAXABLE LIBOR RATE SERIES 1997-1 SUBORDINATE NOTE, OR ON SUCH EARLIER
INTEREST PAYMENT DATE, IF ANY, ON WHICH SUCH TAXABLE LIBOR RATE SERIES
1997-1 SUBORDINATE NOTE CEASES TO BE OUTSTANDING UNDER THE FIRST
SUPPLEMENTAL INDENTURE. FITCH'S RATING ON THE TAXABLE LIBOR RATE SERIES
1997-1 SUBORDINATE NOTES WILL NOT APPLY TO ANY CARRY-OVER AMOUNT THAT MAY
ACCRUE ON THE TAXABLE LIBOR RATE SERIES 1997-1 SUBORDINATE NOTES.
Interest Limited to the Extent Permissible by Law
In no event shall the cumulative amount of interest paid or payable on
the Taxable LIBOR Rate Series 1997-1 Subordinate Notes exceed the amount
permitted by applicable law. If the applicable law is ever judicially
interpreted so as to render usurious any amount called for under the
Taxable LIBOR Rate Series 1997-1 Subordinate Notes or related documents or
otherwise contracted for, charged, reserved, taken or received in
connection with the Taxable LIBOR Rate Series 1997-1 Subordinate Notes, or
if the redemption or acceleration of the maturity of the Taxable LIBOR Rate
Series 1997-1 Subordinate Notes results in payment to or receipt by the
Holder or any former Holder of the Taxable LIBOR Rate Series 1997-1
Subordinate Notes of any interest in excess of that permitted by applicable
law, then, notwithstanding any provision of the Taxable LIBOR Rate Series
1997-1 Subordinate Notes or related documents to the contrary, all excess
amounts theretofore paid or received with respect to the Taxable LIBOR Rate
Series 1997-1 Subordinate Notes shall be credited on the principal balance
of the Taxable LIBOR Rate Series 1997-1 Subordinate Notes (or, if the
Taxable LIBOR Rate Series 1997-1 Subordinate Notes have been paid or would
thereby be paid in full, refunded by the recipient thereof), and the
provisions of the Taxable LIBOR Rate Series 1997-1 Subordinate Notes and
related documents shall automatically and immediately be deemed reformed
and the amounts thereafter collectible thereunder reduced, without the
necessity of the
VI-3
<PAGE>
execution of any new document, so as to comply with the applicable law, but
so as to permit the recovery of the fullest amount otherwise called for
under the Taxable LIBOR Rate Series 1997-1 Subordinate Notes and under the
related documents.
Redemption and Prepayment of the Taxable LIBOR Rate Series 1997-1
Subordinate Notes
The Taxable LIBOR Rate Series 1997-1 Subordinate Notes will be subject
to redemption and prepayment as described in the Prospectus under the
caption "Description of Series 1997-1 Notes - Special Redemption and
Prepayment."
VI-4
<PAGE>
Appendix VII
AUCTION OF THE AUCTION RATE SERIES 1997-1 SENIOR NOTES
If not otherwise defined below, capitalized terms used below will have
the meanings given such terms under "Glossary of Certain Defined Terms". Unless
otherwise noted or the context otherwise requires, the following description of
Auctions and related procedures is applicable separately to each series of the
Auction Rate Series 1997-1 Senior Notes.
Summary of Auction Procedures
The following summarizes certain procedures that will be used in
determining the interest rates on the Auction Rate Series 1997-1 Senior Notes.
Immediately following this summary is a more detailed description of these
procedures. Prospective investors in the Auction Rate Series 1997-1 Senior Notes
should read carefully the following summary, along with the more detailed
description.
The interest rate on each series of Auction Rate Series 1997-1 Senior
Notes will be determined periodically (generally, for periods ranging from 7
days to one year, and initially 28 days, in the case of the Taxable Auction Rate
Series 1997-1 Senior Notes, or 35 days, in the case of Tax Exempt Auction Rate
Series 1997-1 Senior Notes) by means of a "Dutch Auction." In this Dutch
Auction, investors and potential investors submit orders through an eligible
Broker-Dealer as to the principal amount of Auction Rate Series 1997-1 Senior
Notes such investors wish to buy, hold or sell at various interest rates. The
Broker-Dealers submit their clients' orders to the Auction Agent, who processes
all orders submitted by all eligible Broker-Dealers and determines the interest
rate for the upcoming interest period. The Broker-Dealers are notified by the
Auction Agent of the interest rate for the upcoming interest period and are
provided with settlement instructions relating to purchases and sales of Auction
Rate Series 1997-1 Senior Notes.
In the auction procedure, the following orders may be submitted:
(i) "Bid/Hold Orders" - the minimum interest rate that a current
investor is willing to accept in order to continue to hold some
or all of its Auction Rate Series 1997-1 Senior Notes for the
upcoming interest period;
(ii) "Sell Orders" - an order by a current investor to sell a
specified principal amount of Auction Rate Series 1997-1 Senior
Notes, regardless of the upcoming interest rate; and
(iii) "Potential Bid Orders" - the minimum interest rate that a
potential investor (or a current investor wishing to purchase
additional Auction Rate Series 1997-1 Senior Notes) is willing
to accept in order to buy a specified principal amount of
Auction Rate Series 1997-1 Senior Notes.
If an existing investor does not submit orders with respect to all its
Auction Rate Series 1997-1 Senior Notes of a particular series, the investor
will be deemed to have submitted a Hold Order at the new interest rate for that
portion of such series for which no order was received.
In connection with each Auction, Auction Rate Series 1997-1 Senior
Notes will be purchased and sold between investors and potential investors at a
price equal to their then-outstanding principal balance (i.e., par) plus any
accrued interest. The following example helps illustrate how the above-described
procedures are used in determining the interest rate on the Auction Rate Series
1997-1 Senior Notes.
<PAGE>
<TABLE>
(a) Assumptions:
<S> <C> <C>
1. Denominations (Units) = $100,000
2. Interest Period = 28 days
3. Principal Amount Outstanding = $50 Million (500 Units)
</TABLE>
(b) Summary of All Orders Received for the Auction
<TABLE>
<CAPTION>
Bid/Hold Orders Sell Orders Potential Bid Orders
--------------- ----------- --------------------
<S> <C> <C>
10 Units at 2.90% 50 Units Sell 20 Units of 2.95%
30 Units at 3.02% 50 Units Sell 30 Units of 3.00%
60 Units at 3.02% 100 Units Sell 50 Units of 3.05%
--------------
100 Units at 3.10% 200 Units 50 Units of 3.10%
100 Units at 3.12% 50 Units of 3.11%
------------------
300 Units 50 Units of 3.14%
100 Units of 3.15%
------------------
350 Units
</TABLE>
Total units under existing Bid/Hold Orders and Sell Orders always equal
issue size (in this case 500 units).
(c) Auction Agent organizes Orders in Ascending Order
<TABLE>
<CAPTION>
Order Number Cumulative Order Number Cumulative
Number of Units Total (Units) Percent Number of Units Total (Units) Percent
- ------ -------- ------------- -------- ------ ----------- ------------- --------
<C> <S> <C> <C> <C> <C> <C> <C>
1. 10(W) 10 2.90% 7. 100(W) 300 3.10%
2. 20(W) 30 2.95 8. 50(W) 350 3.10
3. 30(W) 60 3.00 9. 50(W) 400 3.11
4. 30(W) 90 3.02 10. 100(W) 500 3.12
5. 50(W) 140 3.05 11. 50(L) 3.14
6. 60(W) 200 3.05 12. 100(L) 3.15
</TABLE>
(W) Winning Order (L) Losing Order
Order #10 is the order that clears the market of all available units.
All winning orders are awarded the winning rate (in this case, 3.12%) as the
interest rate for the next Interest Period, when another Auction will be held.
Multiple orders at the winning rate are allocated units on a pro rata basis.
Notwithstanding the foregoing, in no event will the interest rate exceed (i) in
the case of the Tax Exempt Auction Rate Series 1997-1 Senior Notes, the Maximum
Auction Rate, or (ii) in the case of the Taxable Auction Rate Series 1997-1
Senior Notes, the lesser of the Net Loan Rate or the Maximum Auction Rate.
VII-2
<PAGE>
The above example assumes that a successful Auction has occurred
(i.e., all Sell Orders and all Bid/Hold Orders below the new interest rate were
fulfilled). In certain circumstances, there may be insufficient Potential Bid
Orders to purchase all the Auction Rate Series 1997-1 Senior Notes offered for
sale. In such circumstances, the interest rate for the upcoming Interest Period
will equal (i) in the case of the Tax Exempt Auction Rate Series 1997-1 Senior
Notes, the Maximum Auction Rate, or (ii) in the case of the Taxable Auction Rate
Series 1997-1 Senior Notes, the lesser of the Net Loan Rate and the Maximum
Auction Rate. Also, if all the Auction Rate Series 1997-1 Senior Notes are
subject to Hold Orders (i.e., each Holder of Auction Rate Series 1997-1 Senior
Notes wishes to continue holding its Auction Rate Series 1997-1 Senior Notes,
regardless of the interest rate), the interest rate for the upcoming Interest
Period will equal (i) in the case of the Tax Exempt Auction Rate Series 1997-1
Senior Notes, the lesser of the Maximum Auction Rate and the All Hold Rate, or
(ii) in the case of the Taxable Auction Rate Series 1997-1 Senior Notes, the
least of the Maximum Auction Rate, the Net Loan Rate and the All Hold Rate.
As stated above, the foregoing is only a summary of the Auction
Procedures. The remainder of this Appendix VII is a more detailed description of
these procedures.
Auction Participants
Existing Holders and Potential Holders
Participants in each Auction will include: (1) "Existing Holders",
which shall mean any Person (including a Broker-Dealer) who is a holder of
Auction Rate Series 1997-1 Senior Notes in the records of the Auction Agent
(described below) at the close of business on the Business Day preceding each
Auction Date; and (ii) "Potential Holders", which shall mean any Person
(including a Broker-Dealer), including any Existing Holder, who may be
interested in acquiring the Auction Rate Series 1997-1 Senior Notes (or, in the
case of an Existing Holder, an additional principal amount of the Auction Rate
Series 1997-1 Senior Notes). See "Broker-Dealer" below.
By purchasing the Auction Rate Series 1997-1 Senior Notes, whether in
an Auction or otherwise, each prospective purchaser of the Auction Rate Series
1997-1 Senior Notes or its Broker-Dealer must agree and will be deemed to have
agreed: (i) to participate in Auctions on the terms described in the First
Supplemental Indenture; (ii) to have its beneficial ownership of the Auction
Rate Series 1997-1 Senior Notes maintained at all times in Book-Entry Form for
the account of its Participant, which in turn will maintain records of such
beneficial ownership, and to authorize such Participant to disclose to the
Auction Agent such information with respect to such beneficial ownership as the
Auction Agent may request; (iii) so long as the beneficial ownership of the
Auction Rate Series 1997-1 Senior Notes is maintained in Book-Entry Form, to
sell, transfer or otherwise dispose of the Auction Rate Series 1997-1 Senior
Notes only pursuant to a Bid (as defined below) or a Sell Order (as defined
below) in an Auction, or otherwise through a Broker-Dealer, provided that in the
case of all transfers other than those pursuant to an Auction, the Existing
Holder of the Auction Rate Series 1997-1 Senior Notes so transferred, its
Participant or Broker-Dealer advises the Auction Agent of such transfer; (iv)
that a Sell Order placed by an Existing Holder will constitute an irrevocable
offer to sell the principal amount of the Auction Rate Series 1997-1 Senior
Notes specified in such Sell Order; (v) that a Bid placed by an Existing Holder
will constitute an irrevocable offer to sell the principal amount, or a lesser
principal amount, of the Auction Rate Series 1997-1 Senior Notes specified in
such Bid if the rate specified in such Bid is greater than, or in some cases
equal to, the Auction Rate Series 1997-1 Senior Note Interest Rate, determined
as described herein; and (vi) that a Bid placed by a Potential Holder will
constitute an irrevocable offer to purchase the amount, or a lesser principal
amount, of the Auction Rate Series 1997-1 Senior Notes specified in such Bid if
the rate specified in such Bid is, respectively, less than or equal to the
Auction Rate Series 1997-1 Senior Note Interest Rate, determined as described
herein.
The principal amount of the Auction Rate Series 1997-1 Senior Notes
purchased or sold may be subject to proration procedures on the Auction Date.
Each purchase or sale of the Auction Rate Series 1997-1 Senior Notes on the
Auction Date will be made for settlement on the first day of the Interest Period
immediately following such Auction Date at a price equal to 100% of the
principal amount thereof plus, unless such day is an Interest Payment
VII-3
<PAGE>
Date, accrued interest thereon to but not including such day. The Auction Agent
is entitled to rely upon the terms of any Order submitted to it by a Broker-
Dealer.
Auction Agent
_____________________ is appointed in the First Supplemental Indenture
as the initial Auction Agent to serve as agent for the Corporation in connection
with Auctions. The Trustee and the Corporation will enter into the initial
Auction Agent Agreement with _________________, as the initial Auction Agent.
Any substitute Auction Agent shall be (i) a bank, national banking association
or trust company duly organized under the laws of the United States of America
or any state or territory thereof having its principal place of business in the
Borough of Manhattan, New York, or such other location as approved by the
Trustee in writing and having a combined capital stock or surplus of at least
$50,000,000, or (ii) a member of the National Association of Securities Dealers,
Inc., having a capitalization of at least $50,000,000, and, in either case,
authorized by law to perform all the duties imposed upon it under the First
Supplemental Indenture and the Auction Agent Agreement. The Auction Agent may at
any time resign and be discharged of the duties and obligations created by the
First Supplemental Indenture and the Auction Agent Agreement by giving at least
90 days' notice to the Trustee and the Corporation. The Auction Agent may be
removed at any time by the Trustee upon the written direction of an Authorized
Officer of the Corporation or the Holders of 66-2/3% of the aggregate principal
amount of the Auction Rate Series 1997-1 Senior Notes of all series then
Outstanding, and, if by such Holders, by an instrument signed by such Holders or
their attorneys and filed with the Auction Agent, the Corporation and the
Trustee upon at least 90 days' notice. Neither resignation nor removal of the
Auction Agent pursuant to the preceding two sentences shall be effective unless
and until a substitute Auction Agent has been appointed and has accepted such
appointment. If required by the Corporation, a substitute Auction Agent
Agreement shall be entered into with a substitute Auction Agent. Notwithstanding
the foregoing, the Auction Agent may terminate the Auction Agent Agreement if,
within 25 days after notifying the Trustee and the Corporation in writing that
it has not received payment of any Auction Agent Fee due it in accordance with
the terms of the Auction Agent Agreement, the Auction Agent does not receive
such payment.
If the Auction Agent shall resign or be removed or be dissolved, or if
the property or affairs of the Auction Agent shall be taken under the control of
any state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the Trustee, at the direction of an
Authorized Officer of the Corporation, shall use its best efforts to appoint a
substitute Auction Agent.
The Auction Agent is acting as agent for the Corporation in connection
with Auctions. In the absence of bad faith, negligent failure to act or
negligence on its part, the Auction Agent shall not be liable for any action
taken, suffered or omitted or any error of judgment made by it in the
performance of its duties under the Auction Agent Agreement and shall not be
liable for any error of judgment made in good faith unless the Auction Agent
shall have been negligent in ascertaining (or failing to ascertain) the
pertinent facts.
The Corporation will pay the Auction Agent the Auction Agent Fee on
each Interest Payment Date and will reimburse the Auction Agent upon its request
for all reasonable expenses, disbursements and advances incurred or made by the
Auction Agent in accordance with any provision of the Auction Agent Agreement or
the Broker-Dealer Agreements (including the reasonable compensation and the
expenses and disbursements of its agents and counsel). Such amounts are payable
from the Administration Fund. The Corporation will indemnify and hold harmless
the Auction Agent for and against any loss, liability or expense incurred
without negligence or bad faith on the Auction Agent's part, arising out of or
in connection with the acceptance or administration of its agency under the
Auction Agent Agreement and the Broker-Dealer Agreements, including the
reasonable costs and expenses (including the reasonable fees and expenses of its
counsel) of defending itself against any such claim or liability in connection
with its exercise or performance of any of its respective duties thereunder and
of enforcing this indemnification provision; provided that the Corporation will
not indemnify the Auction Agent as described in this paragraph for any fees and
expenses incurred by the Auction Agent in the normal course of performing its
duties under the Auction Agent Agreement and under the Broker-Dealer Agreements,
such fees and expenses being payable as described above.
VII-4
<PAGE>
Broker-Dealer
Existing Holders and Potential Holders may participate in Auctions
only by submitting orders (in the manner described below) through a Broker-
Dealer, including Smith Barney Inc., which will initially be the only Broker-
Dealer, or any other broker or dealer (each as defined in the Exchange Act),
commercial bank or other entity permitted by law to perform the functions
required of a Broker-Dealer set forth below which (i) is a Participant or an
affiliate of a Participant, (ii) has been selected by the Corporation and (iii)
has entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective, in which the Broker-Dealer agrees to participate in Auctions as
described in the Auction Procedures, as from time to time amended or
supplemented.
The Broker-Dealers are entitled to a Broker-Dealer Fee, which is
payable by the Auction Agent from monies received from the Corporation, on each
Interest Payment Date. Such Broker-Dealer Fee is payable from the Administration
Fund as provided in the First Supplemental Indenture.
Market Agent
In connection with the Auction Rate Series 1997-1 Senior Notes, the
Market Agent, initially Smith Barney Inc., will act solely as agent of the
Corporation and will not assume any obligation or relationship of agency or
trust for or with any of the Beneficial Owners.
Auction Procedures
General
Pursuant to the First Supplemental Indenture, Auctions to establish
the Auction Rate for the Auction Rate Series 1997-1 Senior Notes will be held on
each Auction Date, except as described under Appendices I and III-Terms of the
Tax Exempt Auction Rate Series 1997-1 Senior Notes -- Interest Rate on the Tax
Exempt Auction Rate Series 1997-1 Senior Notes" and "Terms of the Taxable
Auction Rate Series 1997-1 Notes-Interest Rate on the Taxable Auction Rate
Series 1997-1 Senior Notes", respectively, by application of the Auction
Procedures described herein. Such procedures are to be applicable separately to
each series of Auction Rate Series 1997-1 Senior Notes. "Auction Date" means,
initially, with respect to the Auction Rate Series 1997-1 Notes, ______, 1997,
with respect to the Series 1997-1A Notes, ______, 1997, with respect to the
Series 1997-1B Notes, _______, 1997, with respect to the Series 1997-1C Notes,
______, 1997, with respect to the Series 1997-1D Notes, ______, 1997, with
respect to the Series 1997-1E Notes, ______, 1997, with respect to the Series
1997-1G Notes, ______, 1997, and with respect to the Series 1997-1H Notes,
_______, 1997, and, thereafter, with respect to each such series of Auction Rate
Series 1997-1 Senior Notes, the Business Day immediately preceding the first day
of each related Auction Period, other than: (i) any Interest Period commencing
after the ownership of such series is no longer maintained in Book-Entry Form;
(ii) any Interest Period commencing after the occurrence and during the
continuance of a Payment Default; or (iii) any Auction Period commencing less
than two Business Days after the cure of a Payment Default. Notwithstanding the
foregoing, the Auction Date for one or more Auction Periods may be changed as
described below under "Changes in Auction Terms".
The Auction Agent will calculate the Net Loan Rate, the Maximum
Auction Rate and the All Hold Rate on each Auction Date. If the ownership of the
Auction Rate Series 1997-1 Senior Notes is no longer maintained in Book-Entry
Form, the Trustee will calculate the Maximum Auction Rate and the Net Loan Rate
on the Business Day immediately preceding the first day of each Interest Period
commencing after delivery of the Auction Rate Series 1997-1 Senior Notes. If a
Payment Default has occurred, the Trustee will calculate the Non-Payment Rate on
the Interest Rate Determination Date for (i) each Interest Period commencing
after the occurrence and during the continuance of such Payment Default and (ii)
any Interest Period commencing less than two Business Days after the cure of any
Payment Default. The Auction Agent shall determine (i) with respect to the
Taxable Auction Rate Series 1997-1 Senior Notes, the One-Month LIBOR or the
Three-Month LIBOR, as applicable, and (ii) with respect to the Tax Exempt
Auction Rate Series 1997-1 Senior Notes, the After-Tax Equivalent, the "AA"
Composite
VII-5
<PAGE>
Commercial Paper Rate and the Applicable Percentage for each Interest Period
other than the Initial Interest Period. If the ownership of the Auction Rate
Series 1997-1 Senior Notes is no longer maintained in Book-Entry Form, or if a
Payment Default has occurred, then the Trustee shall determine the One-Month
LIBOR or the Three-Month LIBOR, as applicable, the After-Tax Equivalent, the
"AA" Composite Commercial Paper Rate and the Applicable Percentage for each such
Interest Period. The determination by the Trustee or the Auction Agent, as the
case may be, of the One-Month LIBOR or the Three-Month LIBOR, as applicable, the
After-Tax Equivalent, the "AA" Composite Commercial Paper Rate and the
Applicable Percentage shall (in the absence of manifest error) be final and
binding upon all parties. The Auction Agent shall promptly advise the Trustee of
the One-Month LIBOR or the Three-Month LIBOR, as applicable, the After-Tax
Equivalent, the "AA" Composite Commercial Paper Rate and the Applicable
Percentage upon its determination thereof. The Market Agent shall calculate the
Index (if the Index is other than the PSA Index) with respect to the Tax Exempt
Auction Rate Series 1997-1 Senior Notes on each Interest Rate Determination Date
and shall notify the Trustee and the Auction Agent of the Index on each Interest
Rate Determination Date. The determination by the Market Agent of the Index
shall (in the absence of manifest error) be final and binding upon all parties.
If the Federal Reserve Bank of New York does not make available its
30-day commercial paper rate for purposes of determining the "AA" Composite
Commercial Paper Rate, the Auction Agent shall notify the Trustee of such fact
and the Trustee shall thereupon request that an Authorized Officer of the
Corporation promptly appoint at least two Commercial Paper Dealers (in addition
to Smith Barney Inc.) to provide commercial paper quotes for purposes of
determining the "AA" Composite Commercial Paper Rate. Pending appointment of
both such additional Commercial Paper Dealers, Smith Barney Inc. and any other
Commercial Paper Dealer appointed and serving as such shall provide the required
quotations and such quotations shall be used for purposes of the First
Supplemental Indenture. Smith Barney Inc. has been appointed as a Commercial
Paper Dealer to provide commercial paper quotes for purposes of determining the
"AA" Composite Commercial Paper Rate as aforesaid.
Submission of Orders
So long as the ownership of a series of Auction Rate Series 1997-1
Senior Notes is maintained in Book-Entry Form, an Existing Holder may sell,
transfer or otherwise dispose of Auction Rate Series 1997-1 Senior Notes of such
series only pursuant to a Bid or Sell Order (as hereinafter defined) placed in
an Auction or otherwise sell, transfer or dispose of such series through a
Broker-Dealer, provided that, in the case of all transfers other than pursuant
to Auctions, such Existing Holder, its Broker-Dealer or its Participant advises
the Auction Agent of such transfer. Auctions shall be conducted on each Auction
Date, if there is an Auction Agent on such Auction Date, in the following
manner:
Prior to the Submission Deadline (defined as 12:30 p.m., New York City
time, on any Auction Date or such other time on any Auction Date by which
Broker-Dealers are required to submit Orders to the Auction Agent as specified
by the Auction Agent from time to time) on each Auction Date:
(a) each Existing Holder of Auction Rate Series 1997-1 Senior
Notes may submit to a Broker-Dealer by telephone or otherwise
information as to: (i) the principal amount of Outstanding Auction
Rate Series 1997-1 Senior Notes, if any, held by such Existing Holder
which such Existing Holder desires to continue to hold without regard
to the Auction Rate Series 1997-1 Senior Note Interest Rate for the
next succeeding Auction Period (a "Hold Order"); (ii) the principal
amount of Outstanding Auction Rate Series 1997-1 Senior Notes, if any,
which such Existing Holder offers to sell if the Auction Rate Series
1997-1 Senior Note Interest Rate for the next succeeding Auction
Period will be less than the rate per annum specified by such Existing
Holder (a "Bid"); and/or (iii) the principal amount of Outstanding
Auction Rate Series 1997-1 Senior Notes, if any, held by such Existing
Holder which such Existing Holder offers to sell without regard to the
Auction Rate Series 1997-1 Senior Note Interest Rate for the next
succeeding Auction Period (a "Sell Order"); and
VII-6
<PAGE>
(b) one or more Broker-Dealers may contact Potential Holders to
determine the principal amount of Auction Rate Series 1997-1 Senior
Notes which each such Potential Holder offers to purchase, if the
Auction Rate Series 1997-1 Senior Note Interest Rate for the next
succeeding Auction Period will not be less than the rate per annum
specified by such Potential Holder (also a "Bid").
Each Hold Order, Bid and Sell Order will be an "Order". Each Existing
Holder and each Potential Holder placing an Order is referred to as a "Bidder".
Subject to the provisions of the First Supplemental Indenture
described below under "Validity of Orders", a Bid by an Existing Holder will
constitute an irrevocable offer to sell: (i) the principal amount of Outstanding
Auction Rate Series 1997-1 Senior Notes specified in such Bid if the Auction
Rate Series 1997-1 Senior Note Interest Rate will be less than the rate
specified in such Bid, (ii) such principal amount or a lesser principal amount
of Outstanding Auction Rate Series 1997-1 Senior Notes to be determined as
described below in "Acceptance and Rejection of Orders", if the Auction Rate
Series 1997-1 Senior Note Interest Rate will be equal to the rate specified in
such Bid, or (iii) such principal amount or a lesser principal amount of
Outstanding Auction Rate Series 1997-1 Senior Notes to be determined as
described below under "Acceptance and Rejection of Orders", if the rate
specified therein will be higher than the Auction Rate Series 1997-1 Senior Note
Interest Rate and Sufficient Bids (as defined below) have not been made.
Subject to the provisions of the First Supplemental Indenture
described below under "Validity of Orders", a Sell Order by an Existing Holder
will constitute an irrevocable offer to sell: (i) the principal amount of
Outstanding Auction Rate Series 1997-1 Senior Notes specified in such Sell Order
or (ii) such principal amount or a lesser principal amount of Outstanding
Auction Rate Series 1997-1 Senior Notes as described below under "Acceptance and
Rejection of Orders", if Sufficient Bids have not been made.
Subject to the provisions of the First Supplemental Indenture
described below under "Validity of Orders", a Bid by a Potential Holder will
constitute an irrevocable offer to purchase: (i) the principal amount of
Outstanding Auction Rate Series 1997-1 Senior Notes specified in such Bid if the
Auction Rate Series 1997-1 Senior Note Interest Rate will be higher than the
rate specified in such Bid or (ii) such principal amount or a lesser principal
amount of Outstanding Auction Rate Series 1997-1 Senior Notes as described below
in "Acceptance and Rejection of Orders", if the Auction Rate Series 1997-1
Senior Note Interest Rate is equal to the rate specified in such Bid.
Each Broker-Dealer will submit in writing to the Auction Agent prior
to the Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the name of
the Bidder placing such Order; (ii) the aggregate principal amount of Auction
Rate Series 1997-1 Senior Notes that are the subject of such Order; (iii) to the
extent that such Bidder is an Existing Holder: (a) the principal amount of
Auction Rate Series 1997-1 Senior Notes, if any, subject to any Hold Order
placed by such Existing Holder; (b) the principal amount of Auction Rate Series
1997-1 Senior Notes, if any, subject to any Bid placed by such Existing Holder
and the rate specified in such Bid; and (c) the principal amount of Auction Rate
Series 1997-1 Senior Notes, if any, subject to any Sell Order placed by such
Existing Holder; and (iv) to the extent such Bidder is a Potential Holder, the
rate specified in such Potential Holder's Bid.
If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate up to the
next highest .001%.
If an Order or Orders covering all Outstanding Auction Rate Series
1997-1 Senior Notes held by any Existing Holder are not submitted to the Auction
Agent prior to the Submission Deadline, the Auction Agent will deem a Hold Order
to have been submitted on behalf of such Existing Holder covering the principal
amount of Outstanding Auction Rate Series 1997-1 Senior Notes held by such
Existing Holder and not subject to an Order submitted to the Auction Agent.
VII-7
<PAGE>
Neither the Corporation, the Trustee nor the Auction Agent will be
responsible for any failure of a Broker-Dealer to submit an Order to the Auction
Agent on behalf of any Existing Holder or Potential Holder.
An Existing Holder may submit multiple Orders, of different types and
specifying different rates, in an Auction with respect to Auction Rate Series
1997-1 Senior Notes then held by such Existing Holder. An Existing Holder that
offers to purchase additional Auction Rate Series 1997-1 Senior Notes is, for
purposes of such offer, treated as a Potential Holder.
Any Bid specifying a rate higher than the applicable Maximum Auction
Rate will (i) be treated as a Sell Order if submitted by an Existing Holder and
(ii) not be accepted if submitted by a Potential Holder.
Validity of Orders
If any Existing Holder submits through a Broker-Dealer to the Auction
Agent one or more Orders covering in the aggregate more than the principal
amount of Outstanding Auction Rate Series 1997-1 Senior Notes held by such
Existing Holder, such Orders will be considered valid as follows and in the
order of priority described below.
Hold Orders. All Hold Orders will be considered valid, but only
up to the aggregate principal amount of Outstanding Auction Rate
Series 1997-1 Senior Notes held by such Existing Holder, and if the
aggregate principal amount of Auction Rate Series 1997-1 Senior Notes
subject to such Hold Orders exceeds the aggregate principal amount of
Auction Rate Series 1997-1 Senior Notes held by such Existing Holder,
the aggregate principal amount of Auction Rate Series 1997-1 Senior
Notes subject to each such Hold Order will be reduced pro rata so that
the aggregate principal amount of Auction Rate Series 1997-1 Senior
Notes subject to all such Hold Orders equals the aggregate principal
amount of Outstanding Auction Rate Series 1997-1 Senior Notes held by
such Existing Holder.
Bids. Any Bid will be considered valid up to an amount equal to
the excess of the principal amount of Outstanding Auction Rate Series
1997-1 Senior Notes held by such Existing Holder over the aggregate
principal amount of Auction Rate Series 1997-1 Senior Notes subject to
any Hold Orders referred to above. Subject to the preceding sentence,
if multiple Bids with the same rate are submitted on behalf of such
Existing Holder and the aggregate principal amount of Outstanding
Auction Rate Series 1997-1 Senior Notes subject to such Bids is
greater than such excess, such Bids will be considered valid up to an
amount equal to such excess. Subject to the two preceding sentences,
if more than one Bid with different rates is submitted on behalf of
such Existing Holder, such Bids will be considered valid first in the
ascending order of their respective rates until the highest rate is
reached at which such excess exists and then at such rate up to the
amount of such excess. In any event, the aggregate principal amount
of Outstanding Auction Rate Series 1997-1 Senior Notes, if any,
subject to Bids not valid under the provisions described above will be
treated as the subject of a Bid by a Potential Holder at the rate
therein specified.
Sell Orders. All Sell Orders will be considered valid up to an
amount equal to the excess of the principal amount of Outstanding
Auction Rate Series 1997-1 Senior Notes held by such Existing Holder
over the aggregate principal amount of Auction Rate Series 1997-1
Senior Notes subject to valid Hold Orders and valid Bids as referred
to above.
If more than one Bid for Auction Rate Series 1997-1 Senior Notes is
submitted on behalf of any Potential Holder, each Bid submitted will be a
separate Bid with the rate and principal amount therein specified. Any Bid or
Sell Order submitted by an Existing Holder covering an aggregate principal
amount of Auction Rate Series 1997-1 Senior Notes not equal to an Authorized
Denomination will be rejected and will be deemed a Hold Order. Any Bid submitted
by a Potential Holder covering an aggregate principal amount of Auction Rate
Series 1997-1 Senior
VII-8
<PAGE>
Notes not equal to an Authorized Denomination will be rejected. Any Order
submitted in an Auction by a Broker-Dealer to the Auction Agent prior to
the Submission Deadline on any Auction Date will be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid
pursuant to the procedures described above is referred to as a "Submitted
Hold Order", a "Submitted Bid" and a "Submitted Sell Order", respectively
(collectively, "Submitted Orders").
Determination of Sufficient Bids and Bid Auction Rate
Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent will assemble all valid Submitted Orders and will determine:
(a) the excess of the total principal amount of Outstanding
Auction Rate Series 1997-1 Senior Notes over the sum of the aggregate
principal amount of Outstanding Auction Rate Series 1997-1 Senior
Notes subject to Submitted Hold Orders (such excess being hereinafter
referred to as the "Available Auction Rate Series 1997-1 Senior
Notes"); and
(b) from such Submitted Orders whether the aggregate principal
amount of Outstanding Auction Rate Series 1997-1 Senior Notes subject
to Submitted Bids by Potential Holders specifying one or more rates
equal to or lower than the Maximum Auction Rate exceeds or is equal to
the sum of (i) the aggregate principal amount of Outstanding Auction
Rate Series 1997-1 Senior Notes subject to Submitted Bids by Existing
Holders specifying one or more rates higher than the Maximum Auction
Rate and (ii) the aggregate principal amount of Outstanding Auction
Rate Series 1997-1 Senior Notes subject to Submitted Sell Orders (in
the event such excess or such equality exists other than because all
of the Outstanding Auction Rate Series 1997-1 Senior Notes are subject
to Submitted Hold Orders, such Submitted Bids by Potential Holders
above will be hereinafter referred to collectively as "Sufficient
Bids"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate", which will
be the lowest rate specified in such Submitted Bids such that if:
(i) each such Submitted Bid from Existing Holders specifying
such lowest rate and all other Submitted Bids from Existing
Holders specifying lower rates were rejected (thus entitling such
Existing Holders to continue to hold the principal amount of
Auction Rate Series 1997-1 Senior Notes subject to such Submitted
Bids); and
(ii) each such Submitted Bid from Potential Holders
specifying such lowest rate and all other Submitted Bids from
Potential Holders specifying lower rates, were accepted,
the result would be that such Existing Holders described in
subparagraph (c)(i) above would continue to hold an aggregate
principal amount of Outstanding Auction Rate Series 1997-1 Senior
Notes which, when added to the aggregate principal amount of
Outstanding Auction Rate Series 1997-1 Senior Notes to be purchased by
such Potential Holders described in subparagraph (c)(ii) above would
equal not less than the Available Auction Rate Series 1997-1, Senior
Notes.
Determination of Auction Rate and Auction Rate Series 1997-1 Senior
Note Interest Rate; Notice
Promptly after the Auction Agent has made the determinations described
above, the Auction Agent is to advise the Trustee of the Net Loan Rate, the
Maximum Auction Rate and the All Hold Rate and the components
VII-9
<PAGE>
thereof on the Auction Date and, based on such determinations, the Auction
Rate for the next succeeding Interest Period as follows:
(a) if Sufficient Bids exist, that the Auction Rate for the next
succeeding Interest Period will be equal to the Bid Auction Rate so
determined;
(b) if Sufficient Bids do not exist (other than because all of
the Outstanding Auction Rate Series 1997-1 Senior Notes are subject to
Submitted Hold Orders), that the Auction Rate for the next succeeding
Interest Period will be equal to the Maximum Auction Rate; or
(c) if all Outstanding Auction Rate Series 1997-1 Senior Notes
are subject to Submitted Hold Orders, that the Auction Rate for the
next succeeding Interest Period will be equal to the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the Trustee of the Auction Rate
Series 1997-1 Senior Note Interest Rate, which rate will be (i) in the case
of the Taxable Auction Rate Series 1997-1 Senior Notes, the lesser of the
Auction Rate and the Net Loan Rate, and (ii) in the case of the Tax Exempt
Auction Rate Series 1997-1 Senior Notes, the Auction Rate. In no event
shall the Auction Rate Series 1997-1 Senior Note Interest Rate exceed the
Auction Rate Series 1997-1 Senior Note Interest Rate Limitation, which, in
the case of the Taxable Auction Rate Series 1997-1 Senior Notes, will be
___% per annum, and, in the case of the Tax Exempt Auction Rate Series
1997-1 Senior Notes, will be ___% per annum.
Acceptance and Rejection of Orders
Existing Holders will continue to hold the principal amount of Auction
Rate Series 1997-1 Senior Notes that are subject to Submitted Hold Orders.
If Sufficient Bids, as described above under "Determination of Sufficient
Bids and Bid Auction Rate", have been received by the Auction Agent (and
if, in the case of the Taxable Auction Rate Series 1997-1 Senior Notes, the
Net Loan Rate is equal to or greater than the Bid Auction Rate), the Bid
Auction Rate will be the Auction Rate Series 1997-1 Senior Note Interest
Rate, and Submitted Bids and Submitted Sell Orders will be accepted or
rejected and the Auction Agent will take such other action as provided in
the First Supplemental Indenture and described below under "Sufficient
Bids".
If the Auction Rate is (or, in the case of the Taxable Auction Rate
Series 1997-1 Senior Notes, if the Auction Rate and the Net Loan Rate are
both) greater than the Auction Rate Series 1997-1 Senior Note Interest Rate
Limitation, the Auction Rate Series 1997-1 Senior Note Interest Rate will
be equal to the Auction Rate Series 1997-1 Senior Note Interest Rate
Limitation. If, in the case of the Taxable Auction Rate Series 1997-1
Senior Notes, the Net Loan Rate is less than the Auction Rate, the Auction
Rate Series 1997-1 Senior Note Interest Rate for such Notes will be the Net
Loan Rate. If the Auction Agent has not received Sufficient Bids as
described above under "Determination of Sufficient Bids and Bid Auction
Rate" (other than because all of the Outstanding Auction Rate Series 1997-1
Senior Notes are subject to Submitted Hold Orders), the Auction Rate Series
1997-1 Senior Note Interest Rate will be (i) in the case of the Taxable
Auction Rate Series 1997-1 Senior Notes, the lesser of the Maximum Auction
Rate and the Net Loan Rate, and (ii) in the case of the Tax Exempt Auction
Rate Series 1997-1 Senior Notes, the Maximum Auction Rate. In any of the
cases described above in this paragraph, Submitted Orders will be accepted
or rejected and the Auction Agent will take such other action as described
below under "Insufficient Bids".
Sufficient Bids. If Sufficient Bids have been made (and, in the
case of the Taxable Auction Rate Series 1997-1 Senior Notes, the Net
Loan Rate is equal to or greater than the Bid Auction Rate) (in which
case the Auction Rate Series 1997-1 Senior Note Interest Rate shall be
the Bid Auction Rate), all Submitted Sell Orders will be accepted and,
subject to the denomination requirements described below, Submitted
Bids will be accepted or rejected as follows in the following order of
priority and all other Submitted Bids will be rejected:
VII-10
<PAGE>
(a) Existing Holders' Submitted Bids specifying any rate that
is higher than the Auction Rate Series 1997-1 Senior Note
Interest Rate will be accepted, thus requiring each such Existing
Holder to sell the aggregate principal amount of Auction Rate
Series 1997-1 Senior Notes subject to such Submitted Bids;
(b) Existing Holders' Submitted Bids specifying any rate that
is lower than the Auction Rate Series 1997-1 Senior Note Interest
Rate will be rejected, thus entitling each such Existing Holder
to continue to hold the aggregate principal amount of Auction
Rate Series 1997-1 Senior Notes subject to such Submitted Bids;
(c) Potential Holders' Submitted Bids specifying any rate that
is lower than the Auction Rate Series 1997-1 Senior Note Interest
Rate will be accepted;
(d) Each Existing Holder's Submitted Bid specifying a rate
that is equal to the Auction Rate Series 1997-1 Senior Note
Interest Rate will be rejected, thus entitling such Existing
Holder to continue to hold the aggregate principal amount of
Auction Rate Series 1997-1 Senior Notes subject to such Submitted
Bid, unless the aggregate principal amount of Auction Rate Series
1997-1 Senior Notes subject to such Submitted Bids will be
greater than the principal amount of Auction Rate Series 1997-1
Senior Notes (the "remaining principal amount") equal to the
excess of the Available Auction Rate Series 1997-1 Senior Notes
over the aggregate principal amount of Auction Rate Series 1997-1
Senior Notes subject to Submitted Bids described in subparagraphs
(b) and (c) above, in which event such Submitted Bid of such
Existing Holder will be rejected in part and such Existing Holder
will be entitled to continue to hold the principal amount of
Auction Rate Series 1997-1 Senior Notes subject to such Submitted
Bid, but only in an amount equal to the aggregate principal
amount of Auction Rate Series 1997-1 Senior Notes obtained by
multiplying the remaining principal amount by a fraction, the
numerator of which will be the principal amount of Outstanding
Auction Rate Series 1997-1 Senior Notes held by such Existing
Holder subject to such Submitted Bid and the denominator of which
will be the sum of the principal amount of Outstanding Auction
Rate Series 1997-1 Senior Notes subject to such Submitted Bids
made by all such Existing Holders that specified a rate equal to
the Auction Rate Series 1997-1 Senior Note Interest Rate; and
(e) Each Potential Holder's Submitted Bid specifying a rate
that is equal to the Auction Rate Series 1997-1 Senior Note
Interest Rate will be accepted, but only in an amount equal to
the principal amount of Auction Rate Series 1997-1 Senior Notes
obtained by multiplying the excess of the aggregate principal
amount of Available Auction Rate Series 1997-1 Senior Notes over
the aggregate principal amount of Auction Rate Series 1997-1
Senior Notes subject to Submitted Bids described in subparagraphs
(b), (c) and (d) above by a fraction, the numerator of which will
be the aggregate principal amount of Outstanding Auction Rate
Series 1997-1 Senior Notes subject to such Submitted Bid and the
denominator of which will be the sum of the principal amount of
Outstanding Auction Rate Series 1997-1 Senior Notes subject to
Submitted Bids made by all such Potential Holders that specified
a rate equal to the Auction Rate Series 1997-1 Senior Note
Interest Rate.
VII-11
<PAGE>
Insufficient Bids. If Sufficient Bids have not been made (other
than because all of the Outstanding Auction Rate Series 1997-1 Senior
Notes are subject to Submitted Hold Orders), or if the Auction Rate
Series 1997-1 Senior Note Interest Rate Limitation applies (or if, in
the case of the Taxable Auction Rate Series 1997-1 Senior Notes, the
Net Loan Rate is less than the Bid Auction Rate, in which case the
Auction Rate Series 1997-1 Senior Note Interest Rate for such Notes
will be the Net Loan Rate), subject to the denomination requirements
described below, Submitted Orders will be accepted or rejected as
follows in the following order of priority and all other Submitted
Bids will be rejected:
(a) Existing Holders' Submitted Bids specifying any rate that
is equal to or lower than the Auction Rate Series 1997-1 Senior
Note Interest Rate will be rejected, thus entitling such Existing
Holders to continue to hold the aggregate principal amount of
Auction Rate Series 1997-1 Senior Notes subject to such Submitted
Bids;
(b) Potential Holders' Submitted Bids (i) specifying any rate
that is equal to or lower than the Auction Rate Series 1997-1
Senior Note Interest Rate will be accepted, and (ii) specifying
any rate that is higher than the Auction Rate Series 1997-1
Senior Note Interest Rate will be rejected; and
(c) each Existing Holder's Submitted Bid specifying any rate
that is higher than the Auction Rate Series 1997-1 Senior Note
Interest Rate and the Submitted Sell Order of each Existing
Holder will be accepted, thus entitling each Existing Holder that
submitted any such Submitted Bid or Submitted Sell Order to sell
the Auction Rate Series 1997-1 Senior Notes subject to such
Submitted Bid or Submitted Sell Order, but in both cases only in
an amount equal to the aggregate principal amount of Auction Rate
Series 1997-1 Senior Notes obtained by multiplying the aggregate
principal amount of Auction Rate Series 1997-1 Senior Notes
subject to Submitted Bids described in subparagraph (b) above by
a fraction, the numerator of which will be the aggregate
principal amount of Outstanding Auction Rate Series 1997-1 Senior
Notes held by such Existing Holder subject to such Submitted Bid
or Submitted Sell Order and the denominator of which will be the
aggregate principal amount of Outstanding Auction Rate Series
1997-1 Senior Notes subject to all such Submitted Bids and
Submitted Sell Orders.
All Hold Orders. If all Outstanding Auction Rate Series 1997-1
Senior Notes are subject to Submitted Hold Orders, all Submitted Bids
will be rejected.
Authorized Denominations Requirement. If, as a result of the
procedures described above regarding Sufficient Bids and Insufficient
Bids, any Existing Holder would be entitled or required to sell, or
any Potential Holder would be entitled or required to purchase, a
principal amount of Auction Rate Series 1997-1 Senior Notes that is
not equal to an Authorized Denomination, the Auction Agent will, in
such manner as in its sole discretion it may determine, round up or
down the principal amount of Auction Rate Series 1997-1 Senior Notes
to be purchased or sold by any Existing Holder or Potential Holder so
that the principal amount of Auction Rate Series 1997-1 Senior Notes
purchased or sold by each Existing Holder or Potential Holder will be
equal to an Authorized Denomination. If, as a result of the procedures
described above regarding Sufficient Bids, any Potential Holder would
be entitled or required to purchase less than a principal amount of
Auction Rate Series 1997-1 Senior Notes equal to an Authorized
Denomination, the Auction Agent will, in such manner as in its sole
discretion it may determine, allocate Auction Rate Series 1997-1
Senior Notes for purchase among Potential Holders so that only Auction
Rate Series 1997-
VII-12
<PAGE>
1 Senior Notes in an Authorized Denomination are purchased by any
Potential Holder, even if such allocation results in one or more of
such Potential Holders not purchasing any Auction Rate Series 1997-1
Senior Notes.
Based on the results of each Auction, the Auction Agent is to
determine the aggregate principal amount of Auction Rate Series 1997-1
Senior Notes to be purchased and the aggregate principal amount of Auction
Rate Series 1997-1 Senior Notes to be sold by Potential Holders and
Existing Holders on whose behalf each Broker-Dealer submitted Bids or Sell
Orders and, with respect to each Broker-Dealer, to the extent that such
aggregate principal amount of Auction Rate Series 1997-1 Senior Notes to be
sold differs from such aggregate principal amount of Auction Rate Series
1997-1 Senior Notes to be purchased, determine to which other Broker-Dealer
or Broker-Dealers acting for one or more purchasers such Broker-Dealer will
deliver, or from which Broker-Dealers acting for one or more sellers such
Broker-Dealer will receive, as the case may be, Auction Rate Series 1997-1
Senior Notes.
Any calculation by the Auction Agent (or the Trustee, if applicable)
of the Auction Rate Series 1997-1 Senior Note Interest Rate, Maximum
Auction Rate, Net Loan Rate, One-Month LIBOR, Three-Month LIBOR, All Hold
Rate and Non-Payment Rate will, in the absence of manifest error, be
binding on all other parties.
Notwithstanding anything in the First Supplemental Indenture to the
contrary, no Auction is to be held on any Auction Date during the
continuance of a Payment Default.
Settlement Procedures
The Auction Agent is required to advise each Broker-Dealer that
submitted an Order in an Auction of the Auction Rate Series 1997-1 Senior
Note Interest Rate for the next Interest Period and, if such Order was a
Bid or Sell Order, whether such Bid or Sell Order was accepted or rejected,
in whole or in part, by telephone not later than 3:00 p.m., New York City
time, on the Auction Date, if the Auction Rate Series 1997-1 Senior Note
Interest Rate is the Auction Rate; provided that such notice is not
required until 4:00 p.m., New York City time, on the Auction Date, if the
Auction Rate Series 1997-1 Senior Note Interest Rate is the Maximum Auction
Rate (or, in the case of the Taxable Auction Rate Series 1997-1 Senior
Notes, the Net Loan Rate). Each Broker-Dealer that submitted an Order on
behalf of a Bidder is required to then advise such Bidder of the Auction
Rate Series 1997-1 Senior Note Interest Rate for the next Interest Period
and, if such Order was a Bid or a Sell Order, whether such Bid or Sell
Order was accepted or rejected, in whole or in part, confirm purchases and
sales with each Bidder purchasing or selling Auction Rate Series 1997-1
Senior Notes as a result of the Auction and advise each Bidder purchasing
or selling Auction Rate Series 1997-1 Senior Notes as a result of the
Auction to give instructions to its Participant to pay the purchase price
against delivery of such Auction Rate Series 1997-1 Senior Notes or to
deliver such Auction Rate Series 1997-1 Senior Notes against payment
therefor, as appropriate. Pursuant to the Auction Agent Agreement, the
Auction Agent is to record each transfer of Auction Rate Series 1997-1
Senior Notes on the Existing Holders Registry to be maintained by the
Auction Agent.
In accordance with DTC's normal procedures, on the Business Day after
the Auction Date, the transactions described above will be executed through
DTC, so long as DTC is the Securities Depository, and the accounts of the
respective Participants at DTC will be debited and credited and Auction
Rate Series 1997-1 Senior Notes delivered as necessary to effect the
purchases and sales of Auction Rate Series 1997-1 Senior Notes as
determined in the Auction. Purchasers are required to make payment through
their Participants in same-day funds to DTC against delivery through their
Participants. DTC will make payment in accordance with its normal
procedures, which now provide for payment against delivery by its
Participants in immediately available funds.
If any Existing Holder selling Auction Rate Series 1997-1 Senior Notes
in an Auction fails to deliver such Auction Rate Series 1997-1 Senior
Notes, the Broker-Dealer of any person that was to have purchased Auction
Rate Series 1997-1 Senior Notes in such Auction may deliver to such person
a principal amount of Auction Rate Series 1997-1 Senior Notes that is less
than the principal amount of Auction Rate Series 1997-1 Senior Notes that
otherwise
VII-13
<PAGE>
was to be purchased by such person but in any event equal to an Authorized
Denomination. In such event, the principal amount of Auction Rate Series
1997-1 Senior Notes to be delivered will be determined by such Broker-
Dealer. Delivery of such lesser principal amount of Auction Rate Series
1997-1 Senior Notes will constitute good delivery. Neither the Trustee nor
the Auction Agent will have any responsibility or liability with respect to
the failure of a Potential Holder, Existing Holder or their respective
Broker-Dealer or Participant to deliver the principal amount of Auction
Rate Series 1997-1 Senior Notes or to pay for the Auction Rate Series 1997-
1 Senior Notes purchased or sold pursuant to an Auction or otherwise. For a
further description of the settlement procedures, see Appendix VIII --
"Settlement Procedures for Auction Rate Series 1997-1 Senior Notes."
Trustee Not Responsible for Auction Agent, Market Agent and Broker-Dealers
The Trustee shall not be liable or responsible for the actions of or
failure to act by the Auction Agent, the Market Agent or any Broker-Dealer
under the First Supplemental Indenture, the Auction Agent Agreement or any
Broker-Dealer Agreement. The Trustee may conclusively rely upon any
information required to be furnished by the Auction Agent, the Market Agent
or any Broker-Dealer without undertaking any independent review or
investigation of the truth or accuracy of such information.
Changes in Auction Terms
Changes in Auction Period or Periods
While any of the Auction Rate Series 1997-1 Senior Notes are
Outstanding, the Corporation may, from time to time, change the length of
one or more Auction Periods (an "Auction Period Adjustment") in order to
conform with then-current market practice with respect to similar
securities or to accommodate economic and financial factors that may affect
or be relevant to the length of the Auction Period and the interest rate
borne by the Auction Rate Series 1997-1 Senior Notes. The Corporation will
not initiate such change in the length of the Auction Period unless it
shall have received, not less than three days nor more than 20 days prior
to the Auction Period Adjustment, (i) in the case of the Tax Exempt Auction
Rate Series 1997-1 Senior Notes, a written opinion of Bond Counsel to the
effect that such Auction Period Adjustment will not adversely affect the
exclusion of interest on any of such Notes from income for federal income
tax purposes, (ii) the written consent of the Market Agent, which consent
shall not be unreasonably withheld, and (iii) written confirmation from
each of the Rating Agencies then rating the Auction Rate Series 1997-1
Senior Notes that such Auction Period Adjustment will not adversely affect
its ratings then applicable to any of the Auction Rate Series 1997-1 Senior
Notes. The Corporation will initiate an Auction Period Adjustment by giving
written notice to the Trustee, the Auction Agent, the Market Agent and the
Securities Depository in substantially the form of, or containing
substantially the information contained in, the First Supplemental
Indenture at least ten days prior to the Auction Date for such Auction
Period.
Any such Auction Period Adjustment shall not result in an Auction
Period of less than seven days nor more than 91 days. If any such Auction
Period Adjustment will result in an Auction Period of less than [35] days,
the notice described above will be effective only if it is accompanied by a
written statement of the Trustee, the Auction Agent and the Securities
Depository to the effect that they are capable of performing their duties,
if any, under the First Supplemental Indenture, the Auction Agent Agreement
and any Broker-Dealer Agreement with respect to such changed Auction
Period.
An Auction Period Adjustment will take effect only if (A) the Trustee
and the Auction Agent receive, by 11:00 a.m., New York City time, on the
Business Day before the Auction Date for the first such Auction Period, a
certificate from the Corporation authorizing an Auction Period Adjustment
specified in such certificate, the opinion of Bond Counsel (in the case of
the Tax Exempt Auction Rate Series 1997-1 Senior Notes), the written
consent of the Market Agent and the Rating Agency confirmations described
above and, if applicable, the written statement of the Trustee, the Auction
Agent and the Securities Depository described above, and (B) Sufficient
Bids exist at the Auction on the Auction Date for such first Auction
Period. If the condition referred to in (A) is not met, the Auction Rate
Series 1997-1 Senior Note Interest Rate applicable for the next Auction
Period will be determined
VII-14
<PAGE>
pursuant to the Auction Procedures and the Auction Period will be the
Auction Period determined without reference to the proposed change. If the
condition referred to in (A) is met, but the condition referred to in (B)
above is not met, the Auction Rate Series 1997-1 Senior Note Interest Rate
applicable for the next Auction Period will be (i) with respect to the
Taxable Auction Rate Series 1997-1 Senior Notes, the lesser of the Maximum
Auction Rate and the Net Loan Rate, and (ii) with respect to the Tax Exempt
Auction Rate Series 1997-1 Senior Notes, the Maximum Auction Rate, and the
Auction Period will be the Auction Period determined without reference to
the proposed change.
Changes in Percentages Used in Determining All Hold Rate, Maximum
Auction Rate and Non-Payment Rate with Respect to the Tax Exempt Auction
Rate Series 1997-1 Senior Notes
The Market Agent may adjust the percentage used in determining the All
Hold Rate, the Applicable Percentage used in determining the Maximum
Auction Rate and the percentage of the Index used in determining the Non-
Payment Rate, in each case with respect to the Tax Exempt Auction Rate
Series 1997-1 Senior Notes, if any such adjustment is necessary, in the
judgment of the Market Agent, to reflect any Change of Tax Law such that a
Tax Exempt Auction Rate Series 1997-1 Senior Note bearing interest at the
All Hold Rate, a Tax Exempt Auction Rate Series 1997-1 Senior Note bearing
interest at the Maximum Auction Rate and a Tax Exempt Auction Rate Series
1997-1 Senior Note bearing interest at the Non-Payment Rate shall have
substantially the same market values after such Change of Tax Law as before
such Change of Tax Law. In making any such adjustment, the Market Agent
shall take the following factors in existence both before and after such
Change of Tax Law into account: (i) short-term taxable and tax-exempt
market rates and indices of such short-term rates; (ii) the market supply
and demand for short-term tax-exempt securities; (iii) yield curves for
short-term and long-term tax-exempt securities or obligations having a
credit rating that is comparable to the Tax Exempt Auction Rate Series
1997-1 Senior Notes; (iv) general economic conditions; and (v) economic and
financial factors present in the securities industry that may affect or
that may be relevant to the Tax Exempt Auction Rate Series 1997-1 Senior
Notes.
The Market Agent shall communicate its determination to adjust the
percentage used in determining the All Hold Rate, the Applicable Percentage
used in determining the Maximum Auction Rate and the percentage of the
Index used in determining the Non-Payment Rate pursuant to the previous
paragraph by means of a written notice delivered in writing at least ten
days prior to the Interest Rate Determination Date on which the Market
Agent desires to effect the change, to the Corporation, the Trustee and the
Auction Agent. Such notice shall not be given unless the Market Agent has
received a Corporation consent thereto and a written opinion of Bond
Counsel to the effect that such adjustment will not adversely affect the
exclusion of interest on any of the Tax Exempt Auction Rate Series 1997-1
Senior Notes from income for federal income tax purposes.
Any such adjustment in the percentages used to determine the All Hold
Rate, the Maximum Auction Rate and the Non-Payment Rate with respect to the
Tax Exempt Auction Rate Series 1997-1 Senior Notes shall take effect on an
Interest Rate Determination Date only if (A) the Trustee, the Auction Agent
and the Corporation receive, by 11:00 a.m., New York City time, on the
Business Day immediately preceding such Interest Rate Determination Date, a
Corporation certificate authorizing the adjustment of such percentage,
together with a copy of the Corporation consent thereto and the opinion of
Bond Counsel described above; and (B) the Trustee and the Corporation have
received written confirmation from each of the Rating Agencies then rating
the Tax Exempt Auction Rate Series 1997-1 Senior Notes that such proposed
adjustment will not adversely affect its ratings then applicable to any of
the Tax Exempt Auction Rate Series 1997-1 Senior Notes. If any of the
conditions referred to in (A) and (B) above are not met, the existing
percentage used to determine the All Hold Rate, Applicable Percentage used
to determine the Maximum Auction Rate and percentage of the Index used to
determine the Non-Payment Rate shall remain in effect, and the rate of
interest on Tax Exempt Auction Rate Series 1997-1 Senior Notes for the next
succeeding Interest Period shall be determined in accordance with the
Auction Procedures.
VII-15
<PAGE>
Changes in the Auction Date
The Market Agent, with the written consent of an Authorized Officer of the
Corporation and, in the case of the Tax Exempt Auction Rate Series 1997-1 Senior
Notes, upon receipt of the opinion of Bond Counsel as hereinafter required, may
specify an earlier Auction Date (but in no event more than five Business Days
earlier) than the Auction Date that would otherwise be determined in accordance
with the definition of "Auction Date" set forth above under "Auction
Procedures -- General", with respect to one or more specified Auction Periods
in order to conform with then-current market practice with respect to similar
securities or to accommodate economic and financial factors that may affect or
be relevant to the day of the week constituting an Auction Date and the
interest rate on the Auction Rate Series 1997-1 Senior Notes. No such change
in the Auction Date shall be effective with respect to the Auction Rate Series
1997-1 Senior Notes unless the Corporation and the Trustee, prior to the
proposed effective date of such change, have received a written opinion of Bond
Counsel to the effect that such change will not adversely affect the exclusion
of interest on any of such Notes from income for federal income tax purposes.
The Market Agent shall deliver a written request for consent to such change
in the Auction Date to the Corporation not less than three days nor more than
20 days prior to the effective date of such change. The Market Agent shall
provide notice of its determination to specify an earlier Auction Date for
one or more Auction Periods by means of a written notice delivered at least ten
days prior to the proposed changed Auction Date to the Trustee, the Auction
Agent, the Corporation and the Securities Depository. Such notice will be
substantially in the form of, or contain substantially the information contained
in, the First Supplemental Indenture.
Notice of Changes in Auction Terms
In connection with any change in Auction Terms described above, the Auction
Agent is to provide such further notice to such parties as is specified in the
Auction Agent Agreement.
VII-16
<PAGE>
Appendix VIII
SETTLEMENT PROCEDURES FOR AUCTION RATE
SERIES 1997-1 SENIOR NOTES
If not otherwise defined below, capitalized terms used below will have
the meanings given such terms under "Glossary of Certain Defined Terms" or
Appendix VII -- "Auction of the Auction Rate Series 1997-1 Senior Notes".
These Settlement Procedures apply separately to each series of Auction Rate
Series 1997-1 Senior Notes.
(a) Not later than 3:00 p.m., New York City time, if the Auction Rate
Series 1997-1 Senior Note Interest Rate is the Auction Rate (provided that
such notice is not required until 4:00 p.m., New York City time, if the
Auction Rate Series 1997-1 Senior Note Interest Rate is the Maximum Auction
Rate (or in the case of the Taxable Auction Rate Series 1997-1 Senior
Notes, the Net Loan Rate)), the Auction Agent is to notify by telephone
each Broker-Dealer that participated in the Auction held on such Auction
Date and submitted an Order on behalf of an Existing Holder or Potential
Holder of:
(i) the Auction Rate Series 1997-1 Senior Note Interest Rate
fixed for the next Interest Period;
(ii) whether there were Sufficient Bids in such Auction;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer")
submitted Bids or Sell Orders on behalf of an Existing Holder, whether
such Bid or Sell Order was accepted or rejected, in whole or in part,
and the principal amount of Auction Rate Series 1997-1 Senior Notes,
if any, to be sold by such Existing Holder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer")
submitted a Bid on behalf of a Potential Holder, whether such Bid was
accepted or rejected, in whole or in part, and the principal amount of
Auction Rate Series 1997-1 Senior Notes, if any, to be purchased by
such Potential Holder;
(v) if the aggregate principal amount of Auction Rate Series
1997-1 Senior Notes to be sold by all Existing Holders on whose behalf
such Seller's Broker-Dealer submitted Bids or Sell Orders exceeds the
aggregate principal amount of Auction Rate Series 1997-1 Senior Notes
to be purchased by all Potential Holders on whose behalf such Buyer's
Broker-Dealer submitted a Bid, the name or names of one or more
Buyer's Broker-Dealers (and the name of the Participant, if any, of
each such Buyer's Broker-Dealer) acting for one or more purchasers of
such excess principal amount of Auction Rate Series 1997-1 Senior
Notes and the principal amount of Auction Rate Series 1997-1 Senior
Notes to be purchased from one or more Existing Holders on whose
behalf such Seller's Broker-Dealer acted by one or more Potential
Holders on whose behalf each of such Buyer's Broker-Dealers acted;
(vi) if the aggregate principal amount of Auction Rate Series
1997-1 Senior Notes to be purchased by all Potential Holders on whose
behalf such Buyer's Broker-Dealer submitted a Bid exceeds the
aggregate principal amount of Auction Rate Series 1997-1 Senior Notes
to be sold by all Existing Holders on whose behalf such Seller's
Broker-Dealer submitted a Bid or a Sell Order, the name or names of
one or more Seller's Broker-Dealers (and the name of the Participant,
if any, of each such Seller's Broker-Dealer) acting for one or more
sellers of such excess principal amount of Auction Rate Series 1997-1
Senior Notes and the principal amount of Auction Rate Series 1997-1
Senior Notes to be sold to one or more Potential Holders on whose
behalf such Buyer's Broker-Dealer acted by one or more Existing
Holders on whose behalf each of such Seller's Broker-Dealers acted;
and
<PAGE>
(vii) the Auction Date for the next succeeding Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an Order
on behalf of any Existing Holder or Potential Holder is to:
(i) advise each Existing Holder and Potential Holder on whose
behalf such Broker-Dealer submitted a Bid or Sell Order in the Auction
on such Auction Date whether such Bid or Sell Order was accepted or
rejected, in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's Broker-
Dealer, advise each Potential Holder on whose behalf such Buyer's
Broker-Dealer submitted a Bid that was accepted, in whole or in part,
to instruct such Potential Holder's Participant to pay to such Buyer's
Broker-Dealer (or its Participant) through the Securities Depository
the amount necessary to purchase the principal amount of the Auction
Rate Series 1997-1 Senior Notes to be purchased pursuant to such Bid
(which amount, unless the date of such purchase is an Interest Payment
Date, will include an amount equal to the interest accrued and unpaid
on such principal amount of Auction Rate Series 1997-1 Senior Notes)
against receipt of such Auction Rate Series 1997-1 Senior Notes;
(iii) in the case of a Broker-Dealer that is a Seller's Broker-
Dealer, instruct each Existing Holder on whose behalf such Seller's
Broker-Dealer submitted a Sell Order that was accepted, in whole or in
part, or a Bid that was accepted, in whole or in part, to instruct
such Existing Holder's Participant to deliver to such Seller's Broker-
Dealer (or its Participant) through the Securities Depository the
principal amount of the Auction Rate Series 1997-1 Senior Notes to be
sold pursuant to such Order against payment therefor;
(iv) advise each Existing Holder on whose behalf such Broker-
Dealer submitted an Order and each Potential Holder on whose behalf
such Broker-Dealer submitted a Bid of the Auction Rate Series 1997-1
Senior Note Interest Rate for the next Interest Period;
(v) advise each Existing Holder on whose behalf such Broker-
Dealer submitted an Order of the next Auction Date; and
(vi) advise each Potential Holder on whose behalf such Broker-
Dealer submitted a Bid that was accepted, in whole or in part, of the
next Auction Date.
(c) On the basis of the information provided to it pursuant to
paragraph (a) above, each Broker-Dealer that submitted a Bid or Sell Order
in an Auction is required to allocate any funds received by it in
connection with such Auction pursuant to paragraph (b)(ii) above, and any
Auction Rate Series 1997-1 Senior Notes received by it in connection with
such Auction pursuant to paragraph (b)(iii) above, among the Potential
Holders, if any, on whose behalf such Broker-Dealer submitted Bids, the
Existing Holders, if any on whose behalf such Broker-Dealer submitted Bids
or Sell Orders in such Auction, and any Broker-Dealers identified to it by
the Auction Agent following such Auction pursuant to paragraph (a)(v) or
(a)(vi) above.
(d) On each Auction Date:
(i) each Potential Holder and Existing Holder with an Order in
the Auction on such Auction Date will instruct its Participant as
provided in paragraph (b)(ii) or (b)(iii) above, as the case may be;
VIII-2
<PAGE>
(ii) each Seller's Broker-Dealer that is not a Participant of the
Securities Depository will instruct its Participant to deliver such
Auction Rate Series 1997-1 Senior Notes through the Securities
Depository to a Buyer's Broker-Dealer (or its Participant) identified
to such Seller's Broker-Dealer pursuant to paragraph (a)(v) above
against payment therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant of
the Securities Depository will instruct its Participant to pay through
the Securities Depository to Seller's Broker-Dealer (or its
Participant) identified to such Buyer's Broker-Dealer pursuant to
paragraph (a)(vi) above the amount necessary to purchase the Auction
Rate Series 1997-1 Senior Notes to be purchased pursuant to paragraph
(b)(ii) above against receipt of such Auction Rate Series 1997-1
Senior Notes.
(e) On the Business Day following each Auction Date:
(i) each Participant for a Bidder in the Auction on such Auction
Date referred to in paragraph (d)(i) above will instruct the
Securities Depository to execute the transactions described under
paragraph (b)(ii) or (b)(iii) above for such Auction, and the
Securities Depository will execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant will instruct
the Securities Depository to execute the transactions described in
paragraph (d)(ii) above for such Auction, and the Securities
Depository will execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Participant will
instruct the Securities Depository to execute the transactions
described in paragraph (d)(iii) above for such Auction, and the
Securities Depository will execute such transactions.
(f) If an Existing Holder selling Auction Rate Series 1997-1 Senior
Notes in an Auction fails to deliver such Auction Rate Series 1997-1 Senior
Notes (by authorized book-entry), a Broker-Dear may deliver to the
Potential Holder on behalf of which it submitted a Bid that was accepted a
principal amount of Auction Rate Series 1997-1 Senior Notes that is less
than the principal amount of Auction Rate Series 1997-1 Senior Notes that
otherwise was to be purchased by such Potential Holder. In such event, the
principal amount of Auction Rate Series 1997-1 Senior Notes to be so
delivered will be determined solely by such Broker-Dealer. Delivery of
such lesser principal amount of Auction Rate Series 1997-1 Senior Notes
will constitute good delivery. Notwithstanding the foregoing terms of this
paragraph (f), any delivery or nondelivery of Auction Rate Series 1997-1
Senior Notes which will represent any departure from the results of an
Auction, as determined by the Auction Agent, will be of no effect unless
and until the Auction Agent will have been notified of such delivery or
nondelivery in accordance with the provisions of the Auction Agent
Agreement and the Broker-Dealer Agreements. Neither the Trustee nor the
Auction Agent will have any responsibility or liability with respect to the
failure of a Potential Holder, Existing Holder or their respective Broker-
Dealer or Participant to take delivery of or deliver, as the case may be,
the principal amount of the Auction Rate Series 1997-1 Senior Notes
purchased or sold pursuant to an Auction or otherwise.
VIII-3
<PAGE>
Appendix IX
SUMMARY OF THE INDENTURE
The following is a summary of the material provisions of the Indenture
and the First Supplemental Indenture and is not to be considered as a full
statement of the provisions of the Indenture or the First Supplemental
Indenture. The summary is qualified by reference to and is subject to the
complete Indenture and the First Supplemental Indenture, which are
incorporated by reference herein. Copies thereof, in reasonable quantity,
may be obtained during the offering period upon request directed to the
Original Issuer at the address set forth in "Incorporation of Certain
Documents by Reference" in this Prospectus. Although the following summary
refers to the "Corporation" only, the use of such term should also be read
to include the Original Issuer prior to the Section 150(d)(3)
Transfer.
The Indenture establishes the general provisions of Notes issued by
the Corporation thereunder and sets forth various covenants and agreements
of the Corporation relating thereto, default and remedy provisions,
responsibilities and duties of the Trustee and establishes the various
Funds into which the Corporation's revenues related to the Notes are
deposited and transferred for various purposes. The First Supplemental
Indenture provides for the specific terms and details of the Series 1997-1
Notes, pledges the Financed Student Loans and the revenues related thereto
and establishes the various Accounts in the Funds related to the Series
1997-1 Notes.
General Terms of Notes
Each series of Notes shall be created by and issued pursuant to a
Supplemental Indenture and such Supplemental Indenture shall designate
Notes of each series as Senior Notes, Subordinate Notes or Class C Notes.
The Notes of each series shall bear such date or dates, shall be payable at
such place or places, shall have such Principal Payment Dates, shall bear
interest at such rate or rates, from such date or dates, payable in such
installments and on Interest Payment Dates and at such place or places, and
may be redeemable or prepayable at such Redemption Price or Prices and upon
such terms, as shall be provided for in the Supplemental Indenture creating
that series.
The Stated Maturities and Sinking Fund Payment Dates of all Notes
shall occur on a June 1 or a December 1, unless otherwise specified with
respect to any series of Variable Rate Notes in the Supplemental Indenture
providing for the issuance thereof. All Corporation Swap Payments and
other payments to be made by the Corporation to Credit Facility Providers
shall be payable on a regularly scheduled Interest Payment Date.
Except as may be otherwise provided in a Supplemental Indenture, in
any case where the principal of, premium, if any, or interest on the Notes
or amounts due to any Other Beneficiary shall be due on a day other than a
Business Day, then payment of such principal, premium and interest or such
amounts may be made on the next succeeding Business Day with the same force
and effect as if made on the date due and no interest shall accrue for the
intervening period.
In the event a default occurs in the due and punctual payment of any
interest on any Note, interest shall be payable thereon to the extent
permitted by law on the overdue installment of interest, at the interest
rate borne by the Note in respect of which such interest is overdue.
The Notes, including the principal thereof, premium, if any, and
interest thereon and any Carry-Over Amounts (and accrued interest thereon)
with respect thereto, and Other Indenture Obligations are limited
obligations of the Corporation, payable solely from the revenues and assets
of the Corporation pledged therefor under the Indenture.
<PAGE>
Additional Notes
Notes shall be issued under the Indenture only for the purposes of (a)
providing funds for the origination or purchase, or both, by the Trustee on
behalf of the Corporation or by the Corporation of Eligible Loans
(including, for this purpose, the acquisition under the Indenture of
Eligible Loans previously purchased or originated by the Corporation from
other available moneys of the Corporation), (b) refunding at or before
their Stated Maturity any or all Outstanding Notes issued for that purpose,
and (c) paying Administrative Costs, Note Fees, Costs of Issuance and
capitalized interest on the Notes being issued and making deposits to the
Reserve Fund.
At any time, one or more series of Notes may be issued in such
principal amounts as may be determined by the Corporation for any of the
purposes hereinbefore specified upon compliance with certain conditions
specified in the Indenture (including the requirement that each Rating
Agency shall have confirmed that no outstanding ratings on any of the
Outstanding Unenhanced Notes will be reduced or withdrawn as a result of
such issuance) and any additional conditions specified in a Supplemental
Indenture. Any Additional Notes will not be offered or sold pursuant to
this Prospectus.
Comparative Security of Noteholders and Other Beneficiaries
The Senior Notes (including the Series 1997-1 Senior Notes) are
equally and ratably secured under the Indenture with any Other Senior
Obligations. The Senior Obligations have payment and certain other
priorities over the Subordinate Notes, the Other Subordinate Obligations
and the Class C Notes. The Subordinate Notes (including the Series 1997-1
Subordinate Notes) are equally and ratably secured under the Indenture with
any Other Subordinate Obligations. The Subordinate Obligations have
payment and certain other priorities over the Class C Notes. (See "Source
of Payment and Security for the Notes -- Priorities" in this Prospectus.)
The Senior Notes and the Subordinate Notes are each payable from the Note
Fund and are secured by the Reserve Fund. The Class C Notes are payable
solely from the Surplus Fund.
The Corporation may at any time issue a series of Notes as described
under "Additional Notes" above, either as Senior Notes, Subordinate Notes
or Class C Notes. (Any Additional Notes will not be offered or sold
pursuant to this Prospectus.) In connection with any such Senior Notes or
Subordinate Notes, the Corporation may enter into a Swap Agreement or
Credit Enhancement Facility as it deems in its best interest, subject to
the provisions described in the next succeeding paragraphs, and the Swap
Counterparty or the Credit Enhancement Provider may become a Senior
Beneficiary or a Subordinate Beneficiary, as herein described.
The Corporation may enter into a Swap Agreement only if the Swap
Counterparty has outstanding obligations rated by each Rating Agency not
lower that in its third highest Specific Rating Category (or each Rating
Agency has a comparable other rating with respect to such Swap
Counterparty, such as a comparable rating of claims paying ability or
deposits). No Swap Agreement shall be designated as a Senior Swap
Agreement unless, as of the date the Corporation enters into such Swap
Agreement, the Senior Asset Requirement will be met and the Trustee shall
have received written confirmation from each Rating Agency that the
execution and delivery of the Swap Agreement will not cause the reduction
or withdrawal of any rating or ratings then applicable to any Outstanding
Unenhanced Notes.
Redemption, Prepayment or Purchase of Notes; Senior Asset Requirement
No redemption (other than mandatory sinking fund redemption of Senior
Term Notes), prepayment of principal or purchase (other than on a Purchase
Date or Mandatory Tender Date) of Notes by the Trustee shall be effective
under the Indenture unless, prior to the Trustee giving notice of
redemption, determining that such prepayment will be made or soliciting
such purchase, the Corporation furnishes the Trustee a Corporation
certificate to the effect that:
IX-2
<PAGE>
1. if Senior Notes are to be redeemed, prepaid or purchased,
either (A) after giving effect to such redemption, prepayment or
purchase, the Senior Asset Requirement will be met, or (B) (i) prior
to such redemption, prepayment or purchase, the Senior Asset
Requirement was not being met, (ii) no Subordinate Notes or Class C
Notes will be redeemed on the Redemption Date, prepaid on the
Prepayment Date or purchased on the purchase date for the Senior Notes
then proposed to be redeemed, prepaid or purchased, and (iii) after
giving effect to such redemption, prepayment or purchase, the Senior
Percentage will be greater than it would have been without such
redemption, prepayment or purchase;
2. if Subordinate Notes are to be redeemed, prepaid or purchased,
after giving effect to such redemption, prepayment or purchase, the
Senior Asset Requirement will be met; and
3. if Class C Notes are to be redeemed, prepaid or purchased,
after giving effect to such redemption, prepayment or purchase, the
Senior Asset Requirement will be met and there shall be no deficiency
then existing in the Note Fund, the Reserve Fund or the Rebate Fund.
In general, compliance with the foregoing conditions is determined as
of the date of selection of Notes to be redeemed or as of the date on which
moneys are transferred to the Retirement Account to make any prepayment and
any failure to satisfy such conditions as of the Redemption Date or
Prepayment Date, as applicable, will not affect such determination;
provided that, if Notes have been defeased and are to be redeemed,
compliance with such conditions will be determined on the date of
defeasance instead of as of the date of selection. (See "Discharge of
Notes and Indenture" below.)
Any election to redeem or prepay Notes of a series may also be
conditioned upon such additional requirements as may be set forth in the
Supplemental Indenture authorizing the issuance of such Notes.
Funds and Accounts
Acquisition Fund
The Indenture establishes an Acquisition Fund. With respect to each
series of Notes, the Trustee shall, upon delivery to the initial purchasers
thereof and from the proceeds thereof, credit to the Acquisition Fund the
amount, if any, specified in the Supplemental Indenture providing for the
issuance of such series of Notes. The Trustee shall also deposit in the
Acquisition Fund: (i) any funds to be transferred thereto from the Surplus
Fund, and (ii) any other amounts specified in a Supplemental Indenture. In
addition, the Trustee shall also credit to the Acquisition Fund any
Eligible Loans transferred thereto from the Surplus Account as described
under "Surplus Fund" below (any such Eligible Loans so transferred being
thereafter deemed to have been Financed with moneys in the Acquisition
Fund).
Balances in the Acquisition Fund shall be used only for (a) the
purchase or origination of Eligible Loans, (b) the redemption or purchase
of Notes as provided in a Supplemental Indenture providing for the issuance
of such series of Notes, (c) the payment of Debt Service on the Senior
Notes and Other Senior Obligations when due, (d) the payment of the
purchase price of any Senior Notes required to be purchased on a Purchase
Date or a Mandatory Tender Date, or (e) to cure deficiencies in the Rebate
Fund. The Trustee shall make, or authorize any Deposit Agent to make,
payments to Lenders from the Acquisition Fund for the acquisition of
Eligible Loans, such payments to be made from the Series 1997-1 Tax Exempt
and Taxable Acquisition Accounts at a purchase price not in excess of 100%
of the remaining unpaid principal amount of such Eligible Loan, plus
accrued noncapitalized borrower interest thereon, if any, to the date of
purchase, reasonable transfer, origination or assignment fees, if
applicable, and a premium not to exceed certain limitations set forth in
the First Supplemental Indenture. The Trustee shall also make, or
authorize the Deposit Agent to make, payments from the Acquisition Fund for
the origination of Eligible Loans.
IX-3
<PAGE>
Balances in the Acquisition Fund (other than any portion of such
Balances consisting of Student Loans) shall be (i) transferred to the
credit of the Rebate Fund to the extent necessary, after transfers thereto
from the Revenue Fund, the Surplus Fund, the Reserve Fund, the
Administration Fund and the Note Fund, to make any deposit to the credit of
the Rebate Fund as described under "Rebate Fund" below, (ii) after such
transfer, if any, to be made pursuant to the preceding clause (i) has been
taken into account, transferred to the credit of the Note Fund on the last
Business Day preceding any Interest Payment Date, Principal Payment Date or
Redemption Date to the extent required to pay the Debt Service due on the
Senior Notes and any Other Senior Obligations, as described under "Note
Fund" below, and (iii) after such transfers, if any, to be made pursuant to
the preceding clauses (i) and (ii) have been taken into account,
transferred to the credit of the Principal Account on any Purchase Date or
Mandatory Tender Date with respect to Senior Notes, to the extent described
under "Note Fund" below. In the event that, after transfers to the Rebate
Fund from all other Funds and Accounts, a deficiency exists in the Rebate
Fund, the Trustee shall use its best efforts to sell Student Loans included
in the Balance of the Acquisition Fund at the best price available to the
extent of such deficiency; and the proceeds of any such sale shall be
credited to the Rebate Fund, to the extent of any deficiency in the Rebate
Fund, and otherwise to the Revenue Fund. If any amounts have been
transferred to either or both of the Rebate Fund or the Note Fund pursuant
to this paragraph, the Trustee shall, to the extent necessary to cure the
deficiency in the Acquisition Fund as a result of such transfer or
transfers, transfer to the Acquisition Fund amounts from the Revenue Fund
as described below under "Revenue Fund".
Pending application of moneys in the Acquisition Fund for one or more
authorized purposes, such moneys shall be invested in Investment
Securities, as described under "Investments" below, and any earnings on or
income from said investments shall be deposited in the Revenue Fund.
Revenue Fund
The Indenture establishes a Revenue Fund, which is comprised of two
Accounts: the Repayment Account and the Income Account. The Trustee and
any Deposit Agent shall credit to the Revenue Fund: (i) all amounts
received as interest, including federal interest subsidy payments, and
principal payments with respect to Financed Student Loans, including all
Guarantee payments and all Special Allowance Payments with respect to
Financed Student Loans (excluding any federal interest subsidy payments and
Special Allowance Payments that accrued prior to the date on which such
Student Loans were Financed), (ii) unless otherwise provided in a
Supplemental Indenture, proceeds of the resale to a Lender of any Financed
Student Loans pursuant to such Lender's repurchase obligation under the
applicable Student Loan Purchase Agreement, (iii) all amounts received as
earnings on or income from Investment Securities in the Acquisition Fund,
the Reserve Fund, the Administration Fund, the Surplus Fund and the Note
Fund, and (iv) all amounts to be transferred to the Revenue Fund from the
Rebate Fund. The Trustee shall deposit and credit all such amounts
received as payments of principal of Financed Student Loans to the
Repayment Account, and all other such amounts to the Income Account.
Pending transfers from the Revenue Fund, the moneys therein shall be
invested in Investment Securities as described under "Investments" below,
and any earnings on or income from said investments shall be retained
therein.
Repayment Account. On each Monthly Payment Date and on any other date
on which the Balance in the Note Fund is not sufficient to pay all amounts
payable therefrom on such date, the Trustee shall, from the moneys received
since the preceding Monthly Payment Date in the Repayment Account, (1) make
any periodic rebate fee payments required to be made to the Secretary of
Education in connection with Financed Student Loans, and (2) transfer the
remainder of such moneys as follows:
First, to the credit of the Rebate Fund, to the extent necessary
to cure any deficiency therein as provided in the Indenture; second,
to the credit of the Interest Account, to the extent necessary to
increase the Balance thereof to the amount required on such Monthly
Payment Date or such other date pursuant to the Indenture for the
payment of interest on Senior Notes or Other
IX-4
<PAGE>
Senior Obligations payable therefrom; third, to the credit of the
Principal Account, to the extent necessary to increase the Balance
thereof to the amount required on such Monthly Payment Date or such
other date pursuant to the Indenture for the redemption or payment of
principal or the purchase price of Senior Notes or the payment of
Other Senior Obligations payable therefrom; fourth, to the credit of
the Retirement Account, to the extent and in the manner provided in
the Indenture with respect to the redemption of Senior Notes from the
Retirement Account or the payment of Other Senior Obligations payable
therefrom; fifth, to the credit of the Acquisition Fund, to the extent
described above under "Acquisition Fund"; sixth, to the credit of the
Interest Account, to the extent necessary to increase the Balance
thereof to the amount required on such Monthly Payment Date or such
other date pursuant to the Indenture for the payment of interest on
Subordinate Notes or Other Subordinate Obligations payable therefrom;
seventh, to the credit of the Principal Account, to the extent
necessary to increase the Balance thereof to the amount required on
such Monthly Payment Date or such other date pursuant to the Indenture
for the payment of principal at Stated Maturity or the purchase price
of Subordinate Notes or the payment of Other Subordinate Obligations
payable therefrom; eighth, to the credit of the Retirement Account, to
the extent and in the manner provided in the Indenture with respect to
the redemption of Subordinate Notes from the Retirement Account or
payment of Other Subordinate Obligations payable therefrom; ninth, to
the credit of the Reserve Fund, to the extent necessary to increase
the Balance thereof to the Reserve Fund Requirement; tenth, to the
credit of the Principal Account, to the extent necessary to increase
the Balance thereof to the amount required to meet the sinking fund
installment with respect to the redemption of Subordinate Term Notes
on the next Sinking Fund Payment Date therefor; eleventh, to the
credit of the Special Redemption and Prepayment Account, to the extent
necessary to increase the Balance thereof to the Special Redemption
and Prepayment Account Requirement with respect to each series of
Notes; and twelfth, any remainder to the credit of the Surplus
Account.
Income Account. On each Monthly Payment Date and on any other date on
which the Balance in the Note Fund is not sufficient to pay all amounts
payable therefrom on such date, the Trustee shall, after transferring all
amounts received in the Repayment Account pursuant to the preceding
paragraph, from the moneys received since the preceding Monthly Payment
Date in the Income Account, (1) to the extent amounts in the Repayment
Account were not sufficient therefor, make any periodic rebate fee payments
required to be made to the Secretary of Education in connection with
Financed Student Loans, and (2) transfer the remainder of such moneys as
follows:
First, to the credit of the Rebate Fund, to the extent necessary
to cure any deficiency therein as provided in the Indenture; second,
to the credit of the Interest Account, to the extent necessary to
increase the Balance thereof to the amount required on such Monthly
Payment Date or such other date pursuant to the Indenture for the
payment of interest on Senior Notes or Other Senior Obligations
payable therefrom; third, to the credit of the Principal Account, to
the extent necessary to increase the Balance thereof to the amount
required on such Monthly Payment Date or such other date pursuant to
the Indenture for the redemption or payment of principal or the
purchase price of Senior Notes or the payment of Other Senior
Obligations payable therefrom; fourth, to the credit of the Retirement
Account, to the extent and in the manner provided in the Indenture
with respect to the redemption of Senior Notes from the Retirement
Account or payment of Other Senior Obligations payable therefrom;
fifth, to the credit of the Acquisition Fund, to the extent described
above under "Acquisition Fund"; sixth, to the credit of the Interest
Account, to the extent necessary to increase the Balance thereof to
the amount required on such Monthly Payment Date or such other date
pursuant to the Indenture for the payment of interest on Subordinate
Notes or Other Subordinate Obligations payable therefrom; seventh, to
the credit of the Principal Account, to the extent necessary to
increase the Balance thereof to the amount required on such Monthly
Payment Date or such other date pursuant to the Indenture for the
payment of principal at Stated Maturity or the purchase price of
Subordinate Notes or the payment
IX-5
<PAGE>
of Other Subordinate Obligations payable therefrom; eighth, to the
credit of the Retirement Account, to the extent and in the manner
provided in the Indenture with respect to the redemption of
Subordinate Notes from the Retirement Account or payment of Other
Subordinate Obligations payable therefrom; ninth, to the credit of the
Administration Fund, to the extent necessary to increase the Balance
thereof to such amounts as an Authorized Officer of the Corporation
shall direct by Corporation Order for certain costs and expenses;
tenth, to the credit of the Reserve Fund, to the extent necessary to
increase the Balance thereof to the Reserve Fund Requirement;
eleventh, to the credit of the Principal Account, to the extent
necessary to increase the Balance thereof to the amount required to
meet the sinking fund installment with respect to the redemption of
Subordinate Term Notes on the next Sinking Fund Payment Date therefor;
twelfth, to the credit of the Special Redemption and Prepayment
Account, to the extent necessary to increase the Balance thereof to
the Special Redemption and Prepayment Account Requirement with respect
to each series of Notes; and thirteenth, any remainder to the credit
of the Surplus Account.
Note Fund
The Indenture establishes a Note Fund, which is comprised of three
Accounts: the Interest Account, the Principal Account and the Retirement
Account. The Note Fund shall be used only for the payment when due of
principal of, premium, if any, and interest on the Senior Notes and the
Subordinate Notes, the purchase price of Senior Notes and Subordinate Notes
to be purchased on a Purchase Date or Mandatory Tender Date in accordance
with the Indenture, Other Indenture Obligations and Carry-Over Amounts
(including any accrued interest thereon) and to make transfers to the
credit of the Rebate Fund. The principal of and interest on the Class C
Notes are payable from the Surplus Fund.
Interest Account. The Trustee shall deposit in the Interest Account
(i) that portion of the proceeds from the sale of Financed Student Loans
representing accrued interest and Special Allowance Payments thereon, (ii)
that portion of the proceeds from the sale of the Corporation's bonds,
notes or other evidences of indebtedness, if any, to be used to pay
interest on the Senior Notes or the Subordinate Notes, (iii) all
Counterparty Swap Payments, (iv) all payments under any Credit Enhancement
Facilities to be used to pay interest on (or the interest portion of the
purchase price of) the Notes and (v) all amounts required to be transferred
thereto from the Funds and Accounts specified in the last sentence of the
following paragraph. The moneys in the Interest Account shall be invested
in Investment Securities as described under "Investments" below, and any
earnings on or income from such investments shall be deposited in the
Revenue Fund.
To provide for the payment of each installment of interest which falls
due upon Senior Notes or Subordinate Notes on each regularly scheduled
Interest Payment Date and all Corporation Swap Payments and fees to a
Credit Facility Provider payable on such Interest Payment Date, the Trustee
shall make deposits to the credit of the Interest Account on each Monthly
Payment Date (less certain credits against such payments). If, on any
Interest Payment Date (including a Redemption Date or a date that Notes are
to be purchased that is not a regularly scheduled Interest Payment Date),
moneys in the Interest Account are insufficient to pay the accrued interest
due on the Senior Notes and Subordinate Notes and all Corporation Swap
Payments and fees to a Credit Enhancement Facility Provider payable on such
Interest Payment Date or constituting a portion of the purchase price of
Notes to be so purchased, the Trustee shall deposit immediately to the
credit of the Interest Account an amount equal to such deficiency. Each
deposit required by this paragraph shall be made by transfer from the
following Funds and Accounts, in the following order of priority: the
Revenue Fund, the Surplus Fund (other than that portion of the Balance
thereof consisting of Eligible Loans), the Reserve Fund, the Administration
Fund, the Surplus Fund (including any portion of the Balance thereof
consisting of Eligible Loans), the Retirement Account, the Principal
Account and, as to Senior Notes and Other Senior Obligations only, the
Acquisition Fund (other than that portion of the Balance thereof consisting
of Student Loans); provided that such transfers in respect of Subordinate
Notes or Other Subordinate Obligations shall be so made from the Principal
Account or the Retirement Account only if, and to the extent, any
IX-6
<PAGE>
amounts to be so transferred are in excess of the requirements of such
Accounts with respect to Senior Obligations payable therefrom.
If, as of any regularly scheduled Interest Payment Date, any Carry-
Over Amount (including any accrued interest thereon) is due and payable
with respect to a series of Notes, as provided in the related Supplemental
Indenture, the Trustee shall transfer to the Interest Account (to the
extent amounts are available therefor in the Surplus Account, after taking
into account all other amounts payable from the Surplus Fund on such
Interest Payment Date) an amount equal to such Carry-Over Amount (including
any accrued interest thereon) so due and payable.
Balances in the Interest Account shall be transferred to the credit of
the Rebate Fund to the extent necessary, after transfers thereto from the
Revenue Fund, the Surplus Fund, the Reserve Fund, the Administration Fund,
the Retirement Account and the Principal Account, to make any deposit to
the credit of the Rebate Fund required by the Indenture. (See "Rebate
Fund" below.)
Apart from transfers to the Rebate Fund and transfers to the Principal
Account as described under "Principal Account" below, Balances in the
Interest Account shall be applied, first, to the payment of interest on all
Senior Notes, Corporation Swap Payments under Senior Swap Agreements and
fees payable to Senior Credit Enhancement Providers due on an Interest
Payment Date, and if such money (after the transfers hereinabove described,
including all amounts, to the extent necessary, in the Principal Account)
is less than such interest and Other Senior Obligations on such Interest
Payment Date, such money shall be applied, pro rata, among such
indebtedness based upon such amounts then owing to Senior Beneficiaries and
to be paid from the Interest Account; second, to the payment of interest on
all Subordinate Notes, Corporation Swap Payments under Subordinate Swap
Agreements and fees payable to Subordinate Credit Enhancement Providers due
on an Interest Payment Date, and if such money (after the transfers
hereinabove described, including all amounts, to the extent necessary, in
the Principal Account over and above the amount on deposit therein to meet
any accrued obligations to pay principal of the Senior Notes or amounts,
other than fees, to Senior Credit Facility Providers) is less than such
interest and Other Subordinate Obligations on such Interest Payment Date,
such money shall be applied, pro rata, among such indebtedness based upon
such amounts then owing to Subordinate Beneficiaries and to be paid from
the Interest Account; and third, to the payment of all Carry-Over Amounts
(including any accrued interest thereon) due and payable on all series of
Notes, and if such money is less than such Carry-Over Amounts (including
any accrued interest thereon) on an Interest Payment Date, such money shall
be applied, pro rata, among such Carry-Over Amounts (including any accrued
interest thereon) based upon such amounts then otherwise due and payable to
Noteholders and to be paid from the Interest Account.
Other Indenture Obligations payable from the Interest Account will
include reimbursement to any Credit Facility Provider for interest paid on
Senior Notes or Subordinate Notes from amounts derived from the related
Credit Enhancement Facility, which reimbursement shall have the same
priority of payment from the Interest Account as the interest so paid.
Principal Account. The Trustee shall deposit to the credit of the
Principal Account: (i) that portion of the proceeds from the sale of
Financed Student Loans representing principal thereof, (ii) that portion of
the proceeds from the sale of the Corporation's bonds, notes or other
evidences of indebtedness, if any, to be used to pay principal of the
Senior Notes and the Subordinate Notes, (iii) all payments under any Credit
Enhancement Facilities to be used to pay principal of Senior Notes or
Subordinate Notes or the purchase price of Senior Notes or Subordinate
Notes to be purchased on a Purchase Date or Mandatory Tender Date, and (iv)
all amounts required to be transferred thereto from the following Funds, in
the following order of priority: (1) in the case of payment of principal
of Notes at Stated Maturity, redemption of Senior Notes on a Sinking Fund
Payment Date or the purchase of Notes on a Purchase Date or Mandatory
Tender Date, the Revenue Fund, the Surplus Fund (other than that portion of
the Balance thereof consisting of Eligible Loans), the Reserve Fund, the
Administration Fund and the Surplus Fund (including any portion of the
Balance thereof consisting of Eligible Loans), and (2) in the case
IX-7
<PAGE>
of redemption of Subordinate Notes on a Sinking Fund Payment Date, the
Revenue Fund and the Surplus Fund (other than that portion of the Balance
thereof consisting of Eligible Loans); provided, however, that if principal
is payable on Senior Notes at the Stated Maturity thereof or upon a Sinking
Fund Payment Date therefor, or the purchase price is payable on Senior
Notes on a Purchase Date or Mandatory Tender Date, and money credited to
the Principal Account, after the foregoing transfers, is insufficient to
pay such principal or purchase price, funds shall be transferred, to the
extent necessary, to the Principal Account for this purpose, (i) from the
Interest Account, but only to the extent that the Balance in the Interest
Account exceeds any then accrued payments of interest on the Senior Notes,
Corporation Swap Payments under Senior Swap Agreements and fees owing to
Senior Credit Enhancement Providers and (ii) thereafter from the
Acquisition Fund (other than that portion of the Balance thereof consisting
of Student Loans).
To provide for the payment of principal due on the Stated Maturity of
Senior or Subordinate Serial Notes or on a Sinking Fund Payment Date for
Senior or Subordinate Term Notes, the Trustee shall make deposits to the
credit of the Principal Account on each Monthly Payment Date from amounts
available therefor in the Revenue Fund and the other Funds referred to
above. To the extent there are not available moneys to make any monthly
payment with respect to the cumulative sinking fund redemption of
Subordinate Term Notes, subsequent monthly payments shall be increased to
make up any such deficiency, and to the extent that on any Sinking Fund
Payment Date the aggregate of such payments actually made as of the next-
to-the-last Monthly Payment Date prior to such Sinking Fund Payment Date is
less than the amount of the sinking fund installment due on such Sinking
Fund Payment Date, the amount of such deficiency shall be added to the
amount of the sinking fund installment due on the next Sinking Fund Payment
Date, and the increased amount thereupon be deemed to be the amount due for
such next sinking fund installment. However, the requirement for payments
of cumulative sinking fund installments on Subordinate Term Notes shall not
be construed to create an Event of Default in the event of any such
deficiency (other than, under certain circumstances, in amounts due with
respect to the Stated Maturity of Subordinate Term Notes) unless a sinking
fund installment of such Subordinate Term Notes shall not only be due and
not applied to the redemption or purchase of Subordinate Term Notes, but
also that all contingencies upon the obligation so to apply it as of such
time in fact have been satisfied.
In the event that the Corporation is required to furnish moneys to the
Depositary to purchase Notes on a Purchase Date or Mandatory Tender Date,
the Trustee shall, subject to the applicable provisions of the related
Supplemental Indenture, immediately deposit to the credit of the Principal
Account moneys sufficient to pay the purchase price thereof.
Balances in the Principal Account shall be transferred to the credit
of the Rebate Fund to the extent necessary, after transfers thereto from
the Revenue Fund, the Surplus Fund, the Reserve Fund, the Administration
Fund and the Retirement Account, to make any required deposit to the credit
of the Rebate Fund. (See "Rebate Fund" below.)
Balances to the credit of the Principal Account shall be applied in
the following order of priority: first, to the extent required by the
immediately preceding paragraph, for transfer to the Rebate Fund; second,
to the Interest Account to the extent required (see "Interest Account"
above) for the payment of interest on Senior Notes and Other Senior
Obligations payable therefrom; third, to the payment of Senior Notes at
their Stated Maturity or on their Sinking Fund Payment Date and Other
Senior Obligations payable therefrom; fourth, to the payment of the
purchase price of Senior Notes on a Purchase Date or Mandatory Tender Date;
fifth, to the Interest Account to the extent required (see "Interest
Account" above) for the payment of interest on Subordinate Notes and Other
Subordinate Obligations payable therefrom; sixth, to the payment of
Subordinate Notes at their Stated Maturity and Other Subordinate
Obligations payable therefrom; seventh, to the payment of the purchase
price of Subordinate Notes on a Purchase Date or Mandatory Tender Date; and
eighth, to the payment of Subordinate Term Notes on a Sinking Fund Payment
Date.
IX-8
<PAGE>
Other Indenture Obligations payable from the Principal Account will
include reimbursement to any Credit Facility Provider for principal or the
purchase price paid on Senior Notes or Subordinate Notes from amounts
derived from the related Credit Enhancement Facility, which reimbursement
shall have the same priority of payment from the Principal Account as the
principal so paid.
Subject to compliance with the provisions of the Indenture described
under "Redemption, Prepayment or Purchase of Notes; Senior Asset
Requirement" above, Balances in the Principal Account may also be applied
to the purchase of Senior Notes or Subordinate Notes at a purchase price
(including any brokerage or other charges) not to exceed the Principal
Amount thereof plus accrued interest, as determined by the Corporation at
such time, provided the Trustee shall have first certified that no
deficiencies exist at such time in the Note Fund or the Rebate Fund. Any
such purchase shall be limited to those Senior Notes or Subordinate Notes
whose Stated Maturity or Sinking Fund Payment Date is the next succeeding
Principal Payment Date.
The moneys in the Principal Account shall be invested in Investment
Securities as described under "Investments" below, and any earnings on or
income from such investments shall be deposited in the Revenue Fund.
Retirement Account. The Trustee shall deposit to the credit of the
Retirement Account (i) any amounts transferred thereto from the Reserve
Fund and the Surplus Fund, (ii) that portion of the proceeds from the sale
of the Corporation's bonds, notes or other evidences of indebtedness, if
any, to be used to pay the principal or Redemption Price of Senior Notes or
Subordinate Notes on a date other than the Stated Maturity thereof or a
Sinking Fund Payment Date therefor, and (iii) all payments under any Credit
Enhancement Facilities to be used to pay the Redemption Price of Notes
payable from the Retirement Account. All Senior Notes or Subordinate Notes
which are to be retired, or the principal of which is to be prepaid, other
than with moneys in the Principal Account shall be retired or prepaid with
moneys deposited to the credit of the Retirement Account.
Balances in the Retirement Account shall be transferred to the credit
of the Rebate Fund to the extent necessary, after transfers thereto from
the Revenue Fund, the Surplus Fund, the Reserve Fund and the Administration
Fund, to make any required deposit to the Rebate Fund. (See "Rebate Fund"
below.) After taking into account any such required transfers to the
Rebate Fund, Balances in the Retirement Account shall be transferred to the
credit of the Interest Account to the extent required (see "Interest
Account" above) for the payment of interest on Notes and Other Indenture
Obligations payable therefrom.
Other Indenture Obligations payable from the Retirement Account will
include reimbursement to any Credit Facility Provider for the Redemption
Price paid on Senior Notes or Subordinate Notes from amounts derived from
the related Credit Enhancement Facility, which reimbursement shall have the
same priority of payment from the Retirement Account as the Redemption
Price so paid.
Subject to compliance with the provisions of the Indenture described
under "Redemption, Prepayment or Purchase of Notes; Senior Asset
Requirement" above, Balances in the Retirement Account (other than any
portion thereof to be applied to the mandatory prepayment of principal of
any Notes) may also be applied to the purchase of Senior Notes or
Subordinate Notes at a purchase price (including any brokerage or other
charges) not to exceed the Principal Amount thereof plus accrued interest
plus any then applicable redemption premium, as determined by the
Corporation at such time; provided the Trustee shall have first certified
that no deficiencies exist at such time in the Note Fund or the Rebate
Fund.
The moneys in the Retirement Account shall be invested in Investment
Securities as described under "Investments" below, and any earnings on or
income from such investment shall be deposited in the Revenue Fund.
IX-9
<PAGE>
Administration Fund
With respect to each series of Notes, the Trustee shall, upon delivery
thereof and from the proceeds thereof, credit to the Administration Fund
established under the Indenture the amount, if any, specified in the
Supplemental Indenture providing for the issuance of such series of Notes.
The Trustee shall also credit to the Administration Fund all amounts
transferred thereto from the Revenue Fund and the Surplus Account. Amounts
in the Administration Fund shall be used to pay Costs of Issuance,
Administrative Expenses and Note Fees or to reimburse another fund, account
or other source of the Corporation for the previous payment of Costs of
Issuance, Administrative Expenses or Note Fees. Balances in the
Administration Fund shall also be applied to remedy deficiencies in the
Rebate Fund and the Note Fund after transfers thereto from the Revenue
Fund, the Surplus Fund (other than that portion of the Balance thereof
consisting of Eligible Loans) and the Reserve Fund.
The Trustee shall transfer and credit to the Administration Fund
moneys available under the Indenture for transfer thereto from the sources
set forth in the following paragraph and in such amounts and at such times
as an Authorized Officer of the Corporation shall direct by Corporation
Order; provided such Corporation Order shall certify that the amounts are
required and have been or will be expended within the next 90 days for a
purpose for which the Administration Fund may be used and applied.
Deposits to the credit of the Administration Fund shall be made from
the following sources in the following order of priority: the Income
Account after transfers therefrom to the Rebate Fund, the Interest Account,
the Principal Account (other than with respect to the payment of sinking
fund installments for Subordinate Notes), and the Retirement Account; and
the Surplus Account after transfers therefrom to the Rebate Fund, the
Interest Account, the Principal Account (other than with respect to the
payment of sinking fund installments for Subordinate Notes) and the
Retirement Account, provided that any such deposit from the Surplus Account
shall only be made to the extent that portion of the Balance thereof not
consisting of Eligible Loans is sufficient therefor.
Pending transfers from the Administration Fund, the moneys therein
shall be invested in Investment Securities, as described under
"Investments" below, and any earnings on or income from such investments
shall be deposited in the Revenue Fund.
Reserve Fund
The Reserve Fund is established under the Indenture only for the
security of the Senior Beneficiaries and the Subordinate Beneficiaries, and
not for the Holders of the Class C Notes (other than to provide funds for
transfers to the Rebate Fund for Tax Exempt Class C Notes as hereinafter
described). Immediately upon the delivery of any series of Senior Notes or
Subordinate Notes, and from the proceeds thereof or, at the option of the
Corporation, from any amounts to be transferred thereto from the Surplus
Fund and from any other available moneys of the Corporation not otherwise
credited to or payable into any Fund or Account under the Indenture or
otherwise subject to the pledge and security interest created by the
Indenture, the Trustee shall credit to the Reserve Fund the amount, if any,
specified in the Supplemental Indenture providing for the issuance of that
series of Notes, such that, upon issuance of such Notes, the Balance in the
Reserve Fund shall not be less than the Reserve Fund Requirement.
If on any Monthly Payment Date the Balance in the Reserve Fund is less
than the Reserve Fund Requirement, the Trustee shall transfer and credit
thereto an amount equal to the deficiency from moneys available therefor in
the following Funds and Accounts in the following order of priority: the
Repayment Account, the Income Account and the Surplus Fund; provided that
any such transfer from the Surplus Fund shall only be made to the extent
that portion of the Balance thereof not consisting of Eligible Loans is
sufficient therefor.
The Balance in the Reserve Fund shall be used and applied solely for
(i) transfers to the Rebate Fund to the extent necessary, after transfers
thereto from the Revenue Fund and the Surplus Fund (other than that portion
of the Balance thereof consisting of Eligible Loans), to make any required
deposit to the Rebate Fund (see "Rebate Fund" below), and (ii) after such
transfer, if any, to be made pursuant to the preceding clause (i) has been
taken
IX-10
<PAGE>
into account, the payment when due of principal and interest on the Senior
Notes and the Subordinate Notes and any Other Indenture Obligations and the
purchase price of Senior Notes and Subordinate Notes on a Purchase Date or
Mandatory Tender Date, and the other purposes specified in the Indenture
(see "Note Fund" above), and shall be so used and applied by transfer by
the Trustee to the credit of the Note Fund, (a) at any time and to the
extent that the Balance therein and the Balances available for deposit to
the credit thereof from the Revenue Fund and the Surplus Fund (other than
that portion of the Balance thereof consisting of Eligible Loans) are
insufficient to meet the requirements specified in the Indenture for
deposit to the credit of the Note Fund at such time (provided, however,
that such amounts shall be applied, first, to the payment of interest on
the Senior Notes and Other Senior Obligations payable from the Interest
Account, second, to the payment of principal and the purchase price of
Senior Notes and Other Senior Obligations payable from the Principal
Account, third, to the payment of interest on the Subordinate Notes and
Other Subordinate Obligations payable from the Interest Account, and,
fourth, to the payment of principal and the purchase price of Subordinate
Notes and Other Subordinate Obligations payable from the Principal Account)
and (b) at any time when a portion of the Balance therein is required to be
transferred to the Retirement Account to pay a portion of the Redemption
Price of Senior Notes or Subordinate Notes to be redeemed as provided in a
Supplemental Indenture relating thereto. If on any Monthly Payment Date
the Balance in the Reserve Fund exceeds the Reserve Fund Requirement, such
excess shall, upon Corporation Order, be transferred to the Principal
Account, to the extent necessary to make the deposits required to be made
to the credit of the Principal Account on such Monthly Payment Date,
whether or not other moneys are available to make such deposits.
Pending transfers from the Reserve Fund, the moneys therein shall be
invested in Investment Securities as described under "Investments" below
and any earnings on or income from such investments shall be deposited in
the Revenue Fund.
Rebate Fund
The Indenture establishes a Rebate Fund, which is comprised of two
accounts: the Rebate Account and the Excess Earnings Account.
Rebate Account. The Trustee shall deposit to the credit of the Rebate
Account amounts from the Balances in the Revenue Fund, the Surplus Fund
(other than that portion of the Balance thereof consisting of Eligible
Loans), the Reserve Fund, the Administration Fund, the Surplus Fund
(including any portion of the Balance thereof consisting of Eligible
Loans), the Retirement Account, the Principal Account, the Interest Account
and the Acquisition Fund, in that order of priority, upon receipt of a
Corporation certificate (which the Corporation is required to provide on an
annual basis) that any amounts to be so transferred equal amounts which are
subject to rebate to the United States under Section 148 of the Code with
respect to each series of Tax Exempt Notes. In addition, the Trustee shall
deposit to the credit of the Rebate Account all investment earnings
received on amounts in the Rebate Account. In determining the rebate
amount, the Corporation and the Trustee shall take into account all amounts
held under the Indenture and, pending the application of such amounts to
the purpose for which such amounts were removed, all amounts removed from
under the Indenture.
Moneys in the Rebate Account shall be paid by the Trustee to the
United States at such times and in such amounts as are necessary to comply
with the rebate provisions of Section 148 of the Code with respect to each
series of Tax Exempt Notes. In addition, upon receipt by the Trustee of a
certification of the Corporation that certain amounts in the Rebate Account
are not subject to rebate and an opinion of Bond Counsel to the effect that
failure to rebate such amounts will not cause interest on any series of Tax
Exempt Notes to become includable in gross income of the owners thereof for
federal income tax purposes under either existing laws, regulations,
rulings and decisions or any then pending federal legislation, the Trustee
shall transfer any such amounts to the credit of the Revenue Fund. Moneys
in the Rebate Account are not available for transfer to any Fund or Account
under the Indenture, except the Revenue Fund under the circumstances
described above, and shall be applied solely to meet the Corporation's
rebate obligations.
IX-11
<PAGE>
Excess Earnings Account. On or prior to each date established under
the Indenture for the calculation of Excess Earnings with respect to each
series of Tax Exempt Notes (each an "Excess Earnings Computation Date"),
the Trustee and the Corporation shall determine whether any Excess Earnings
have resulted with respect to such series of Notes. In this regard, a
portion of the proceeds of the Tax Exempt Series 1997-1 Notes will be
applied to the purchase of certain Eligible Loans previously financed with
the proceeds of other bonds or notes of the Original Issuer (the "Refunded
Obligations"), thereby refunding such bonds or notes. Excess Earnings on
such Eligible Loans shall be the "Excess Earnings" computed with respect to
the related series of Refunded Obligations in accordance with the
requirements of the indenture relating to such series, all deposits to the
Series 1997-1 Excess Earnings Subaccount in respect of Excess Earnings for
each such series of Refunded Obligations shall be applied to reduce the
yield on the applicable Eligible Loans in accordance with the requirements
of the related indenture, and amounts in respect of such Excess Earnings
shall be deposited in, and shall be applied from, the Series 1997-1 Excess
Earnings Subaccount prior to any other deposits in, or applications from,
the Excess Earnings Account. The foregoing provisions shall apply to each
series of Refunded Obligations until such series has been retired, after
which time Excess Earnings on the applicable Eligible Loans will be
computed with respect to the Tax Exempt Series 1997-1 Notes. The
Corporation shall, upon each such calculation, furnish the Trustee with a
Corporation certificate verifying such calculation and with any supporting
documentation required to calculate or evidence the Excess Earnings in
accordance with applicable Treasury Regulations (the "Excess Earnings
Regulations"). In the event any Excess Earnings with respect to a series
of Notes have resulted, the Trustee shall, on or prior to such Excess
Earnings Computation Date, transfer to the Excess Earnings Account the
amount, if any, which is necessary to increase the balance in such Account
to an amount equal to such Excess Earnings. Any such transfer shall be
made from the Balances in the Revenue Fund, the Surplus Fund (other than
that portion of the Balance thereof consisting of Eligible Loans), the
Reserve Fund, the Administration Fund, the Surplus Fund (including any
portion of the Balance thereof consisting of Eligible Loans), the
Retirement Account, the Principal Account, the Interest Account and the
Acquisition Fund, in that order of priority.
All amounts in the Excess Earnings Account, including all investment
earnings thereon, shall remain therein until transferred to the Revenue
Fund or paid by the Trustee to the United States Department of the Treasury
or for such other purpose as the Corporation may specify, upon receipt by
the Trustee of (a) a Corporation Order directing the Trustee to so transfer
or pay a specified amount, and (b) a written opinion of Bond Counsel to the
effect that any such transfer or payment, upon satisfaction of any
conditions set forth in such opinion (e.g., forgiveness of indebtedness on
all or a portion of the related Financed Student Loans), would not cause
interest on any series of Tax-Exempt Notes to be includable in the gross
income of any owners thereof for federal income tax purposes.
Amounts in the Excess Earnings Account shall be used only for the
purposes specified in the preceding paragraph, and shall not be available
for any other purpose, including, but not limited to, payment of Debt
Service on or the purchase price of the Notes or any Other Indenture
Obligations.
Surplus Fund
The Indenture establishes a Surplus Fund, which is comprised of two
Accounts: the Special Redemption and Prepayment Account and the Surplus
Account. The Trustee shall deposit to the credit of the Surplus Fund
Balances in the Revenue Fund not required for deposit to any other Fund or
Account. Deposits to the Surplus Fund from the Revenue Fund shall be
credited to the Special Redemption and Prepayment Account to the extent the
Balance thereof is less than the Special Redemption and Prepayment Account
Requirement for each series of Notes, and otherwise to the Surplus Account.
Balances in the Surplus Fund shall be applied to the following
purposes in the following order of priority: first, to remedy deficiencies
in the Rebate Fund (after transfers thereto from the Revenue Fund); second,
to remedy deficiencies in the Interest Account (after transfers thereto
from the Revenue Fund) for the payment of interest on Senior Notes or Other
Senior Obligations payable therefrom; third, to remedy deficiencies in the
Principal Account
IX-12
<PAGE>
(after transfers thereto from the Revenue Fund) for the redemption or
payment of principal or the purchase price of Senior Notes or the payment
of Other Senior Obligations payable therefrom; fourth, to remedy
deficiencies in the Retirement Account (after transfers thereto from the
Revenue Fund) for the redemption of Senior Notes or the payment of Other
Senior Obligations payable therefrom; fifth, to remedy deficiencies in the
Interest Account (after transfers thereto from the Revenue Fund) for the
payment of interest on Subordinate Notes or Other Subordinate Obligations
payable therefrom; sixth, to remedy deficiencies in the Principal Account
(after transfers thereto from the Revenue Fund) for the payment of the
principal at Stated Maturity or the purchase price of Subordinate Notes or
the payment of Other Subordinate Obligations payable therefrom; seventh, to
remedy deficiencies in the Retirement Account (after transfers thereto from
the Revenue Fund) for the redemption of Subordinate Notes or the payment of
Other Subordinate Obligations payable therefrom; eighth, to make deposits
(but only from the Surplus Account) to the credit of the Administration
Fund (after transfers thereto from the Revenue Fund) to the extent required
pursuant to a Corporation Order for certain costs and expenses; ninth, to
remedy deficiencies in the Reserve Fund (to the extent that the Balance is
less than the Reserve Fund Requirement after transfers thereto from the
Revenue Fund); tenth, to remedy deficiencies in the Principal Account
(after transfers thereto from the Revenue Fund) to meet the sinking fund
installment with respect to the redemption of Subordinate Term Notes on a
Sinking Fund Payment Date; eleventh, to make transfers to the credit of the
Retirement Account to redeem or prepay Senior Notes or Subordinate Notes as
provided in a Supplemental Indenture relating thereto (provided that any
such transfers shall be made only from Balances in the Special Redemption
and Prepayment Account); and twelfth, to make deposits (but only from the
Surplus Account) to the credit of the Interest Account for the payment of
Carry-Over Amounts (and accrued interest thereon). Notwithstanding the
foregoing, Balances in the Surplus Fund consisting of Eligible Loans shall
not be required to be applied (1) pursuant to priorities first through
seventh above until after any transfers from the Reserve Fund have been
taken into account, and (2) in any event pursuant to priorities eighth
through twelfth above. If the Surplus Fund is to be used to make such
transfers, transfers shall be made, first, from any cash or Investment
Securities included in the Surplus Account or the Special Redemption and
Prepayment Account, in that order, and, second, from the proceeds of any
sale of Student Loans included in the Surplus Account.
Balances in the Special Redemption and Prepayment Account may also be
transferred to the Acquisition Fund for the acquisition or origination of
Eligible Loans as provided in the Indenture and as further authorized or
limited in a Supplemental Indenture.
Subject to compliance with the provisions of the Indenture described
under "Redemption, Prepayment or Purchase of Notes; Senior Asset
Requirement" above and satisfaction of certain other conditions set forth
in the Indenture, Balances in the Special Redemption and Prepayment Account
(other than any portion thereof to be applied to the mandatory prepayment
of principal of any Notes) may also be transferred to the Note Fund for the
purchase of Notes.
Balances in the Surplus Account may, subject to satisfaction of
certain conditions set forth in the Indenture (including the requirement
that, after taking into account any such payments, the Senior Asset
Requirement will be met) also be applied, as determined by the Corporation
from time to time, to the payment of principal of or interest on Class C
Notes when due or upon the redemption thereof at the option of the
Corporation.
Subject to compliance with the provisions of the Indenture described
under "Redemption, Prepayment or Purchase of Notes; Senior Asset
Requirement" above, Balances in the Surplus Account may also be applied to
any one or more of the following purposes at any time as determined by the
Corporation at such time, provided the Trustee shall have first certified
that no deficiencies exist at such time in the Note Fund, the Rebate Fund,
the Reserve Fund or the Special Redemption and Prepayment Account:
(1) transfer to the Retirement Account for the redemption of
Senior Notes or Subordinate Notes;
IX-13
<PAGE>
(2) transfer to the Principal Account or the Retirement Account
for the purchase of Senior Notes or Subordinate Notes; or
(3) upon satisfaction of certain conditions set forth in the
Indenture, (a) the acquisition of Student Loans meeting the
requirements of clauses (A) (1) and (2) or (B) of the definition of
"Eligible Loan" (see "Glossary of Certain Defined Terms"); (b) to
reimburse another fund, account or other source of the Corporation for
the previous payment of Costs of Issuance; and (c) for such other
purposes as the Corporation shall determine; provided, however, that
Balances in the Surplus Account shall not be applied to any of the
purposes specified in the preceding clause (3)(b) or (c) or to the
purchase of Student Loans that are not Eligible Loans unless, after
taking into account any such application and excluding, for these
purposes only, from the calculation of Aggregate Value, any Financed
Student Loans which are not Eligible Loans and any moneys reasonably
expected to be needed for transfer to the Rebate Fund or to be used to
pay Costs of Issuance, Note Fees or Administrative Expenses, (i) the
Senior Percentage will not be less than ___% (or such lower percentage
specified in a Corporation certificate delivered to the Trustee which,
if Unenhanced Senior Notes are Outstanding, shall not result in the
lowering or withdrawal of the outstanding rating assigned by any
Rating Agency to any of the Unenhanced Senior Notes Outstanding, or,
if no Unenhanced Senior Notes are Outstanding but Other Senior
Obligations are Outstanding, is acceptable to the Other Senior
Beneficiaries entitled to such Other Senior Obligations, and (ii) the
Subordinate Percentage will not be less than ___% (or such lower
percentage specified in a Corporation certificate delivered to the
Trustee which, if Unenhanced Subordinate Notes are Outstanding, shall
not result in the lowering or withdrawal of the outstanding rating
assigned by any Rating Agency to any of the Unenhanced Subordinate
Notes Outstanding, or, if no Unenhanced Subordinate Notes are
Outstanding but Other Subordinate Obligations are Outstanding, is
acceptable to the Other Subordinate Beneficiaries entitled to such
Other Subordinate Obligations; and provided, further, that Balances in
the Surplus Account may be applied to the purchase of Eligible Loans
as specified in the preceding clause (3)(a) without satisfying any
other condition of this clause (3), to the extent provided in a
Supplemental Indenture (in this regard, the First Supplemental
Indenture does not so provide with respect to the application of
Balances in the Series 1997-1 Surplus Subaccounts).
The Trustee shall use its best efforts to sell Student Loans included
in the Balance of the Surplus Account at the best price available to the
extent necessary to make any transfer or payment therefrom described above.
In addition, the Corporation may, at any time, sell to any purchaser (A)
one or more Eligible Loans Financed with moneys in the Surplus Account at a
price not less than 100% of the Principal Balance thereof plus accrued
noncapitalized interest thereon payable by the Eligible Borrower, or (B)
one or more Student Loans Financed with moneys in the Surplus Account that
are not Eligible Loans at a price not less than the lesser of 100% of the
Principal Balance thereof or the percentage of the Principal Balance
thereof paid to Finance such Student Loan plus, in either case, accrued
noncapitalized interest thereon payable by the Eligible Borrower. Student
Loans from time to time held in the Surplus Account may also be purchased
at any time with the proceeds of the Corporation's bonds, notes or other
evidences of indebtedness, at a purchase price equal to 100% of the
Principal Balance of the Student Loans so purchased plus accrued
noncapitalized interest thereon payable by the Eligible Borrower. Any
money received by the Corporation in connection with a sale of Financed
Student Loans pursuant to this paragraph shall be deposited to the credit
of the Surplus Account.
Pending transfers from the Surplus Fund, the moneys therein shall be
invested in Investment Securities as described under "Investments" below,
and any earnings on or income from such investments shall be deposited in
the Revenue Fund.
IX-14
<PAGE>
Pledge; Encumbrances
The Notes and all Other Indenture Obligations are special, limited
obligations of the Corporation specifically secured by the pledge of the
proceeds of the sale of Notes (until expended for the purpose for which the
Notes were issued), the Financed Student Loans and the revenues, moneys and
securities in the Acquisition Fund, the Note Fund, the Revenue Fund, the
Administration Fund, the Reserve Fund and the Surplus Fund, in the manner
and subject to the prior applications provided in the Indenture. Financed
Student Loans purchased with the proceeds of the Corporation's bonds, notes
or obligations or sold to another purchaser, or resold to a Lender pursuant
to its repurchase obligation under a Student Loan Purchase Agreement, or
sold or exchanged for Eligible Loans in accordance with the provisions of
the Indenture, are, contemporaneously with receipt by the Trustee of the
purchase price thereof, including any Eligible Loans to be received in
exchange therefor, no longer pledged to nor serve as security for the
payment of the principal of, premium, if any, or interest on, or any Carry-
Over Amounts (or accrued interest thereon) with respect to the Notes or any
Other Indenture Obligations. The revenues, moneys and securities in the
Rebate Fund and the proceeds thereof are not pledged to, and do not serve
as security for, the payment of the principal of, premium, if any, or
interest on, any Carry-Over Amounts (or accrued interest thereon) with
respect to, or the purchase price of the Notes or any Other Indenture
Obligations.
The Corporation agrees that it will not create, or permit the creation
of, any pledge, lien, charge or encumbrance upon the Financed Student Loans
or the revenues and other moneys, securities, properties, rights, interests
and evidences of indebtedness pledged under the Indenture, except only as
to a lien subordinate to the lien of the Indenture created by any other
indenture authorizing the issuance of bonds, notes or other evidences of
indebtedness of the Corporation, the proceeds of which have been or will be
used to refund or otherwise retire all or a portion of the Outstanding
Notes or as otherwise provided in or permitted by the Indenture. The
Corporation agrees that it will not issue any bonds or other evidences of
indebtedness, other than the Notes as permitted by the Indenture and other
than Swap Agreements and Credit Enhancement Facilities relating to Notes as
permitted by the Indenture, secured by a pledge of the revenues and other
moneys, securities, properties, rights, interests and evidences of
indebtedness pledged under the Indenture or held aside by the Corporation
or by a fiduciary under the Indenture, creating a lien or charge on such
revenues and other moneys, securities, properties, rights, interests and
evidences of indebtedness equal or superior to the lien of the Indenture;
provided that nothing in the Indenture is intended to prevent the
Corporation from issuing obligations secured by assets and revenues of the
Corporation other than the revenues and other moneys, securities,
properties, rights, interests and evidences of indebtedness pledged in the
Indenture.
Covenants
Certain covenants with the Holders of the Notes and Other
Beneficiaries contained in the Indenture are summarized as follows:
Trustee to Hold Financed Student Loans. The Corporation shall cause
all Financed Student Loans to be endorsed and otherwise conveyed to the
Trustee on behalf of the Corporation in accordance with the provisions of
the applicable Student Loan Purchase Agreement or, in the case of any
origination of Financed Student Loans, shall cause such Student Loans to be
originated in the name of the Trustee. The Trustee shall be the legal
owner of all Financed Student Loans for all purposes of the Higher
Education Act and each Guarantee Program. The Trustee shall so hold such
Financed Student Loans in its capacity as trustee pursuant to the Indenture
and, in such capacity, shall be acting on behalf of the Corporation, as the
beneficial owner of such Student Loans, as well as the Holders of the Notes
and all Other Beneficiaries, as their interests may appear.
Enforcement and Amendment of Guarantee Agreements. So long as any
Notes or Other Indenture Obligations are Outstanding and Financed Eligible
Loans are Guaranteed by a Guarantee Agency, the Corporation agrees that it
(1) will, from and after the date on which the Trustee on its behalf shall
have entered into the Guarantee Agreement, cause the Trustee to maintain
the same and diligently enforce the Trustee's rights thereunder,
IX-15
<PAGE>
(2) will cause the Trustee to enter into such other similar or supplemental
agreements as shall be required to maintain benefits for all Financed
Student Loans covered thereby, and (3) will not consent to or permit any
rescission of or consent to any amendment to or otherwise take any action
under or in connection with the same which in any manner will materially
adversely affect the rights of the Noteholders or Other Beneficiaries under
the Indenture.
Acquisition, Collection and Assignment of Student Loans. The
Corporation agrees that it will, except as provided with regard to the
Surplus Fund (see "Funds and Accounts -- Surplus Fund" above), cause the
Trustee to originate or acquire only Eligible Loans with moneys in any of
the Funds and (subject to any adjustments referred to in the following
paragraph) shall diligently cause to be collected all principal and
interest payments on all the Financed Student Loans and other sums to which
the Corporation is entitled pursuant to any Student Loan Purchase
Agreement, and all grants, subsidies, donations, insurance payments,
Special Allowance Payments and all defaulted payments Guaranteed by any
Guarantee Agency which relate to such Financed Student Loans. The
Corporation shall also make, or cause to be made by Lenders or Servicers,
every effort to perfect the Corporation's, the Trustee's or such Lender's
or Servicer's claims for payment from the Secretary of Education or a
Guarantee Agency, as soon as possible, of all payments related to such
Financed Student Loans. The Corporation will cause the Trustee to assign
such Financed Student Loans for payment of guarantee or insurance benefits
within the time required under applicable law and regulations. The
Corporation will cause all United States and State statutes, rules and
regulations which apply to the Program and to Financed Student Loans to be
complied with.
Enforcement of Financed Student Loans. The Corporation agrees that it
shall cause to be diligently enforced, and cause to be taken all steps,
actions and proceedings reasonably necessary for the enforcement of, all
terms, covenants and conditions of all Financed Student Loans and
agreements in connection therewith, including the prompt payment of all
principal and interest payments (as such payments may be adjusted to take
into account (i) any discount the Corporation may cause to be made
available to borrowers who make payments on Financed Student Loans through
automatic withdrawals, and (ii) any reduction in the interest payable on
Financed Student Loans provided for in any special program under which such
loans were originated) and all other amounts due the Corporation or the
Trustee thereunder. Nothing in the provisions of the Indenture described in
this paragraph, however, shall be construed to prevent the Corporation from
settling a default or curing a delinquency on any Financed Student Loan on
such terms as shall be required by law. In addition, (1) the Corporation
may cause the Trustee to forgive the indebtedness on all or a portion of
the Financed Student Loans or take such other action as may be provided in
the written opinion of Bond Counsel, as provided in the Indenture, to the
extent necessary to prevent interest on any series of Tax Exempt Notes from
being includable in the gross income of the owners thereof for federal
income tax purposes, and may cause the Trustee to forgive the remaining
indebtedness on any Financed Student Loan having a principal balance not in
excess of $100 if, in the reasonable judgment of the Corporation, the cost
of collection of the remaining indebtedness of such Financed Student Loan
would exceed such remaining indebtedness, and (2) the Corporation may cause
the Trustee to amend the terms of a Financed Student Loan to provide for a
different rate of interest thereon to the extent required by law or, if
such Financed Student Loan is a Plus or SLS Loan, to effect a reissuance of
such Plus or SLS Loan at a variable rate.
Servicing and Other Agreements. The Corporation may contract with
other Persons to assist it in performing its duties under the Indenture,
and any performance of such duties by a Person so identified to the Trustee
shall be deemed to be action taken by the Corporation. The Corporation may,
and prior to or contemporaneously with the Section 150(d)(3) Transfer
shall, enter into a Servicing Agreement providing for the servicing of the
Financed Student Loans and performance of certain of its other obligations
under the Indenture.
Administration and Collection of Financed Student Loans. The
Corporation agrees that all Financed Student Loans shall be administered
and collected either by the Corporation or by a Servicer selected by the
Corporation (and, after the Section 150(d)(3) Transfer, shall be so
administered and collected by a Servicer) in a competent, diligent and
orderly fashion and in accordance with all requirements of the Higher
Education Act, the Secretary of
IX-16
<PAGE>
Education, the Indenture, the Contracts of Insurance and each applicable
Certificate of Insurance, the Federal Reimbursement Contract, each Guarantee
Program and each Guarantee Agreement.
Books of Account, Annual Audit. The Corporation agrees that it will
cause to be kept and maintained proper books of account relating to the Program
in which full, true and correct entries will be made, in accordance with
generally accepted accounting principles, of all dealings or transactions of or
in relation to the business and affairs of the Corporation, and within 120 days
after the end of each Fiscal Year will cause such books of account to be audited
by an Accountant. A copy of each audit report, annual balance sheet and income
and expense statement showing in reasonable detail the financial condition of
the Corporation as at the close of each Fiscal Year, and summarizing in
reasonable detail the income and expenses for such year, including the
transactions relating to the Funds and Accounts, shall be filed promptly with
the Trustee and be available for inspection by any Noteholder or Other
Beneficiary.
Punctual Payments. The Corporation agrees that it will duly and
punctually pay, or cause to be paid, the principal of, premium, if any, and
interest on and any Carry-Over Amount (and accrued interest thereon) with
respect to each and every Note and each Other Indenture Obligation from the
revenues and other assets pledged under the Indenture on the dates and at the
places, and in the manner provided, in the Notes and with respect to each Other
Indenture Obligation according to the true intent and meaning thereof, and the
Corporation will faithfully do and perform and at all times fully observe and
keep any and all of its covenants, undertakings, stipulations and provisions
contained in the Notes, the Other Indenture Obligations and the Indenture.
Monthly Servicing Reports. The Corporation shall prepare, or cause a
Servicer to prepare, a Monthly Servicing Report for each calendar month and
shall furnish, or cause to be furnished, to the Trustee a copy of each such
report within __ Business Days after the end of such calendar month.
Tax Covenant. The Corporation covenants that (a) it will not take or
omit to take any action which may render the interest on any Tax Exempt Notes
includable in gross income for purposes of federal income taxation, (b) it will
use the proceeds of the Notes and any other funds of the Corporation in such a
manner that the use thereof would not cause the Tax Exempt Notes to be
"arbitrage bonds" under Section 148 of the Code, and (c) it will not permit at
any time any proceeds of the Notes or any other funds of the Corporation to be
used, directly or indirectly, in a manner which would result in the inclusion of
the interest on any Tax Exempt Note in gross income for purposes of federal
income taxation otherwise afforded by the Code.
The First Supplemental Indenture prohibits any obligor on a Student
Loan Financed, in whole or in part, with proceeds of the Tax Exempt Series 1997-
1 Notes, or any related party to such obligor, from purchasing any Tax Exempt
Series 1997-1 Notes in an amount related to the amount of such Student Loan.
Limitation on Administrative Expenses and Note Fees. The Corporation
covenants and agrees that the Administrative Expenses and Note Fees will not, in
any Fiscal Year, exceed those that are reasonable and necessary in light of all
circumstances then existing and will not, in any event, be in such amounts as
will materially adversely affect the ability of the Corporation to pay or
perform, as the case may be, any of its obligations under the Indenture or the
security for any Beneficiaries. The Corporation further covenants in the First
Supplemental Indenture that the Costs of Issuance, Administrative Expenses and
Note Fees to be paid, or reimbursed to the Corporation, from the Administration
Fund will not exceed the aggregate amount thereof specified in the Closing Cash
Flow Projection, unless the Corporation satisfies certain conditions, including
confirmation from each of the Rating Agencies then rating the Series 1997-1
Notes that payment or reimbursement of such additional Costs of Issuance,
Administrative Expenses or Note Fees will not result in a reduction or
withdrawal of the rating of the Series 1997-1 Notes.
IX-17
<PAGE>
Amendment of Student Loan Purchase Agreements. The Corporation shall
notify the Trustee in writing of any proposed amendments to the Student Loan
Purchase Agreements. No such amendment shall become effective unless and until
the Trustee consents in writing thereto, which consent shall not be given unless
the Trustee receives an opinion of Counsel that such amendment is required by
the Higher Education Act or is not to the prejudice of the Holders of the Notes
or Other Beneficiaries.
Amendment of Remarketing Agreements and Depositary Agreements. The
Corporation shall notify the Trustee and any related Credit Facility Provider in
writing of any proposed amendments to any Remarketing Agreement or Depositary
Agreement. No such amendment shall become effective unless and until (1) the
Trustee consents in writing thereto, which consent shall not be given unless the
Trustee receives an opinion of Counsel that such amendment is required by a
Credit Enhancement Facility or the Indenture or is not to the material prejudice
of the Holders of the Notes, and (2) any related Credit Facility Provider
consents in writing thereto, which consent shall not be unreasonably withheld,
provided that no consent of the Credit Facility Provider shall be required if
the Credit Facility Provider receives an opinion of Counsel that such amendment
is required by the Indenture.
Credit Enhancement Facilities and Swap Agreements. The Corporation
may from time to time enter into or obtain the benefit of any Credit Enhancement
Facilities or Swap Agreements with respect to any Notes of any series; provided
that a Supplemental Indenture is entered into authorizing the execution and
delivery of such agreement. (See "Supplemental Indentures" below.)
No Supplemental Indenture shall authorize the execution of a Swap
Agreement unless, as of the date the Corporation enters into such Swap
Agreement, the Swap Counterparty has outstanding obligations rated by each
Rating Agency not lower than in its third highest Specific Rating Category (or
each Rating Agency has a comparable other rating with respect to such Swap
Counterparty, such as a comparable rating of claims paying ability or deposits).
No such Swap Agreement shall be designated as a Senior Swap Agreement unless, as
of the date the Corporation enters into such Swap Agreement, the Senior Asset
Requirement will be met and the Trustee shall have received written confirmation
from each Rating Agency that the execution and delivery of the Swap Agreement
will not cause the reduction or withdrawal of any rating or ratings then
applicable to any Outstanding Unenhanced Notes.
Any Supplemental Indenture authorizing the execution by the
Corporation of a Swap Agreement or Credit Enhancement Facility may include
provisions with respect to the application and use of all amounts to be paid
thereunder. No amounts paid under any such Credit Enhancement Facility will be
part of the Trust Estate except to the extent, if any, specifically provided in
such Supplemental Indenture and no Beneficiary shall have any rights with
respect to any such amounts so paid except as may be specifically provided in
such Supplemental Indenture.
No Petition
The Trustee, by entering into the Indenture, and each Noteholder, by
accepting a Note, covenants and agrees that it will not at any time institute
against the Corporation, or join in any institution against the Corporation of,
any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings, or other proceedings under any United States Federal or state
bankruptcy or similar law in connection with any obligations relating to the
Notes or the Indenture.
Investments
"Investment Securities" shall mean any of the following:
1. Government Obligations;
2. Interest-bearing time or demand deposits, certificates of
deposit or other similar banking arrangements with any bank, trust
company, national banking association or other
IX-18
<PAGE>
depositary institution (including the Trustee or any of its
affiliates), provided that, at the time of deposit or purchase, if the
investment is for a period exceeding one year, such depository
institution shall have long-term unsecured debt rated by each Rating
Agency not lower than in its highest applicable Specific Rating
Category or if the investment is for a period of less than one year,
such depository institution shall have short-term unsecured debt rated
by each Rating Agency not lower than its highest applicable Specific
Rating Category;
3. Obligations issued or guaranteed as to principal and interest
by any of the following: (a) the Government National Mortgage
Association; (b) the Federal National Mortgage Association; or (c) the
Federal Farm Credit Banks, the Federal Intermediate Credit Banks, the
Export-Import Bank of the United States, the Federal Land Banks, the
Student Loan Marketing Association, the Federal Financing Bank, the
Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation or
the Farmers Home Administration, or any agency or instrumentality of
the United States of America which shall be established for the
purpose of acquiring the obligations of any of the foregoing or
otherwise providing financing therefor, provided that any such
obligation described in this clause (c) shall either be rated by Fitch
or, if not rated by Fitch, rated by Moody's, (i) if such obligation
has a term of less than one year, not lower than in its highest
applicable Specific Rating Category, or (ii) if such obligation has a
term of one year or longer, not lower than in its highest applicable
Specific Rating Category;
4. Repurchase agreements or reverse repurchase agreements with
banks (which may include the Trustee or any of its affiliates) which
are members of the Federal Deposit Insurance Corporation or with
government bond dealers insured by the Securities Investor Protection
Corporation, which such agreements are secured by Government
Obligations to a level sufficient to obtain a rating by each Rating
Agency in its highest applicable Specific Rating Category, or with
brokers or dealers whose unsecured long-term debt is rated by each
Rating Agency in its highest applicable Specific Rating Category;
5. Any money market fund, including a qualified regulated
investment company described in I.R.S. Notice 87-22, rated by each
Rating Agency not lower than its highest applicable Specific Rating
Category;
6. Any debt instrument; provided that if such instrument has a
term of less than one year, it is rated by each Rating Agency not
lower than in its highest applicable Specific Rating Category, and if
such instrument has a term of one year or longer, it is rated by each
Rating Agency not lower than in its highest applicable Specific Rating
Category;
7. Any investment agreement which constitutes a general
obligation of an entity whose debt, unsecured securities, deposits or
claims paying ability is rated by each Rating Agency, (a) if such
investment agreement has a term of less than one year, not lower than
in its highest applicable Specific Rating Category, or (b) if such
investment agreement has a term of one year or longer, not lower than
in its highest applicable Specific Rating Category; and
8. Any other investment if the Trustee shall have received
written evidence from each Rating Agency that treating such investment
as an Investment Security will not cause any rating then applicable to
any Outstanding Unenhanced Notes to be lowered or withdrawn or, if no
Unenhanced Notes are then Outstanding but Other Indenture Obligations
are Outstanding, is acceptable to the Other Beneficiaries entitled to
such Other Indenture Obligations, as evidenced in writing to the
trustee by each such Other Beneficiary.
IX-19
<PAGE>
Reports to Noteholders
The Trustee, in accordance with the Indenture, is required to mail a
copy of each Monthly Servicing Report to each Noteholder of record as of the
most recent Record Date. In addition, beneficial owners of the Notes may receive
such reports, upon written request to the Trustee together with a certification
that they are beneficial owners of the Notes. In the case of the Series 1997-1
Notes, the Servicer will file a copy of each such report with the Commission on
Form 8-K. However, in accordance with the Exchange Act and the rules and
regulations of the Commission thereunder, the Corporation expects that it's
obligation to file such reports will be terminated after June 30, 1998.
Events of Default
If any of the following events occur, it is an Event of Default under
the Indenture:
(A) default in the due and punctual payment of any interest on
any Senior Note; or
(B) default in the due and punctual payment of the principal of,
or premium, if any, on, any Senior Note, whether at the Stated
Maturity thereof, at the date fixed for redemption thereof (including,
but not limited to, Sinking Fund Payment Dates) or otherwise upon the
maturity thereof; or
(C) default by the Corporation in its obligation in purchase any
Senior Note on a Purchase Date or Mandatory Tender Date therefor; or
(D) default in the due and punctual payment of any amount owed by
the Corporation to any Other Senior Beneficiary under a Senior Swap
Agreement or Senior Credit Enhancement Facility; or
(E) if no Senior Obligations are Outstanding, default in the due
and punctual payment of any interest on any Subordinate Note; or
(F) if no Senior Obligations are Outstanding, default in the due
and punctual payment of the principal of, or premium, if any, on, any
Subordinate Note, whether at the Stated Maturity thereof, at the date
fixed for redemption thereof (including, but not limited to, Sinking
Fund Payment Dates) or otherwise upon the maturity thereof; or
(G) if no Senior Obligations are Outstanding, default by the
Corporation in its obligation to purchase any Subordinate Note on a
Purchase Date or Mandatory Tender Date therefor; or
(H) if no Senior Obligations are Outstanding, default in the due
and punctual payment of any amount owed by the Corporation to any
Other Subordinate Beneficiary under a Subordinate Swap Agreement or a
Subordinate Credit Enhancement Facility; or
(I) if no Senior Obligations or Subordinate Obligations are
Outstanding, default in the due and punctual payment of any interest
on any Class C Note; or
(J) if no Senior Obligations or Subordinate Obligations are
Outstanding, default in the due and punctual payment of the principal
of, or premium, if any, on, any Class C Note, whether at the Stated
Maturity thereof, at the date fixed for redemption thereof (including,
but not limited to, Sinking Fund Payment Dates) or otherwise upon the
maturity thereof; or
IX-20
<PAGE>
(K) default in the performance of any of the Corporation's
obligations with respect to the transmittal of moneys to be credited
to the Revenue Fund, the Rebate Fund, the Acquisition Fund or the Note
Fund under the provisions of the Indenture and such default shall have
continued for a period of 30 days; or
(L) default in the performance or observance of any other of the
covenants, agreements or conditions on the part of the Corporation in
the Indenture or in the Notes contained, and such default shall have
continued for a period of 30 days after written notice thereof,
specifying such default, shall have been given by the Trustee to the
Corporation, which may give such notice in its discretion and shall
give such notice at the written request of the Acting Beneficiaries
Upon Default, or by the Holders of not less than 10% in aggregate
Principal Amount of the Outstanding Notes to the Corporation and the
Trustee, provided that, except with respect to the Corporation's
covenants relating to the tax exemption of interest on any Tax Exempt
Notes, if the default is such that it can be corrected, but not within
such 30 days, it shall not constitute an Event of Default if
corrective action is instituted by the Corporation within such 30 days
and is diligently pursued until the default is corrected; or
(M) certain events of bankruptcy or insolvency of the
Corporation.
Remedies
Whenever any Event of Default other than that described in paragraph
(L) under "Events of Default" above shall have occurred and be continuing, the
Trustee may (and, upon the written request of the Acting Beneficiaries Upon
Default, the Trustee shall), by notice in writing delivered to the Corporation,
declare the principal of and interest accrued on all Notes then Outstanding due
and payable.
Whenever any Event of Default described in paragraph (L) under "Events
of Default" above shall have occurred and be continuing, (1) the Trustee may, by
notice in writing delivered to the Corporation, declare the principal of and
interest on all Notes then Outstanding due and payable; and (2) the Trustee
shall, upon the written request of the Acting Beneficiaries Upon Default, by
notice in writing delivered to the Corporation, declare the principal of and
interest on all Notes then Outstanding due and payable.
At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the Acting Beneficiaries Upon Default, by written notice to the
Corporation and the Trustee, may rescind and annul such declaration and its
consequences if:
(1) There has been paid to or deposited with the Trustee by or for
the account of the Corporation, or provision satisfactory to the Trustee
has been made for the payment of, a sum sufficient to pay:
(A) if Senior Notes or Other Senior Obligations are Outstanding:
(i) all overdue installments of interest on all Senior Notes; (ii) the
principal of (and premium, if any, on) any Senior Notes which have
become due other than by such declaration of acceleration, together
with interest thereon at the rate or rates borne by such Senior Notes;
(iii) to the extent that payment of such interest is lawful, interest
upon overdue installments of interest on the Senior Notes at the rate
or rates borne by such Senior Notes; (iv) all Other Senior Obligations
which have become due other than as a direct result of such
declaration of acceleration; (v) all other sums required to be paid to
satisfy the Corporation's obligations with respect to the transmittal
of moneys to be credited to the Revenue Fund, the Rebate Fund, the
Acquisition Fund and the Interest Account under the provisions of the
Indenture; and (vi) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel and any Paying Agents,
Deposit Agents, Remarketing Agents, Depositaries, Auction Agents and
Broker-Dealers; or
IX-21
<PAGE>
(B) if no Senior Obligations are Outstanding, but Subordinate
Notes or Other Subordinate Obligations are Outstanding: (i) all
overdue installments of interest on all Subordinate Notes; (ii) the
principal of (and premium, if any, on) any Subordinate Notes which
have become due other than by such declaration of acceleration,
together with interest thereon at the rate or rates borne by such
Subordinate Notes; (iii) to the extent that payment of such interest
is lawful, interest upon overdue installments of interest on the
Subordinate Notes at the rate or rates borne by such Subordinate
Notes; (iv) all Other Subordinate Obligations which have become due
other than as a direct result of such declaration of acceleration; (v)
all other sums required to be paid to satisfy the Corporation's
obligations with respect to the transmittal of moneys to be credited
to the Revenue Fund, the Rebate Fund, the Acquisition Fund and the
Interest Account under the provisions of the Indenture; and (vi) all
sums paid or advanced by the Trustee under the Indenture and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel and any Paying Agents, Deposit Agents,
Remarketing Agents, Depositaries, Auction Agents and Broker-Dealers;
or
(C) if no Senior Obligations or Subordinate Obligations are
Outstanding: (i) all overdue installments of interest on all Class C
Notes and all overdue sinking fund installments for the retirement of
Class C Term Notes; (ii) the principal of (and premium, if any, on)
any Class C Notes which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate or rates
borne by such Class C Notes; (iii) to the extent that payment of such
interest is lawful, interest upon overdue installments of interest on
the Class C Notes at the rate or rates borne by such Class C Notes;
(iv) all other sums required to be paid to satisfy the Corporation's
obligations with respect to the transmittal of moneys to be credited
to the Revenue Fund, the Rebate Fund and the Acquisition Fund under
the provisions of the Indenture; and (v) all sums paid or advanced by
the Trustee under the Indenture and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and
counsel and any Paying Agents, Deposit Agents, Remarketing Agents,
Depositaries, Auction Agents and Broker-Dealers; and
(2) All Events of Default, other than the nonpayment of the
principal of and interest on Notes or amounts owing to Other
Beneficiaries which have become due solely by such declaration of
acceleration, have been cured or waived as provided in the Indenture.
If an Event of Default has occurred and is continuing, the Trustee
may, subject to applicable law, pursue any available remedy by suit at law or
in equity to enforce the covenants of the Corporation in the Indenture and may
pursue such appropriate judicial proceedings as the Trustee shall deem most
effective to protect and enforce, or aid in the protection and enforcement of,
the covenants and agreements in the Indenture. The Trustee is also authorized
to file proofs of claims in any equity, receivership, insolvency, bankruptcy,
liquidation, readjustment, reorganization or other similar proceedings.
Notwithstanding any other provisions of the Indenture, if an "Event of
Default" (as defined therein) occurs under a Swap Agreement or a Credit
Enhancement Facility and, as a result, the Other Beneficiary that is a party
thereto is entitled to exercise one or more remedies thereunder, such Other
Beneficiary may exercise such remedies, including, without limitation, the
termination of such agreement, as provided therein, in its own discretion;
provided that the exercise of any such remedy does not adversely affect the
legal ability of the Trustee or Acting Beneficiaries Upon Default to exercise
any remedy available under the Indenture.
If an Event of Default has occurred and is continuing, and if it shall
have been requested so to do by the Holders of not less than 25% in aggregate
Principal Amount of all Notes then Outstanding or any Other Beneficiary and
shall have been indemnified as provided in the Indenture, the Trustee is obliged
to exercise such one or more of the rights and powers conferred by the Indenture
as the Trustee, being advised by its counsel, shall deem most expedient in the
interests of the Beneficiaries; provided, however, that the Trustee has the
right to decline to comply with any such request if the Trustee shall be advised
by Counsel that the action so requested may not lawfully be
IX-22
<PAGE>
taken or if the Trustee receives, before exercising such right or power,
contrary instructions from the Holders of not less than a majority in aggregate
Principal Amount of the Notes then Outstanding or from any Other Beneficiary.
The Acting Beneficiaries Upon Default have the right, at any time, by
an instrument or instruments in writing executed and delivered to the Trustee,
to direct the method and place of conducting all proceedings to be taken in
connection with the enforcement of the terms and conditions of the Indenture;
provided that (a) such direction shall not be otherwise than in accordance with
the provisions of law and of the Indenture; (b) the Trustee shall not determine
that the action so directed would be unjustly prejudicial to the Holders of
Notes or Other Beneficiaries not taking part in such direction, other than by
effect of the subordination of any of their interests thereunder; and (c) the
Trustee may take any other action deemed proper by the Trustee which is not
inconsistent with such direction.
Except as may be permitted in a Supplemental Indenture with respect to
an Other Beneficiary, no Holder of any Note or Other Beneficiary shall have any
right to institute any suit, action or proceeding in equity or at law for the
enforcement of the Indenture or for the execution of any trust under the
Indenture or for the appointment of a receiver or any other remedy under the
Indenture unless (1) an Event of Default shall have occurred and be continuing,
(2) the Holders of not less than 25% in aggregate Principal Amount of Notes then
Outstanding or any Other Beneficiary shall have made written request to the
Trustee, (3) such Beneficiary or Beneficiaries shall have offered to the Trustee
indemnity, (4) the Trustee shall have thereafter failed for a period of 60 days
after the receipt of the request and indemnification or refused to exercise the
powers granted in the Indenture or to institute such action, suit or proceeding
in its own name and (5) no direction inconsistent with such written request
shall have been given to the Trustee during such 60-day period by the Holders of
not less than a majority in aggregate Principal Amount of the Notes then
Outstanding or by any Other Beneficiary; provided, however, that,
notwithstanding the foregoing provisions of the Indenture, the Acting
Beneficiaries Upon Default may institute any such suit, action or proceeding in
their own names for the benefit of the Holders of all Outstanding Notes and
Other Beneficiaries under the Indenture.
The Holder of any Note shall have the right, which is absolute and
unconditional, to receive payment of the principal of, premium, if any, and
interest on such Note in accordance with the terms thereof and of the Indenture
and, upon the occurrence of an Event of Default with respect thereto, to
institute suit for the enforcement of any such payment, and such right shall not
be impaired without the consent of such Holder.
The Trustee, unless it has declared the principal of and interest on
all Outstanding Notes immediately due and payable and a judgment or decree for
payment of the money due has been obtained by the Trustee, must waive any Event
of Default and its consequences upon written request of the Acting Beneficiaries
Upon Default; provided, however, that there shall not be waived (a) any Event of
Default arising from the acceleration of the maturity of the Notes, except upon
the rescission and annulment of such declaration as described in the third
paragraph under this caption "Remedies"; (b) any Event of Default in the payment
when due of any amount owed to any Beneficiary (including payment of principal
of or interest on any Note) except with the consent of such Beneficiary or
unless, prior to such waiver, the Corporation has paid or deposited (or caused
to be paid or deposited) with the Trustee a sum sufficient to pay all amounts
owed to such Beneficiary (including to the extent permitted by law, interest
upon overdue installments of interest); (c) any Event of Default arising from
the failure of the Corporation to pay unpaid expenses of the Trustee, its agents
and counsel, and any Authenticating Agent, Paying Agents, Note Registrars,
Deposit Agents, Remarketing Agents, Depositaries, Auction Agents and Broker-
Dealers as required by the Indenture, unless, prior to such waiver, the
Corporation has paid or deposited (or caused to be paid or deposited) with the
Trustee sums required to satisfy such obligations of the Corporation under the
provisions of the Indenture.
Application of Proceeds
All moneys received by the Trustee pursuant to any remedy shall, after
payment of the cost and expenses of the proceedings resulting in the collection
of such moneys and of the expenses, liabilities and advances incurred or made by
the Trustee with respect thereto, shall be applied as follows:
IX-23
<PAGE>
(A) Unless the principal of all the Outstanding Notes shall have
become or shall have been declared due and payable, all such moneys shall
be applied as follows:
FIRST, to the payment to the Senior Beneficiaries of all
installments of principal and interest then due on the Senior Notes
and all Other Senior Obligations, and if the amount available shall
not be sufficient to pay all such amounts in full, then to the payment
ratably, in proportion to the amounts due, to the Senior Noteholders
and to each Other Senior Beneficiary, without any discrimination or
preference, and the Trustee shall apply the amount so apportioned to
the Senior Noteholders first to the payment of interest and thereafter
to the payment of principal;
SECOND, to the payment to the Subordinate Beneficiaries of all
installments of principal and interest then due on the Subordinate
Notes and all Other Subordinate Obligations, and if the amount
available shall not be sufficient to pay all such amounts in full,
then to the payment ratably, in proportion to the amounts due, without
regard to due date, to the Subordinate Noteholders and to each Other
Subordinate Beneficiary, without any discrimination or preference, and
the Trustee shall apply the amount so apportioned to the Subordinate
Noteholders first to the payment of interest and thereafter to the
payment of principal; and
THIRD, to the payment of the Holders of the Class C Notes of all
installments of principal and interest (other than interest on overdue
principal) then due and payable.
(B) If the principal of all Outstanding Notes shall have become due
or shall have been declared due and payable and such declaration has not
been annulled and rescinded under the provisions of the Indenture, all
such moneys shall be applied as follows:
FIRST, to the payment to the Senior Beneficiaries of all
principal and interest then due on the Senior Notes and all Other
Senior Obligations, without preference or priority of principal over
interest or of interest over principal, or of any installment of
interest over any other installment of interest, or of any Senior
Beneficiary over any other Senior Beneficiary, ratably, according to
the amounts due, to the Persons entitled thereto without any
discrimination or preference; and
SECOND, to the payment to the Subordinate Beneficiaries of the
principal and interest then due on the Subordinate Notes and all Other
Subordinate Obligations, without preference or priority of principal
over interest or of interest over principal, or of any installment of
interest over any other installment of interest, or of any Subordinate
Beneficiary over any other Subordinate Beneficiary, ratably, according
to the amounts due, to the Persons entitled thereto without any
discrimination or preference, and
THIRD, to the payment of the principal and premium, if any, and
interest then due and unpaid upon the Class C Notes, without
preference or priority of principal over interest or of interest over
principal, or of any installment of interest over any other
installment of interest, or of any Class C Note over any other Class C
Note, ratably, according to the amounts due respectively for principal
and interest, and other amounts owing, to the Persons entitled thereto
without any discrimination or preference.
(C) If the principal of all Outstanding Notes shall have been
declared due and payable and if such declaration shall thereafter have
been rescinded and annulled, then (subject to the provisions described in
paragraph (B) above, in the event that the principal of all the
Outstanding Notes shall later become or be declared due and payable) the
money held by the Trustee under the Indenture shall be applied in
accordance with the provisions described in paragraph (A) above.
IX-24
<PAGE>
Trustee
Prior to the occurrence of an Event of Default which has not been
cured, the Trustee is required to perform such duties and only such duties as
are specifically set forth in the Indenture. Upon the occurrence and
continuation of an Event of Default, the Trustee shall exercise the rights and
powers vested in it by Indenture, and use the same degree of care and skill in
their exercise, as a prudent man would exercise or use under the circumstances
in his own affairs.
Before taking any action under the Indenture, the Trustee may require
that satisfactory indemnity be furnished to it for the reimbursement of all
expenses to which it may be put and to protect it against all liability by
reason of any action so taken, except liability which is adjudicated to have
resulted from its negligence or willful misconduct.
The Trustee may at any time resign upon 60 days' notice to the
Corporation and to the Beneficiaries, such resignation to take effect upon the
appointment of a successor Trustee. The Trustee may be removed at any time by
the Corporation at the request of the Holders of a majority in Principal Amount
of Notes Outstanding, except during the existence of an Event of Default. No
such removal shall be effective until the appointment of a successor Trustee.
Deposit Agents
The Corporation may, in a Supplemental Indenture, appoint one or more
Deposit Agents to hold any part or all of the Revenue Fund, the Acquisition Fund
and/or the Administration Fund. Pursuant to the First Supplemental Indenture,
Norwest Bank of South Dakota, N.A., Sioux Falls, South Dakota, has been
appointed a Deposit Agent for the Revenue Fund. Any Deposit Agent may be removed
at any time by the Corporation by Board Resolution and by instrument signed by
an Authorized Officer of the Corporation filed with such Deposit Agent.
Each Deposit Agent appointed by the Corporation shall be an
incorporated bank having trust powers or trust company organized under the laws
of the State, or a national banking association having trust powers, having its
principal office in the State and having a combined capital and surplus of at
least $5,000,000.
Supplemental Indentures
Supplemental Indentures Not Requiring Consent of Beneficiaries
The Corporation and the Trustee may, from time to time and at any
time, without the consent of, or notice to, any of the Noteholders or any Other
Beneficiary (except to the extent, if any, required pursuant to a Supplemental
Indenture authorizing the issuance of a series of Notes), enter into an
indenture or indentures supplemental to the Indenture as shall not be
inconsistent with the terms and provisions of the Indenture, so as to thereby,
among other things:
(a) cure any ambiguity or formal defect or omission in the
Indenture or in any Supplemental Indenture,
(b) grant to or confer upon the Trustee for the benefit of the
Beneficiaries any additional rights, remedies, powers, authority or
security that may lawfully be granted to or conferred upon the
Beneficiaries or the Trustee,
(c) describe or identify more precisely any part of the Trust
Estate or subject additional revenues, properties or collateral to the
lien and pledge of the Indenture,
IX-25
<PAGE>
(d) authorize the issuance of a series of Notes, subject to the
requirements of the Indenture (see "Additional Notes" above),
(e) amend the assumptions contained in the definition of "Cash
Flow Projection",
(f) modify the Indenture as required by any Credit Facility
Provider or Swap Counterparty, or otherwise necessary to give effect
to any Credit Enhancement Facility or Swap Agreement, at the time of
issuance of a series of Notes to which such agreements relate;
provided that no such modifications shall be effective (1) if the
consent of any Noteholders would be required therefor under the
proviso described in the next succeeding paragraph and such consent
has not been obtained, or (2) the Trustee shall determine that such
modifications are to the prejudice of any Class C Noteholder, or
(g) make any other change in the Indenture which, in the
judgment of the Trustee, is not to the prejudice of the Trustee or any
Beneficiary.
Supplemental Indentures Requiring Consent of Noteholders
Exclusive of Supplemental Indentures described in the preceding
paragraph, the Trustee, upon receipt of an instrument evidencing the
consent to the below-mentioned Supplemental Indenture by: (i) if they are
affected thereby, the Holders of not less than two-thirds of the aggregate
Principal Amount of the Outstanding Senior Notes not held by the
Corporation or a related person, (ii) if they are affected thereby, the
Holders of not less than two-thirds of the aggregate Principal Amount of
the Outstanding Subordinate Notes not held by the Corporation or a related
person, and (iii) each other Person which must consent to such Supplemental
Indenture as provided in any then outstanding Supplemental Indenture
authorizing the issuance of a series of Notes, shall join with the
Corporation in the execution of such other Supplemental Indenture as shall
be deemed necessary and desirable for the purpose of modifying, altering,
amending, adding to or rescinding, in any particular, any of the terms or
provisions contained in the Indenture; provided, however, that no such
Supplemental Indenture shall permit without the consent of each Beneficiary
which would be affected thereby: (a) an extension of the maturity of the
principal of or the interest on any Note, (b) a reduction in the Principal
Amount, Redemption Price or purchase price of any Note or the rate of
interest thereon, (c) a privilege or priority of any Senior Obligation over
any other Senior Obligation, (d) a privilege or priority of any Subordinate
Obligation over any other Subordinate Obligation, (e) a privilege or
priority of any Class C Note over any other Class C Note, (f) a privilege
of any Senior Notes over any Subordinate Notes or Class C Notes, or of any
Subordinate Notes over any Class C Notes, other than as theretofore
provided in the Indenture, (g) the surrendering of a privilege or a
priority granted by the Indenture if, in the judgment of the Trustee, to
the detriment of another Beneficiary under the Indenture, (h) a reduction
or an increase in the aggregate Principal Amount of the Notes required for
consent to such Supplemental Indenture, (i) the creation of any lien
ranking prior to or on a parity with the lien of the Indenture on the Trust
Estate or any part thereof, except as expressly permitted in the Indenture,
(j) any Beneficiary to be deprived of the lien created on the rights,
title, interest, privileges, revenues, moneys and securities pledged under
the Indenture, (k) the modification of any of the provisions of the
Indenture described in this paragraph, or (l) the modification of any
provision of a Supplemental Indenture which states that it may not be
modified without the consent of the Holders of Notes issued pursuant
thereto or any Notes of the same class or any Beneficiary that has provided
a Credit Enhancement Facility or Swap Agreement of such class.
Rights of Trustee
If, in the opinion of the Trustee, any Supplemental Indenture
adversely affects the rights, duties or immunities of the Trustee under the
Indenture or otherwise, the Trustee may, in its discretion, decline to
execute such Supplemental Indenture. The Trustee is entitled to receive,
and shall be fully protected in relying upon, an opinion of its Counsel as
conclusive evidence that any such Supplemental Indenture conforms to the
requirements of the Indenture.
IX-26
<PAGE>
Consent of Depositaries, Remarketing Agents, Auction Agents and
Broker-Dealers
So long as any Depositary Agreement, Remarketing Agreement, Auction
Agent Agreement or Broker-Dealer Agreement is in effect, no Supplemental
Indenture which materially adversely affects the rights, duties or
immunities of the Depositary, the Remarketing Agent, the Auction Agent or
the Broker-Dealer, as the case may be, created by the Indenture or the
Depositary Agreement, Remarketing Agreement, Auction Agent Agreement or
Broker-Dealer Agreement, as appropriate, shall become effective unless and
until delivery to the Trustee of a written consent of the Depositary, the
Remarketing Agent, the Auction Agent or the Broker-Dealer, as the case may
be, to such Supplemental Indenture.
Opinion and Rating Agency Approval Required Prior to Execution of
Supplemental Indenture
No Supplemental Indenture shall be executed unless, prior to the
execution thereof: (1) if any Tax Exempt Notes are Outstanding, the
Corporation shall have provided to the Trustee an opinion of Bond Counsel
to the effect that the execution and delivery of such Supplemental
Indenture will not adversely affect the exclusion from the gross income of
the owners thereof for federal income tax purposes of interest on any such
Tax-Exempt Notes; and (2) the Trustee shall have received written evidence
from each Rating Agency that execution and delivery of such Supplemental
Indenture will not adversely affect any rating or ratings then applicable
to any of the Outstanding Notes.
Discharge of Notes and Indenture
The obligations of the Corporation under the Indenture, and the liens,
pledges, charges, trusts, covenants and agreements of the Corporation
therein made or provided for, shall be fully discharged and satisfied as to
any Note and such Note shall no longer be deemed to be Outstanding
thereunder:
(i) when such Note shall have been canceled, or shall have been
purchased by the Trustee from moneys held by it under the Indenture;
or
(ii) as to any Note not canceled or so purchased, when payment of
the principal of and the applicable redemption premium, if any, on
such Note, plus interest on such principal to the due date thereof,
either (a) shall have been made or caused to be made in accordance
with the terms of the Indenture, or (b) shall have been provided for
by irrevocably depositing with the Trustee exclusively for such
payment, (1) moneys sufficient to make such payment or (2) Government
Obligations maturing as to principal and interest in such amount and
at such times as will ensure the availability of sufficient moneys to
make such payment and, if payment of all then Outstanding Notes is to
be so provided for, all payments required to be made to the United
States Treasury or otherwise with respect to Rebate Amounts and Excess
Earnings, as well as the fees and expenses of the Trustee and any
other fiduciaries under the Indenture.
Notwithstanding the provisions of the Indenture just described, no
Notes shall be defeased unless, after giving effect to the defeasance, the
requirements in the Indenture described under "Redemption, Prepayment or
Purchase of Notes; Senior Asset Requirement" above are met as if such Notes
were to be redeemed on the date such Notes are to be defeased.
Notices to Noteholders
Except as is otherwise provided in the Indenture, any provision in the
Indenture for the mailing of notice or other instrument to Holders of Notes
will be fully complied with if it is mailed by first-class mail, postage
prepaid, to each Holder of Notes outstanding at the address appearing on
the Note Register. In addition, whenever notice is to be mailed under the
Indenture to the Holders of Notes, the Trustee is also, upon request, to
mail a copy of such notice to (1) any Holder of at least $1,000,000 in
aggregate Principal Amount of the Notes (or, in the event
IX-27
<PAGE>
less than $1,000,000 in aggregate Principal Amount of Notes is outstanding,
the Holder of all outstanding Notes), in addition to the copy mailed to
such Holder's address appearing on the Note Register, at such other address
as such Holder shall specify in writing to the Trustee, and (2) any Person
that is the beneficial owner of a Note, as evidenced to the satisfaction of
the Trustee, at such address as such beneficial owner shall specify in
writing to the Trustee; provided that any defect in or failure to mail any
such notice prescribed by this sentence shall not affect the validity of
any proceedings to be taken (including, without limitation, for the
redemption of Notes) pursuant to such notice.
Rights of Other Beneficiaries
All rights of any Other Beneficiary under the Indenture to consent to
or direct certain remedies, waivers, actions and amendments thereunder
shall cease for so long as such Other Beneficiary is in default of any of
its obligations or agreements under the Swap Agreement or the Credit
Enhancement Facility by reason of which such Person is an Other
Beneficiary.
IX-28
<PAGE>
Appendix X
WEIGHTED AVERAGE LIFE OF THE
TAXABLE LIBOR RATE SERIES 1997-1 NOTES
The following information is given solely to illustrate the effect of
prepayments on the Financed Eligible Loans on the weighted average life of
the Taxable LIBOR Rate Series 1997-1 Notes under the assumptions stated
below and is not a prediction of the prepayment rate that might actually be
experienced by the Financed Eligible Loans.
Weighted average life refers to the average amount of time from the
date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of the
Taxable LIBOR Rate Series 1997-1 Notes will be primarily a function of the
rate at which payments are made on the Financed Eligible Loans. Payments
on the Financed Eligible Loans may be in the form of scheduled amortization
of principal or prepayments (including, for this purpose, reimbursements on
defaults).
The Constant Prepayment Rate prepayment model ("CPR") represents an
assumed constant rate of prepayment of Financed Eligible Loans outstanding
as of the beginning of each month expressed as a per annum percentage.
There can be no assurance that Financed Eligible Loans will experience
prepayments at a constant prepayment rate or otherwise in the manner
assumed by the prepayment model.
The weighted average lives in the following table were determined
assuming that (i) scheduled payments of principal on the Financed Eligible
Loans are received in a timely manner and prepayments are made at the
percentages of the prepayment model set forth in the table; (ii) the
initial Student Loan Portfolio principal balance is $________ and the
Financed Eligible Loans have the characteristics described under
"Characteristics of the Initial Financed Eligible Loans"; (iii) payments
are made on the Taxable LIBOR Rate Series 1997-1 Notes on the 1st day of
each month commencing in _________ 1997; and (iv) the Taxable LIBOR Rate
Series 1997-1 Notes are issued on July __, 1997. No representation is made
that these assumptions will be correct, including the assumption that the
Financed Eligible Loans will not experience delinquencies or unanticipated
losses.
In making an investment decision with respect to the Taxable LIBOR
Rate Series 1997-1 Notes, investors should consider a variety of possible
prepayment scenarios, including the limited scenarios described in the
table below.
Weighted Average Life of the Taxable LIBOR Rate Series 1997-1 Notes
at the Respective CPRs Set Forth Below:
<TABLE>
<CAPTION>
Weighted Average Life (years)
--------------------------------------
0% CPR 3% CPR 5% CPR 7% CPR 10%CPR
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Class 1997-1I Notes (Senior).......
Class 1997-1J Notes (Senior).......
Class 1997-1L Notes (Subordinate)..
</TABLE>
<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 Series 1997-1 Notes offered
hereby nor an offer of the Series 1997-1 Notes 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 TO PROSPECTUS
<TABLE>
<CAPTION>
Page
------
<S> <C> <C>
AVAILABLE INFORMATION. 6
REPORTS TO NOTEHOLDERS 6
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 6
PROSPECTUS SUMMARY.... 7
RISK FACTORS.......... 28
DESCRIPTION OF SERIES 1997-1 NOTES 40
APPLICATION OF SERIES 1997-1 NOTE PROCEEDS 50
SOURCE OF PAYMENT AND SECURITY FOR THE NOTES 52
THE ORIGINAL ISSUER AND THE CORPORATION 55
THE SERVICER.......... 56
THE SLFC SERVICING AGREEMENT 59
DESCRIPTION OF FINANCED ELIGIBLE LOAN PROGRAM 64
CHARACTERISTICS OF THE INITIAL FINANCED ELIGIBLE LOANS 67
DESCRIPTION OF FEDERAL FAMILY EDUCATION LOAN PROGRAM 72
DESCRIPTION OF THE GUARANTEE AGENCIES 86
TAX MATTERS........... 95
ERISA CONSIDERATIONS.. 99
CERTAIN RELATIONSHIPS AMONG FINANCING PARTICIPANTS 100
PLAN OF DISTRIBUTION.. 100
LEGAL MATTERS......... 101
FINANCIAL INFORMATION. 101
RATINGS............... 101
GLOSSARY OF CERTAIN DEFINED TERMS 102
APPENDIX I TERMS OF THE TAX EXEMPT AUCTION RATE
SERIES 1997-1 SENIOR NOTES I-1
APPENDIX II TERMS OF THE TAX EXEMPT FIXED RATE
SERIES 1997-1 SENIOR NOTES II-1
APPENDIX III TERMS OF THE TAXABLE AUCTION RATE
SERIES 1997-1 SENIOR NOTES III-1
APPENDIX IV TERMS OF THE TAXABLE LIBOR RATE
SERIES 1997-1 SENIOR NOTES IV-1
APPENDIX V TERMS OF THE TAX EXEMPT FIXED RATE
SERIES 1997-1 SUBORDINATE NOTES V-1
APPENDIX VI TERMS OF THE TAXABLE LIBOR RATE
SERIES 1997-1 SUBORDINATE NOTES VI-1
APPENDIX VII AUCTION OF THE AUCTION RATE
SERIES 1997-1 SENIOR NOTES VII-1
APPENDIX VIII SETTLEMENT PROCEDURES FOR AUCTION RATE
SERIES 1997-1 SENIOR NOTES VIII-1
APPENDIX IX SUMMARY OF THE INDENTURE.............. IX-1
APPENDIX X WEIGHTED AVERAGE LIFE OF THE TAXABLE
LIBOR RATE SERIES 1997-1 NOTES X-1
</TABLE>
Until _______________, 1997, all dealers effecting transactions
in the Series 1997-1 Notes, whether or not participating in this
distribution, may be required to deliver a Prospectus. This delivery
requirement 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.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS--
EDUCATION LOANS INCORPORATED,
A South Dakota Nonprofit Corporation
Item 14. Other Expenses of Issuance and Distribution.
The following table shows the estimated expenses to be incurred in
connection with the issuance of the securities being registered by the
registrant:
SEC registration fee....................... $ 303
Blue Sky fees and expenses................. *
Trustees' fees and expenses................ *
Printing and engraving expenses............ *
Legal fees and expenses.................... *
Accounting fees and expenses............... *
Rating agency fees......................... *
---------
Total................................. $ *
=========
______________
* To be filed by amendment.
All of the above expenses except the SEC registration fee are estimated.
Item 15. Indemnification of Directors and Officers.
Section 47-22-65.1 of the South Dakota nonprofit statute provides, in
summary, that the directors and officers of the registrant may, under
certain circumstances, be indemnified by the registrant against all
expenses incurred by or imposed upon them as a result of actions, suits or
proceedings brought against them as such directors and officers, or as
directors or officers of any other organization at the request of the
registrant, if they act in good faith and in a manner they reasonably
believe to be in or not opposed to the best interests of the registrant,
and with respect to any criminal action or proceeding, have no reasonable
cause to believe their conduct was unlawful, except that no indemnification
shall be made against expenses in respect of any claim, issue or matters to
which they shall have been adjudged to be liable to the registrant unless
and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, they are fairly
and reasonably entitled to indemnity for such expenses which such court
shall deem proper. Section 47-22-65.2 of the South Dakota nonprofit statute
also provides that directors and officers of the registrant are entitled to
such indemnification by the registrant to the extent that such persons are
successful on the merits or otherwise in defending any such action, suit or
proceeding.
Article Ten of the Bylaws of the registrant requires the registrant
to, under certain circumstances, indemnify the directors and officers of
the registrant for liabilities incurred by or on behalf of a director or
officer by reason of his or her status as such or as to acts performed in
the course of such person's duties to the registrant in connection with the
investigation, defense, settlement, or appeal of any threatened, pending or
completed action, claim, litigation, suit or proceeding.
<PAGE>
Pursuant to the form of Underwriting Agreement, a copy of which is
included as Exhibit 1.1 hereto, the Underwriters agree to indemnify, under
certain conditions, the registrant, its directors, and certain of its
officers and persons who control the registrant within the meaning of the
Securities Act of 1933 against certain liabilities.
Item 16. Exhibits.
1.1 Proposed form of Underwriting Agreement*
3.1a Articles of Incorporation of Education Loans Incorporated, a
South Dakota nonprofit corporation+
3.2a Bylaws of Education Loans Incorporated, a South Dakota
nonprofit corporation+
4.1 Form of Indenture*
4.2 Form of First Supplemental Indenture*
4.3 Form of Auction Agent Agreement*
4.4 Form of Broker-Dealer Agreement*
5.1 Opinion of Dorsey & Whitney LLP as to legality*
8.1 Opinion of Dorsey & Whitney LLP as to tax matters*
10.1 Form of Servicing Agreement*
10.2 Form of Student Loan Purchase Agreement*
10.3 Guarantee Agreement with Education Assistance
Corporation dated _______.*
10.4 Guarantee Agreement with Pennsylvania Higher
Education Assistance Agency dated ________.*
10.5 [Other Guarantee Agreements]*
23.1 Consents of Dorsey & Whitney LLP (included in Exhibits 5.1,
8.1, 99.1 and 99.2)
24.1a Powers of Attorney+
25.1 Statement of Eligibility of Trustee (Form T-1)
99.1 Opinion of Dorsey & Whitney LLP as to "true sale"
matters*
99.2 Opinion of Dorsey & Whitney LLP as to nonconsolidation *
_______________
* To be filed by amendment.
+ Previously filed.
Item 17. Undertakings.
The undersigned registrant hereby undertakes as follows:
(a) For purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities and Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) 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
<PAGE>
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(d) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
<PAGE>
EDUCATION LOANS INCORPORATED,
A South Dakota Nonprofit Corporation
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 amendment to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Aberdeen, State of South Dakota on July 1, 1997.
EDUCATION LOANS INCORPORATED
By: /s/ A. Norgrin Sanderson
---------------------------
A. Norgrin Sanderson
President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
amendment has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ A. Norgrin Sanderson
- ------------------------- President, Treasurer July 1, 1997
A. Norgrin Sanderson and Director
(principal executive officer,
principal financial and accounting officer)
____________*____________ Chairman of the Board July 1, 1997
V. G. Stoia
____________*____________ Vice Chairman of the Board July 1, 1997
Manley B. Feinstein
____________*____________ Director July 1, 1997
Harvey C. Jewett
*By /s/ A. Norgrin Sanderson
-------------------------
A. Norgrin Sanderson,
as attorney-in-fact
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS--
EDUCATION LOANS INCORPORATED,
A Delaware Corporation
Item 14. Other Expenses of Issuance and Distribution.
The following table shows the estimated expenses to be incurred in
connection with the issuance of the securities being registered by the
registrant:
<TABLE>
<S> <C>
SEC registration fee....................... $ 303
Blue Sky fees and expenses................. *
Trustees' fees and expenses................ *
Printing and engraving expenses............ *
Legal fees and expenses.................... *
Accounting fees and expenses............... *
Rating agency fees......................... *
-------
Total................................. $ *
=======
</TABLE>
______________
* To be filed by amendment.
All of the above expenses except the SEC registration fee are estimated.
All of the above expenses are being paid by the registrant's co-registrant,
Education Loans Incorporated, a South Dakota nonprofit corporation.
Item 15. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware
(the "DGCL") provides, in summary, that the directors and officers of the
registrant may, under certain circumstances, be indemnified by the
registrant against all expenses incurred by or imposed upon them as a
result of actions, suits or proceedings brought against them as such
directors and officers, or as directors or officers of any other
organization at the request of the registrant, if they act in good faith
and in a manner they reasonably believe to be in or not opposed to the best
interests of the registrant, and with respect to any criminal action or
proceeding, have no reasonable cause to believe their conduct was unlawful,
except that no indemnification shall be made against expenses in respect of
any claim, issue or matters to which they shall have been adjudged to be
liable to the registrant unless and only to the extent that the court in
which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, they are fairly and reasonably entitled to
indemnity for such expenses which such court shall deem proper. Section
145 of the DGCL also provides that directors and officers of the registrant
are entitled to such indemnification by the registrant to the extent that
such persons are successful on the merits or otherwise in defending any
such action, suit or proceeding. The registrant's Bylaws authorize the
registrant to indemnify its officers and directors, under certain
circumstances, as provided by Section 145 of the DGCL.
Pursuant to the form of Underwriting Agreement, a copy of which is
included as Exhibit 1.1 hereto, the Underwriters agree to indemnify, under
certain conditions, the registrant, its directors, and certain of its
officers and persons who control the registrant within the meaning of the
Securities Act of 1933 against certain liabilities.
<PAGE>
Item 16. Exhibits.
1.1 Proposed form of Underwriting Agreement*
3.1b Certificate of Incorporation of Education Loans Incorporated,
a Delaware corporation+
3.2b Bylaws of Education Loans* Incorporated, a Delaware
corporation+
4.1 Form of Indenture*
4.2 Form of First Supplemental Indenture*
4.3 Form of Auction Agent Agreement*
4.4 Form of Broker-Dealer Agreement*
5.1 Opinion of Dorsey & Whitney LLP to legality*
8.1 Opinion of Dorsey & Whitney LLP as to tax matters*
10.1 Form of Servicing Agreement*
10.2 Form of Student Loan Purchase Agreement*
10.3 Guarantee Agreement with Education Assistance Corporation
dated ____________.*
10.4 Guarantee Agreement with Pennsylvania Higher Education
Assistance Agency dated ____________.*
10.5 [Other Guarantee Agreements]*
23.1 Consents of Dorsey & Whitney LLP*
24.1b Powers of Attorney+
25.1 Statement of Eligibility of Trustee (Form T-1)*
99.1 Opinion of Dorsey & Whitney LLP as to "true sale" matters*
99.2 Opinion of Dorsey & Whitney LLP as to nonconsolidation*
----------------
* Incorporated by reference to a similarly numbered exhibit filed or
to be filed by the registrant's co-registrant, Education Loans
Incorporated, a South Dakota nonprofit corporation, on this Form S-3
registration statement.
+ Previously filed.
Item 17. Undertakings.
The undersigned registrant hereby undertakes as follows:
(a) For purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant annual report pursuant to
section 13(a) or section 15(d) of the Securities and Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) 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 Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
<PAGE>
(d) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
<PAGE>
EDUCATION LOANS INCORPORATED,
A Delaware Corporation
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 amendment to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Aberdeen, State of South Dakota on July 1, 1997.
EDUCATION LOANS INCORPORATED
By: /s/ A. Norgrin Sanderson
--------------------------
A. Norgrin Sanderson
President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this amendment
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ A. Norgrin Sanderson President, Treasurer July 1, 1997
- ------------------------ and Chairman of the Board
A. Norgrin Sanderson (principal executive officer,
principal financial and accounting officer)
____________*____________ Director July 1, 1997
V. G. Stoia
____________*____________ Director July 1, 1997
Manley B. Feinstein
____________*____________ Director July 1, 1997
Harvey C. Jewett
*By /s/ A. Norgrin Sanderson
- -----------------------------
A. Norgrin Sanderson,
as attorney-in-fact
</TABLE>
<PAGE>
EXHIBIT INDEX
Listing Exhibits filed by
EDUCATION LOANS INCORPORATED,
A South Dakota Nonprofit Corporation
and
EDUCATION LOANS INCORPORATED,
A Delaware Corporation
as Co-Registrants
Number Exhibit
- ------ -------
1.1 Proposed form of Underwriting Agreement*
3.1a Articles of Incorporation of Education Loans Incorporated, a South
Dakota nonprofit corporation+
3.1b Certificate of Incorporation of Education Loans Incorporated, a
Delaware corporation+
3.2a Bylaws of Education Loans Incorporated, a South Dakota nonprofit
corporation+
3.2b Bylaws of Education Loans Incorporated, a Delaware corporation+
4.1 Form of Indenture*
4.2 Form of First Supplemental Indenture*
4.3 Form of Auction Agent Agreement*
4.4 Form of Broker-Dealer Agreement*
5.1 Opinion of Dorsey & Whitney LLP as to legality*
8.1 Opinion of Dorsey & Whitney LLP as to tax matters*
10.1 Form of Servicing Agreement*
10.2 Form of Student Loan Purchase Agreement*
10.3 Guarantee Agreement with Education Assistance Corporation dated
____________.*
10.4 Guarantee Agreement with Pennsylvania Higher Education Assistance
Agency dated ____________.*
10.5 [Other Guarantee Agreements]*
23.1 Consents of Dorsey & Whitney LLP (included in Exhibits 5.1, 8.1, 99.1
and 99.2)
24.1a Powers of Attorney+
24.1b Powers of Attorney+
25.1 Statement of Eligibility of Trustee (Form T-1)
99.1 Opinion of Dorsey & Whitney LLP as to "true sale" matters*
99.2 Opinion of Dorsey & Whitney LLP as to nonconsolidation*
- ---------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
Exhibit 25.1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM T-1
Statement of Eligibility and Qualification Under the
Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
FIRST BANK NATIONAL ASSOCIATION
(Exact name of Trustee as specified in its charter)
United States 41-0256895
(State of Incorporation) (I.R.S. Employer
Identification No.)
First Trust Center
180 East Fifth Street
St. Paul, Minnesota 55101
(Address of Principal Executive Offices) (Zip Code)
Education Loans Incorporated
(Exact name of registrant as specified in its charter)
South Dakota 45-0350016
(State of Incorporation) (I.R.S. Employer
Identification No.)
Education Loans Incorporated
(Exact name of registrant as specified in its charter)
Delaware Applied for
(State of Incorporation) (I.R.S. Employer
Identification No.)
105 First Avenue Southwest
Aberdeen, South Dakota 57401
(Address of Principal Executive Offices) (Zip Code)
Student Loan Asset-Backed Notes, Series 1997-1
(Title of the Indenture Securities)
<PAGE>
GENERAL
1. General Information Furnish the following information as to the Trustee.
(a) Name and address of each examining or supervising authority to which
it is subject.
Comptroller of the Currency
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS If the obligor or any
underwriter for the obligor is an affiliate of the Trustee, describe each
such affiliation.
There are no such affiliations except that one of the underwriters,
FBS Investment Services Inc., is a direct, wholly-owned subsidiary of
the Trustee.
See Note following Item 16.
Items 3-15 are not applicable because to the best of the Trustee's
knowledge the obligor is not in default under any Indenture for which the
Trustee acts as Trustee.
16. LIST OF EXHIBITS List below all exhibits filed as a part of this statement
of eligibility and qualification.
1. Copy of Articles of Association.*
2. Copy of Certificate of Authority to Commence Business.*
3. Authorization of the Trustee to exercise corporate trust powers
(included in Exhibits 1 and 2; no separate instrument).*
4. Copy of existing By-Laws.*
5. Copy of each Indenture referred to in Item 4. N/A.
6. The consents of the Trustee required by Section 321(b) of the act.
7. Copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or examining
authority is incorporated by reference to Registration Number 333-
22575.
* Incorporated by reference to Registration Number 33-90786.
<PAGE>
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligors within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligors or affiliates, are based
upon information furnished to the Trustee by the obligors, While the Trustee
has no reason to doubt the accuracy of any such information, it cannot accept
any responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, First Bank National Association, an Association organized and existing
under the laws of the United States, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, and its seal to be hereunto affixed and attested,
all in the City of Saint Paul and State of Minnesota on the 16th day of May,
1997.
FIRST BANK NATIONAL ASSOCIATION
[SEAL]
/s/ Kathe Barrett
-----------------
Kathe M. Barrett
Trust Officer
/s/ Richard H. Prokosch
- -----------------------
Richard H. Prokosch
Assistant Secretary
<PAGE>
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939, the
undersigned, FIRST BANK NATIONAL ASSOCIATION hereby consents that reports of
examination of the undersigned by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon its request therefor.
Dated: May 16, 1997
FIRST BANK NATIONAL ASSOCIATION
/s/ Kathe Barrett
-----------------
Kathe Barrett
Trust Officer
