<PAGE>
As filed with the Securities and Exchange Commission on May 8, 1997
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
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 Applied for
(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.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
================================================================================================
Proposed Proposed
Title of Each Amount Maximum Maximum Amount of
Class of Securities to be Offering Price Aggregate Registration
to be Registered Registered Per Share* Offering Price Fee
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Student Loan Asset-Backed Notes,
Series 1997-1 $1,000,000 100% $1,000,000 $303
================================================================================================
</TABLE>
*Estimated solely for purposes of calculating the registration fee pursuant to
Rule 457.
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 May 8, 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 21
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 solely of
the Corporation, and 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
generally will not have recourse to the Corporation and the Corporation will
have no significant assets available to make payment on the Series 1997-1 Notes
other than those pledged as collateral for the Notes under the Indenture.
<TABLE>
<CAPTION>
======================================================================================================
PROCEEDS TO
PRICE UNDERWRITING ORIGINAL
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
$__________.
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
<PAGE>
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 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 Exemption."
The Series 1997-1 Notes are offered by Smith Barney Inc., FBS Investment
Services, Inc., Dougherty Dawkins LLC and Miller & Schroeder Financial, Inc.
(the "Underwriters") subject to prior sale, when, as and if issued to the
Underwriters, subject to approval of validity by Dorsey & Whitney LLP,
Minneapolis, Minnesota, Special Counsel to the Original Issuer and the
Corporation and Bond Counsel. Certain legal matters are subject to approval by
counsel for 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 on or about __________, 1997.
SMITH BARNEY INC.
FBS INVESTMENT SERVICES, INC.
DOUGHERTY DAWKINS LLC
MILLER & SCHROEDER FINANCIAL, INC.
The date of this Prospectus is __________, 1997.
<PAGE>
(continued from previous 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 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
Series 1997-1 Subordinate Notes and the Taxable 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 (the "Indenture") from the Original Issuer
to First Bank National Association, as trustee (the "Trustee"). The Series
1997-1 Notes will be payable from and secured by: (i) student loans meeting
certain requirements described herein (the "Financed Eligible Loans") and moneys
due or paid thereunder after the applicable date of acquisition; (ii) funds on
deposit in certain trust funds and accounts held under the Indenture; and (iii)
certain related rights and property held in trust for the benefit of the Holders
(as defined herein) (collectively, the "Trust Estate"). The initial Financed
Eligible Loans have been acquired by the Original Issuer pursuant to its
programs of purchasing student loans from lenders in South Dakota and elsewhere.
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 Eligible Loans and to perform certain of
the Corporation's obligations under the Indenture (in such capacities, 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 through ___________, 1997 for the Series 1997-1A Notes,
__________, 1997 for the Series 1997-1B Notes, ______________,
<PAGE>
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."
By purchasing Auction Rate Series 1997-1 Senior Notes, whether in an
Auction 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 conducted pursuant to the procedures described herein (an
"Auction"), or to or through a specified broker-dealer (as described herein);
provided, that in the case of all transfers other than those 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 agent
conducting the Auction (the "Auction Agent") of such transfer. 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 from time to time 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
-2-
<PAGE>
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."
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."
The Indenture authorizes the issuance of other Notes ("Additional Notes")
in the future, which Additional Notes may be issued on a parity basis 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."
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.
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.
-3-
<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., the nominee of The
Depository Trust Company ("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 eligible participant (a "Participant") or eligible indirect
participant (an "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.
-4-
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of 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 the
Prospectus is delivered, on the written or oral request of any such person, a
copy of any or all of the documents incorporated herein by reference, except the
exhibits to such documents (unless such exhibits are specifically incorporated
by reference in such documents). Requests for such copies should be directed to
Education Loans Incorporated, 105 First Avenue Southwest, Aberdeen, South Dakota
57401, Attention: President.
-5-
<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."
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. 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), the Original
Issuer will issue the Series 1997-1 Notes and then
immediately transfer its interest in the Trust Estate 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. Because the functions and
obligations of issuer of the Series 1997-1 Notes will
immediately be assumed by the Corporation, discussions of
those functions and obligations in this Prospectus will
refer to the Corporation, notwithstanding that the Series
1997-1 Notes will actually be issued by the Original
Issuer. 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
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
-6-
<PAGE>
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.
PAYMENT OF INTEREST
ON SERIES 1997-1
NOTES
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.
Payments of interest on the Tax Exempt Auction Rate Series
1997-1 Senior Notes will be made to the Holders thereof as
of the fifteenth day of the month preceding the Interest
Payment Date. 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).
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.
Tax Exempt The Tax Exempt Fixed Rate Series 1997-1 Senior Notes
Fixed Rate maturing on the dates set forth below will bear interest
Series 1997-1 at the respective rates per annum set forth below, payable
Senior Notes 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:
-7-
<PAGE>
Maturity Date Interest Rate
------------- -------------
June 1, 2010 %
June 1, 2020
Taxable Auction The Series 1997-1G and 1997-1H Notes will bear interest at
Rate Series 1997-1 initial rates of _____% and _____% per annum,
Senior Notes respectively, through the respective Initial Auction
Dates, which will be __________, 1997 for the Series 1997-
1G Notes and _________, 1997 for the Series 1997-1H Notes.
Payments of interest on the Taxable Auction Rate Series
1997-1 Senior Notes will be made to the Holders thereof as
of the Business Day next preceding each Auction Date.
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
Taxable Auction Rate, as defined herein). 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.
Taxable LIBOR Interest on each series of the Taxable LIBOR Rate Series
Rate Series 1997-1 1997-1 Senior Notes will be payable monthly on the first
Senior Notes 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 from
time to time 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. See Appendix IV
- "Terms of the Taxable LIBOR Rate Series 1997-1 Senior
Notes."
Tax Exempt Fixed The Series 1997-1K Notes will bear interest at the rate of
Rate Series 1997-1 __% per annum, payable on each June 1 and December 1,
Subordinate Notes commencing December 1, 1997, to the Holders thereof as of
the fifteenth day of the month preceding the Interest
Payment Date.
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Taxable LIBOR Interest on the Taxable LIBOR Rate Series 1997-1
Rate Series Subordinate Notes will be payable monthly on the first day
1997-1 of each month, commencing __________, 1997. The Taxable
Subordinate LIBOR Rate Series 1997-1 Subordinate Note Interest Rate
Notes Notes will be determined by the Trustee from time to time
as described herein to equal the One-Month LIBOR plus __%
per annum. 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:
Date Principal Amount
------------ ----------------
June 1, 2010 $___________
June 1, 2020 $___________
The Stated Maturity Date of all other series of the 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 Series 1997-1
Subordinate Notes may be redeemed at any time on and after
[December 1, 2007], in whole or in part, at the applicable
Redemption Price plus accrued interest to the Redemption
Date. See "Description of Series 1997-1 Notes--Optional
Redemption".
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Special
Redemption and
Prepayment
Prepayment of The Taxable LIBOR Rate Series 1997-1 Notes shall receive
Taxable LIBOR prepayments of principal on any Interest Payment Date from
Rate Series moneys credited to the Retirement Account as hereinafter
1997-1 Notes described. The Corporation is required to direct the
From Principal Trustee to transfer to the Retirement Account from the
Repayments 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 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. 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 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," 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
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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 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 - Variability of Revenues."
Redemption of Tax Tax Exempt Auction Rate Series 1997-1 Senior Notes of any
Exempt Auction series, Tax Exempt Fixed Rate Series 1997-1 Senior Notes
Rate Series 1997-1 and Tax Exempt Fixed Rate Series 1997-1 Subordinate Notes,
Senior Notes, Tax may, at the Corporation's option, be redeemed in whole or
Exempt Fixed Rate in part on any Interest Rate Adjustment Date for such
Series 1997-1 series or on any regularly scheduled Interest Payment Date
Senior Notes and for such series occurring on or after ________ 1, 199_,
Tax Exempt Fixed from amounts transferred to the Series 1997-1 Tax Exempt
Rate Series 1997-1 Retirement Sub-Account from the Series 1997-1 Tax Exempt
Subordinate Notes Surplus Sub-Account and the Series 1997-1 Tax Exempt
from Excess Reserve Account. In general, such transfers are intended
Revenues 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 "Description of Series 1997-1 Notes --
Special Redemption -- From Moneys in the Surplus Account"
and Appendix IX -"Summary of Certain Provisions of the
Indenture -- Funds and Accounts -- Surplus Fund" and
" -- Reserve Fund".
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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 on any Interest Rate Adjustment Date for
Notes from such series or on any regularly scheduled Interest Payment
Excess Revenues 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,
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. See "Description of Series 1997-1 Notes -- Special
Redemption -- From Moneys in the Surplus Account" and
Appendix IX -"Summary of Certain provisions 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 on any Interest Rate Adjustment Date for
Notes and Fixed such series or on any regularly scheduled Interest Payment
Rate Series 1997-1 Date for such series at a Redemption Price of 100% of
Notes from principal amount plus accrued interest to the Redemption
Unused Proceeds 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
"Description of Series 1997-1 Notes -- Special Redemption
-- From Unused Proceeds" and Appendix IX - "Summary of
Certain Provisions 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, at a
Redemption Price of 100% of principal amount plus accrued
interest to the Redemption Date, in each case 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
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________________, 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
Certain Provisions 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 redeemed,
Series 1997-1 in whole but not in part, at a Redemption Price of 100% of principal
Notes upon amount plus accrued interest to the Redemption Date, on any date when
Reduction of the remaining aggregate outstanding principal balance of Student Loans
Portfolio Balance 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 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 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 and any multiple thereof.
INDENTURE The Series 1997-1 Notes are being issued pursuant to an Indenture of
Trust and a First Supplemental Indenture of Trust (collectively, as
amended and supplemented from time to time, the "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 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
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Indenture Obligations may be secured on a basis which is senior to or on
a parity with the Series 1997-1 Subordinate Notes.
TRUSTEE First Bank National Association, the headquarters of which is located in
Minneapolis, Minnesota. 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. 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
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Series 1997-1 Notes. See "Description of Series 1997-1 Notes - Special
Redemption and Prepayment - From Unused Proceeds" herein.
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 agreements between the respective
Guarantee Agencies and the Trustee (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 loans originated
ELIGIBLE LOANS 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 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 such 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
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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 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 attending a post-secondary school located within or without the State,
or (b) a resident of a state other than the State attending a post-secondary
school located within the State.
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.
THE FEDERAL The Financed Student Loans will initially consist solely of, and are
FAMILY expected at all times to consist primarily of, student loans originated
EDUCATION LOAN pursuant to the Federal Family Education Loan Program under the Higher
PROGRAM 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
guarantor (each, a "Guarantee Agency"). The Guarantee Agencies each
have reinsurance contracts with the Secretary of the United States
Department of Education (the "Department"), pursuant to which the
Department 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 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 -
Failure to Comply with Loan Origination and Servicing Procedures for
Eligible Loans" and "-Unsecured Nature of Financed Eligible Loans;
Financial Status of Guarantee Agencies" herein.
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STUDENT LOAN The pool of Financed Student Loans included in the Trust
PORTFOLIO Estate from time to time is referred to herein as the
CHARACTERISTICS "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
"Estimated Characteristics of the 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 - Changing Assets of the Trust Estate"
and "-Variability of Revenues," "Description of the
Federal Family Education Loan Program," and "Certain
Characteristics of the Financed Eligible Loans" herein.
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 SLFC shall act as servicer (in such capacity, the
"Servicer") and custodian of the Financed Student Loans.
See "The Servicer", "The Servicing Agreement" and "Certain
Relationships Among Financing Participants".
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 LOANS Lender will be obligated to repurchase any Financed
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 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 Reserve Fund, and
the Note Fund consisting of an Interest Account, a
Principal Account and the Retirement Account. In addition,
there will be certain other funds established under the
Indenture as described herein under "Security and Source
of Payment for the Notes-Description of Flow of Revenues
in the Funds."
ACQUISITION FUND 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 "Estimated
Characteristics of the Financed Eligible Loans" herein.
The remaining proceeds deposited in the Series 1997-1
Accounts of the Acquisition Fund on the Date of
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Issuance of the Series 1997-1 Notes 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.
RESERVE FUND The sum of $________ will be deposited into the Reserve
Fund on the Date of Issuance of the Series 1997-1 Notes.
At any time thereafter, the amount required to be on
deposit in the Reserve Fund (the "Reserve Fund
Requirement") shall be an amount equal to the greater of
__% of the aggregate principal amount of all Notes then
Outstanding or $_______. Any amounts in the Reserve Fund
will be available to pay debt service on the Series 1997-1
Notes, as well as any Additional Notes and other Indenture
Obligations, to the extent that other revenues under the
Indenture are insufficient for such purpose.
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. See "Summary of Certain Provisions of the
Indenture" herein.
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.
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.
CERTAIN FEDERAL The Series 1997-1 Notes will be treated as debt of the
INCOME TAX Original Issuer (and upon the assumption by the
CONSEQUENCES Corporation of the Original 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
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Taxable Series 1997-1 Notes as paid or accrued, in
accordance with their respective accounting methods and
the provisions of the Code. See "Certain Federal Income
Tax Consequences".
EXCLUSION OF In the opinion of Bond Counsel, under existing laws,
INTEREST ON TAX regulations, rulings and decisions, interest on the
EXEMPT NOTES Tax Exempt Series 1997-1 Notes is not includable
FROM GROSS in the gross income of the owners thereof for federal
INCOME 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 and the
Corporation's 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 Exemption".
ERISA The Series 1997-1 Notes are eligible for
CONSIDERATIONS purchase by or on 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
Notes that the Series 1997-1 Senior Notes each be rated
"AAA" by Fitch Investors Service, L.P. ("Fitch") and "Aaa"
by Moody's Investors Services, Inc. (Moody's"), and that
the Series 1997-1 Subordinate Notes each be rated no less
than "A" by Fitch 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. A 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. See "Ratings".
REGISTRATION OF The Series 1997-1 Notes of each series initially
NOTES will be represented by one or more certificates registered
in the name of Cede & Co. ("Cede"), as a nominee of The
Depository Trust Corporation ("DTC"). No person acquiring
an interest in such Notes will be entitled to a definitive
certificate representing such person's interest, except in
the event that definitive securities are issued under the
limited circumstances described herein. See "Book Entry
Registration" herein.
</TABLE>
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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.
NATURE OF THE SERIES 1997-1 NOTES; LIMITED ASSETS
The Corporation is a special purpose corporation and the Series 1997-1
Notes 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 other than
its interest in the Financed Student Loans and the other property granted to the
Trustee for the benefit of the Noteholders. 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 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 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 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. 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
other Funds and Accounts for payment of principal of and interest on the Series
1997-1 Notes.
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 Notes that
may be issued 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.
FAILURE TO COMPLY WITH LOAN ORIGINATION AND SERVICING PROCEDURES FOR FINANCED
LOANS
The Higher Education Act of 1965, as amended, and the implementing
regulations thereunder (the "Higher Education Act"), require 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.
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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"
herein. 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-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 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'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 Guarantee
Payments under their Guarantee Agreements with the Trustee with respect to such
Financed Student Loans. Failure of the Guarantee Agencies to receive
reinsurance payments from the Department could adversely affect the Guarantee
Agencies' ability or legal obligation to make payments under the Guarantee
Agreements ("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" herein.
NO RECOURSE TO ORIGINAL ISSUER
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 Eligible 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.
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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.
CHANGES IN LEGISLATION
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 to Guarantee
Agencies, reduced the premiums and default collections that Guarantee Agencies
are entitled to receive and/or retain, and given the Department 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 in
certain circumstances.
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.
COMPETING LOAN PROGRAM
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 has implemented a direct consolidation loan program, which program
may further
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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" herein.
DIFFERENT PAYMENT TIMING EXPECTATIONS BETWEEN SERIES OF TAXABLE NOTES
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
prepayments with respect to Financed Student Loans (whether as a result of
voluntary prepayments or liquidations due to default or breach).
ISSUANCE OF ADDITIONAL NOTES
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. A
registration statement for such Additional Notes will be filed with the
Commission if and when such Additional Notes are offered to the public. This
Prospectus relates only to the Series 1997-1 Notes. See "Additional Notes"
herein.
BASIS RISK
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. In addition, the Financed Student Loans bear interest at the rates (the
"Loan Rates") described herein under "Description of the Federal Family
Education Loan Program." To the extent that the Loan Rates decrease or do not
increase as fast
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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 assurances given 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.
CHANGING 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 "Estimated Characteristics of the 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 Certain
Provisions 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.
RELIANCE UPON LENDERS
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
Eligible Loans that
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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
the Corporation's behalf, have met or will have met all 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. See "Risk Factors- Certain Legal Aspects,"
and "- Failure to Comply with Loan Origination and Servicing Procedures for
Eligible Loans."
REPURCHASE OF FINANCED ELIGIBLE LOANS
Under the circumstances set forth in the Student Loan Purchase Agreements,
a Lender may be obligated to repurchase Financed Eligible Loans from the
Trustee. If a Lender were to become insolvent or otherwise be unable to
repurchase such Financed Eligible Loans, it is unlikely that a repurchase of
such Financed Eligible Loan from the Trustee would occur. The failure of such a
Lender to repurchase a Financed Eligible 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. See "Risk Factors - Reliance Upon Lenders".
POSSIBLE LOSS OF TAX EXEMPTION
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
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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.
CERTAIN INSOLVENCY CONCERNS
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 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, pursuant to the Indenture, transfer all of its
right, title and interest in and to the Financed Student Loans to the Trustee,
as eligible lender trustee and custodian, who will hold such Financed Student
Loans, or cause such Financed Student Loans to be held, on behalf and for the
benefit of the Original Issuer and its assignees from time to time. The
Original Issuer will thereafter transfer to SLFC the beneficial interest in the
Financed Student Loans resulting from the transfer of such loans to the Trustee,
and SLFC will in turn transfer such beneficial interest to the Corporation.
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The Original Issuer intends that its transfer of the Financed Student Loans
to the Trustee, together with its transfer of the beneficial interest therein to
SLFC, constitute a sale of all of the Original Issuer's rights in such Financed
Student Loans, rather than a pledge to secure indebtedness. Similarly, SLFC
intends that its transfer of the beneficial interest in 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 beneficial interest in 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.
In connection, with its transfer of the Financed Student Loans to the
Trustee, the Original Issuer will deliver custody of the Financed Student Loans
to SLFC, as Servicer on behalf of the Trustee. SLFC will retain custody of the
Financed Student Loans, in such capacity, after the transfers of the beneficial
interest therein from the Original Issuer to SLFC and from SLFC to the
Corporation. Although Dorsey & Whitney LLP will opine that the Original Issuer
has transferred all of its legal rights and title in the Financed Student Loans
to the Trustee, there can be no assurance that a court would not hold that,
because SLFC is an affiliate of the Original Issuer, the Original Issuer did not
effectively convey the Financed Student Loans to the Trustee. Similarly,
although the Trustee will retain legal title to the Financed Student Loans and
SLFC will transfer to the Corporation only the beneficial interest therein,
there can be no assurance that a court would not hold that SLFC acquired both
legal and equitable title to the Financed Student Loans, which it did not
transfer to either the Trustee or the Corporation.
Each Student Loan Purchase Agreement is structured as, and intended to
effectuate, a valid sale of the Financed Student Loans transferred thereunder by
the Lender to the Original Issuer or the Trustee on behalf of the Corporation,
as applicable. 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. See "Risk Factors -- Certain Legal Aspects" herein.
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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 "Summary of Certain Provisions of the Indenture--Events of
Default."
PLAN FOR DOING BUSINESS
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
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
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.
PERFECTION OF 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 possession of
the promissory notes evidencing the Financed Student Loans by the Trustee, and
by the filing of financing statements. Under the Uniform Commercial Code,
possession may be either by the secured party or by an agent on the secured
party's behalf. With respect to the Indenture, possession by the Trustee, as
secured party, is to be accomplished by delivery of such promissory notes to
SLFC, acting as custodial agent for the Trustee. The Corporation is a wholly-
owned subsidiary of SLFC. If, through fraud,
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inadvertence or otherwise, any party other than the Trustee or the Trustee's
agent 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.
CERTAIN LEGAL ASPECTS
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. In the event of insolvency of any such Lender
that is a bank, however, 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 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 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. See "Risk Factors-
Reliance Upon Lender" and "-Perfection of Security Interest in Financed Eligible
Loans" herein.
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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 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.
VARIABILITY OF REVENUES
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.
Principal prepayments with respect to the Notes 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 similar to 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 Eligible Loans, the
rate of prepayment would be expected to increase. Conversely, if interest rates
rise above the interest rates on the Financed Eligible 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. In addition, the rate of the
payments of principal on the Notes will be directly related to the actual
amortization schedule of the Financed Eligible Loans. See "Risk Factors--Changes
in Legislation" herein.
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Receipt of principal and interest on Financed Student Loans may be
accelerated due to various factors, including, among others: (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 Corporation's expected portfolio;
(3) the commencement of principal repayment by borrowers on earlier dates than
are assumed based upon the current analysis of the Corporation's expected
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.
Principal and interest payments on Financed Student Loans, moreover, 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 Corporation's expected 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.
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.
UNSECURED NATURE OF FINANCED ELIGIBLE LOANS; FINANCIAL STATUS OF GUARANTEE
AGENCIES
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
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to the Financed Student Loans). Moreover, to the extent that the Department
pays reimbursement claims submitted by a Guarantee Agency for any fiscal year
exceeding certain specified levels, the Department'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
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 and the Department 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's
obligation to pay guarantee claims directly in this fashion is contingent upon
the Department making the determination referred to above. There can be no
assurance that the Department 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"
herein.
INVESTMENT OF 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.
RATINGS OF THE NOTES
It is a condition to issuance of the 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 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.
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LIMITED LIQUIDITY
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.
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. See "Book Entry
Registration" herein.
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."
Such summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, the provisions of the Indenture.
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 (as
hereinafter 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, DTC Participants and
Beneficial Owners (as hereinafter defined), is based solely on information
furnished by DTC
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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.
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 Securities Exchange
Act of 1934, as amended. 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 Securities
and Exchange Commission.
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
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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 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.
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THE ORIGINAL ISSUER, THE CORPORATION AND THE UNDERWRITERS OF THE SERIES
1997-1 NOTES CANNOT AND DO NOT GIVE ANY ASSURANCES THAT DTC, DTC PARTICIPANTS,
INDIRECT PARTICIPANTS OR OTHERS WILL DISTRIBUTE PAYMENTS OF PRINCIPAL OF,
PREMIUM, IF ANY, AND INTEREST ON THE SERIES 1997-1 NOTES PAID TO DTC OR ITS
NOMINEE, AS THE REGISTERED OWNER, OR ANY REDEMPTION OR OTHER NOTICES, TO THE
BENEFICIAL OWNERS OR THAT THEY WILL DO SO ON A TIMELY BASIS OR WILL SERVE AND
ACT IN A MANNER DESCRIBED IN THIS PROSPECTUS. NEITHER THE ORIGINAL ISSUER, THE
CORPORATION NOR THE UNDERWRITERS ARE RESPONSIBLE OR LIABLE FOR THE FAILURE OF
DTC, DTC PARTICIPANTS OR INDIRECT PARTICIPANTS TO MAKE ANY PAYMENT OR GIVE ANY
NOTICE TO A BENEFICIAL OWNER IN RESPECT OF THE SERIES 1997-1 NOTES OR ANY ERROR
OR DELAY RELATING THERETO.
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
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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.
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 and any
multiple thereof. The Tax Exempt Fixed Rate Series 1997-1 Notes are being
issued in denominations of $5,000 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 the Series 1997-1 Notes
shall be payable on each regularly scheduled Interest Payment Date, 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
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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 "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 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 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,
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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 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 - Variability of Revenues."
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 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 Certain Provisions 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 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, 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. See Appendix IX - "Summary of
Certain provisions of the Indenture -- Funds and Accounts -- Surplus Fund" and
"-- Reserve Fund."
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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 plus
accrued interest 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 Certain Provisions 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, at a
Redemption Price of 100% of principal amount plus accrued interest to the
Redemption Date, in each case 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 Certain Provisions 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 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 applicable
Redemption Price plus accrued interest to the Redemption Date.
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), that principal amount
of Series 1997-1 Subordinate Notes 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, at least 45
days prior to the Redemption Date (unless a shorter notice is satisfactory to
the Trustee), 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.
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.
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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 Certain Provisions of the
Indenture --Redemption 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.
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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."
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.
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Balances in the Reserve Fund and in the Acquisition Fund representing
proceeds of the Series 1997-1 Notes not used to acquire Eligible Loans on the
Date of Issuance are expected to be invested pending use for Financing Eligible
Loans, under one or more investment agreements meeting the requirements of the
Indenture. See "Summary of Certain Provisions of the Indenture -- Investments".
The Costs of Issuance of the Series 1997-1 Notes will be paid by the
Original Issuer from other moneys available therefor.
[Description of Investment Agreements]
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 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
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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
"Summary of Certain Provisions 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.
Additional Notes may be issued on a parity basis with the Series 1997-1 Senior
Notes (such Additional Notes being referred to herein, together with the Series
1997-1 Senior Notes, as "Senior Notes"), on a parity basis with the Series 1997-
1 Subordinate Notes (such Additional Notes being referred to herein, together
with the Series 1997-1 Subordinate Notes, as "Subordinate Notes") or on a
subordinate basis to the Senior Notes and the Subordinate Notes (the "Class C
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 obligations, together with the Senior
Notes, being referred to herein as "Senior Obligations") or parity obligations
with the Subordinate Notes (such 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 "Summary of Certain Provisions of the
Indenture -- Additional Notes" and "-- Covenants -- Credit Enhancement
Facilities and Swap Agreements".
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.
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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 Certain Provisions 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
"Summary of Certain Provisions 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 "Summary of Certain Provisions 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
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
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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 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 "Summary of Certain Provisions 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.
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
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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 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 "Summary of
Certain Provisions 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
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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
Education Loans Incorporated, a newly organized bankruptcy remote, limited
purpose Delaware corporation and wholly-owned subsidiary of SLFC (the
"Corporation") 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.
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 Servicing Agreement"
and "Certain Relationships among Financing Participants."
THE SERVICER
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
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$_________ 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 Servicing Agreement, the
Original Issuer would have no obligation or liability with respect thereto.
THE SERVICING AGREEMENT
IN GENERAL
The Corporation and the Trustee will enter into a Servicing Agreement,
dated as of _________ 1, 1997 (the "Servicing Agreement"), with SLFC. A form of
the 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 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 Servicing Agreement.
Pursuant to the 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 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 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 Servicing
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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 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. SLFC,
however, will not be conducting 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
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, with respect thereto, causing all
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
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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 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 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 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 Servicing Agreement. These include
providing all necessary personnel, facilities, equipment, forms and supplies for
operating the Program in accordance with the
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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 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 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.
PLAN FOR DOING BUSINESS
In providing administrative services on behalf of the Corporation under the
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 and filing any such amendments to
the Plan for Doing Business.
SERVICING FEES AND NO PETITION
The Servicing Agreement provides that SLFC shall be paid for the
performance of its functions under the 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 an itemized written monthly billing statement from
SLFC. If SLFC believes that it is necessary to increase the monthly fee payable
under the 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 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 Servicing Agreement that the Corporation and
the Trustee contemplate paying all servicing fees payable under the Servicing
Agreement solely from funds available for such purpose in the Administration
Fund created under the Indenture, which funds
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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 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.
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 United States Federal or state bankruptcy or similar law
in connection with any obligation relating to this Servicing Agreement.
BENEFIT OF THE NOTEHOLDERS
The 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 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 Servicing Agreement.
TERM AND TERMINATION
The term of the Servicing Agreement continues for so long as any of the
Notes remain Outstanding, unless the Servicing Agreement is terminated in
accordance with its terms. The 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;
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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
Servicing Agreement as a whole or deny in writing that the
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 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, Special Allowance Payments
and interest subsidy payments.
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 Servicing Agreement.
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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, 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 educational 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 student loan revenue bond issues during each of the last five fiscal
years and for the _____ months ended ________, 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
________, 1997 (__ months)
</TABLE>
In addition to the loans included in the table above, the Original Issuer
has acquired Student Loans from the proceeds of its commercial paper note and
asset-backed note issues and other 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
commercial paper and asset-backed note issues and other borrowings for each of
the last five fiscal years and for the ____ months ended ________, 1997.
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<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
________, 1997 (__ months).....
</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 "Estimated Characteristics of the 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 the Acquisition Fund will be used to acquire or originate
approximately $___________ additional aggregate principal amount of Eligible
Loans that are In-State Loans and approximately $___________ additional
aggregate principal amount of Eligible Loans that are out-of-state loans.
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 -- From Unused
Proceeds".
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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 Certain Provisions 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 146 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").
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 Certain Provisions 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 and Special
Allowance Payments, plus any expenses incurred by the
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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.
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ESTIMATED CHARACTERISTICS OF THE
FINANCED ELIGIBLE LOANS*
COMPOSITION OF THE STUDENT LOAN PORTFOLIO AS OF ________, 1997
Aggregate Outstanding Principal Balance...........................$___________
Number of Borrowers.....................................................______
Average Outstanding Principal Balance Per Borrower......................______
Number of Notes.........................................................______
Number of Loans........................................................_______
Average Outstanding Principal Balance Per Loan..........................$_____
Weighted Average Remaining Term (months)(repayment status loans only)......___
Weighted Average Borrower Interest Rate................................______%
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY LOAN TYPE
<TABLE>
<CAPTION>
Outstanding Percent of Account
Number of Principal by Outstanding
Loan Types Notes Balance Balance
---------- ----- ------- -------
<S> <C> <C> <C>
Consolidation $ %
PLUS
SLS
Stafford
Unsubsidized Stafford**
Nonsubsidized Stafford**
----- -------
Total $ 100%
===== ======= ====
</TABLE>
- -------------------
* Financed Eligible Loans expected to be pledged to the Trustee on the Date
of Issuance of the Series 1997-1 Notes.
** Nonsubsidized Stafford loans are ineligible for interest subsidy payments
and Special Allowance Payments; Unsubsidized Stafford loans are eligible for
Special Allowance Payments.
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DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY INTEREST RATE
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Interest Rate Range Notes Balance Balance
------------------- ----- ------- -------
<S> <C> <C> <C>
Less than 7.50% $ %
7.50% to 8.49%
8.50% to 9.49%
9.50% or greater
--- ----- ---
Total $ 100%
===== ====== =====
</TABLE>
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY SCHOOL TYPES
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
School Type Notes Balance Balance
----------- ----- ------- -------
<S> <C> <C> <C>
Under 4 Year $ %
4 and 5 Year
Proprietary
Consolidation
Other/Unknown
----- ------- -----
Total $ 100%
===== ======= =====
</TABLE>
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Distribution of the Financed Eligible Loans by
Borrower Payment Status
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Borrower Payment Status Notes Balance Balance
----------------------- ----- ------- -------
<S> <C> <C> <C>
School $
Grace
Repayment:
First Year Repayment
Second Year Repayment
Third Year Repayment
Fourth Year Repayment
and thereafter.
Deferment
Forbearance
Claims
----- ------- -----
Total $ 100%
===== ======= =====
</TABLE>
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY
GUARANTEE STATUS
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Disbursement Date Notes Balance Balance
----------------- ----- ------- -------
<S> <C> <C> <C>
Guaranteed 100% $ %
Guaranteed 98%
Non-Guaranteed
----- -------
Total $ 100.00%
===== ======= =======
</TABLE>
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DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY GUARANTEE AGENCY
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Guarantee Agencies Notes Balance Balance
------------------ ----- ------- -------
<S> <C> <C> <C> <C>
EAC $ %
PHEAA
Other Guarantee Agency
Non-Guaranteed
Total $ 100.00%
===== ======= =======
</TABLE>
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY RANGE OF PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Percent
Outstanding of Loans by
Number of Principal Outstanding
Principal Balance Range Borrowers Balance Balance
- ----------------------- --------- ------- -------
<S> <C> <C> <C>
Less than $1,000
$1,000-$1,999
$2,000-$2,999
$3,000-$3,999
$4,000-$4,999
$5,000-$5,999
$6,000-$6,999
$7,000-$7,999
$8,000-$8,999
$9,000-$9,999
$10,000-$10,999
$11,000-$11,999
$12,000-$12,999
$13,000-$13,999
$14,000-$14,999
$15,000 or greater
Total $ $ 100.00%
========= =========== =======
</TABLE>
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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.
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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.
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, Supplemental Loans for Students ("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
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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.
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
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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 is
signed, does 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
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auction prior to the preceding June 1, plus 3.1% per annum (but not to
exceed 9% per annum).
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 is signed,
has 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; and
(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; and
(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.
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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.
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
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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:
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
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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
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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.
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
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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 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
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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 below 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.
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.
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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.
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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 the
Secretary determines that the agency's administrative or financial 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
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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
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%.
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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.
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.
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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 provides 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
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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.
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
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(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 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
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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 __% will be guaranteed by Education Assistance Corporation
("EAC"), approximately __% will be guaranteed by Pennsylvania Higher Education
Assistance Agency ("PHEAA"), and the remainder will be guaranteed by various
other Guarantee Agencies. 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.
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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.
The Higher Education Act had allowed a Guarantee Agency to charge a guarantee
fee equal to 3% of the principal amount of each loan (other than Consolidation
Loans and Unsubsidized Stafford Loans) that it guaranteed prior to July 1, 1994.
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
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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 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 a
contract pursuant to Section 428(c) of the Higher Education Act (and, for older
Guarantee Agencies, a supplemental contract pursuant to former Section 428A of
the Higher Education Act) (collectively, the "Federal Reimbursement Contracts"),
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".
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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 (the "Grace
Period"), and during certain deferment periods (the "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.
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
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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 below.
<TABLE>
<CAPTION>
Claims Rates
------------
Year Ended
September 30 EAC PHEAA
------------ --- -----
<S> <C> <C>
1992 1.25% 2.84%
1993 1.28 2.32
1994 1.43 2.18
1995 1.56 1.97
1996 1.54 1.58
</TABLE>
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. The Board of Directors presently
consists of the same four persons who presently constitute 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 $14,789,00, and a fund balance of approximately $7,579,000. 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.
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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 processes applications and
guarantee claims and undertakes other administrative tasks with respect to loans
made after December 21, 1987 that EAC would otherwise have guaranteed, and PHEAA
guarantees such loans. EAC recommenced guaranteeing student loans in July 1991,
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 offices are 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.
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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-Finance 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 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
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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); $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.
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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.
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.
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 and the Corporation and
certain covenants of the Original Issuer 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
and the Corporation will comply with applicable requirements of the Code.
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 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
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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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain 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
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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.
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.
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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.
Taxation of Interest Income of Noteholders
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.
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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 the accrual of payments of principal
and 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.
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
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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-
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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.
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 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, SLFC and
EAC presently consist of the same four persons.
The Trustee is an affiliate of 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 and related
entities have 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 such entities 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
the SLFC). In addition, Foley & Lardner has from time to time represented, and
is currently representing, EAC in connection with various matters.
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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 each
Underwriter has severally agreed to purchase the principal amount of each series
of the Series 1997-1 Notes set forth opposite its name below:
<TABLE>
<CAPTION>
Underwriter Principal Amount
----------- -----------------
Series Series Series Series
1997-1A 1997-1B 1997-1C 1997-1D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Smith Barney Inc....................
FBS Investment Services, Inc........
Dougherty Dawkins LLC...............
Miller & Schroeder Financial, Inc...
Underwriter Principal Amount
----------- -----------------
Series Series Series Series
1997-1E 1997-1F 1997-1G 1997-1H
------- ------- ------- -------
Smith Barney Inc....................
FBS Investment Services, Inc........
Daugherty Dawkins LLC...............
Miller & Schroeder Financial, Inc...
Underwriter Principal Amount
----------- -----------------
Series Series Series Series
1997-1I 1997-1J 1997-1K 1997-1L
------- ------- ------- -------
Smith Barney Inc....................
FBS Investment Services, Inc........
Daugherty Dawkins LLC...............
Miller & Schroeder Financial, Inc...
</TABLE>
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In the Underwriting Agreement, the Underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
Series 1997-1 Notes offered hereby, if any Series 1997-1 Notes are purchased.
In the event of a default by any Underwriter, the Underwriting Agreement
provides that, in certain circumstances, purchase commitments of the non-
defaulting Underwriters may be increased or purchase commitments of all
Underwriters may be terminated. 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.
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.
FBS Investment Services, Inc. is an affiliate of the Trustee. 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.
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.
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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.
("Fitch") and "Aaa" by Moody's Investors Services, Inc. (Moody's"), and that the
Series 1997-1 Subordinate Notes be rated no less than "A" by Fitch and "A" by
Moody's. The Original Issuer has applied for ratings of the Series 1997-1 Notes
from Moody's and Fitch. 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 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.
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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 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 duly licensed to practice and practicing as such
under the laws of the State, selected and paid by the Corporation, who is
Independent and not under the domination of the Corporation, but
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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
"Events of Default" below): (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 "Events of Default" below: (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
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(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;
(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
"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 "Events of Default" below: (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
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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.
"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).
"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 Loan Purchase Regulations, 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, (4) any agreement providing for continuing secondary
market disclosure with respect to one or more series of Notes, and (5) 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.
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"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 "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 (i) the After-Tax Equivalent and (ii) the Index; provided that in no
event shall the All Hold Rate be greater than the Maximum Auction Rate, and
(iii) 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 "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:
<TABLE>
<CAPTION>
Moody's Fitch's
Credit Rating Credit Rating Applicable Percentage
- ---------------------- ------------- ----------------------
<S> <C> <C>
"Aaa" "AAA" 175%
"Aa" "AA" 175%
"A" "A" 175%
"Baa" "BBB" 200%
Below "Baa" Below "BBB" 265%
</TABLE>
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.
"Auction" shall mean the implementation of the Auction Procedures on an
Auction Date.
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"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 mean, initially, 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 Auction Period, other
than: (A) an Auction Period commencing after the ownership of such series is no
longer maintained in Book-Entry Form by the Securities Depository; (B) an
Auction Period commencing after and during the continuance of a Payment Default;
or (C) an 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 pursuant to the provisions of the First
Supplemental Indenture described under "Auction of the Auction Rate Series 1997-
1 Senior Notes -- Changes in Auction Terms -- Changes in the Auction Date".
"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 "Auction of the Auction Rate Series 1997-1 Senior
Notes -- Changes in Auction Terms -- Changes in Auction Period or Periods".
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"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 "Auction of
the Auction Rate Series 1997-1 Senior Notes".
"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 Auction 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.
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"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.
"Beneficiaries" shall mean, collectively, all Senior Beneficiaries, all
Subordinate Beneficiaries and all Holders of any Outstanding Class C Notes.
"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 Securities Exchange Act of 1934, as amended), 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 Securities Exchange Act of 1934, as amended), 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.
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"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
Certain Provisions 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 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.
"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
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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.
"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 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.
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"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 "Auction of the
Auction Rate Series 1997-1 Senior Notes -- Auction Procedures -- General".
"Consolidation Loan" shall mean a Student Loan made pursuant to Section
428C of the Higher Education Act.
"Contracts of Insurance" shall mean, collectively, the Corporation Contract
of Insurance and the Trustee Contract of Insurance.
"Corporation Contract of Insurance" shall mean the Contract of Insurance
for Loans to Students Under Title IV Part B of the Higher Education Act, dated
March 12, 1979, and the Contract of Federal Loan Insurance, dated January 22,
1981, between the Original Issuer and the Secretary of Education, and any
amendment thereof which is hereafter entered into.
"Corporation Guarantee Agreements" shall mean (1) that certain Lender
Agreement for Guarantee of Student Loans With Federal Reinsurance, dated
December 21, 1992, between the Original Issuer and Education Assistance
Corporation, (2) that certain Lender Agreement for Guarantee of Student Loans
With Federal Reinsurance, dated August 17, 1989, between the Original Issuer and
Pennsylvania Higher Education Assistance Agency, (3) that certain Agreement to
Guarantee Loans, dated October 9, 1986, between the Original Issuer and United
Student Aid Funds, Inc., (4) that certain Lender Participation Agreement for
Insurance, dated August 4, 1987, between the Original Issuer and the North
Dakota Guaranteed Student Loan Program, (5) that certain Lender Agreement for
Guarantee of Student Loans With Federal Reinsurance, dated November 1, 1991,
between the Original Issuer and Northstar Guarantee Inc., (6) that certain
Student Loan Guaranty, dated August 24, 1990, between the Original Issuer and
Great Lakes Higher Education Corporation, (7) that certain Agreement for Payment
on Guarantee of Student Loans With Federal Reinsurance, dated October 6, 1994,
between the Original Issuer and Educational Management Credit Corporation
(formerly known as Transitional Guaranty Agency, Inc.) and (8) any other
agreement between a Guarantee Agency and either the Corporation or a Lender
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 made or acquired by the Corporation or the Lender from time to
time, including any supplement thereto or amendment thereof entered into in
accordance with the provisions thereof and of the Indenture.
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"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).
"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.
"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 "Supplemental Indentures" below), 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 Certain Provisions 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.
"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.
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"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.
"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.
"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.
"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.
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"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 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.
"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.
"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.
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"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.
"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.
"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, collectively, the Corporation Guarantee
Agreements and the Trustee Guarantee Agreements.
"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.
"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.
"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
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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.
"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).
"Lender" shall mean any "eligible lender" (as defined in the Higher
Education Act and the Loan Purchase Regulations) 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.
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"Loan Purchase Regulations" shall mean the rules and regulations of the
Corporation duly adopted by the Board of Directors of the Corporation, which
pertain to the Program.
"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.
"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 Servicer's Report" shall mean the monthly report prepared by the
Servicer in accordance with the Servicing Agreement.
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"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.
"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, One-Month LIBOR
plus 1.50%.
"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 Loan Purchase Regulations, 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.
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"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 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.
"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.
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"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 "Discharge of Notes
and Obligations under the Indenture" below, (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.
"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.
"Plus Loan" shall mean a Student Loan made pursuant to Section 428B of the
Higher Education Act.
"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.
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"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.
"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.
"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.
"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.
"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.
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"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.
"Reserve Fund Requirement" shall mean, at any time, an amount equal to the
greater of (1) ____% of the aggregate Principal Amount of Senior Notes and
Subordinate Notes then Outstanding, and (2) $_______; 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).
"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 other officer, board, body, commission or
agency succeeding to the functions thereof under the Higher Education Act.
"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.
"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
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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.
"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.
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"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.
"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.
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"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.
"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 Servicing Agreement dated as of
___________ 1, 1997 among the Corporation, the Trustee and SLFC, and any other
agreement between the Corporation and a Servicer under which the Servicer agrees
to act as the Corporation'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.
"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 Redemption and Prepayment Account Requirement" (i) with respect
to the Taxable LIBOR Rate Series 1997-1 Notes, shall mean an amount equal to
___________________, and (ii) with respect to any other series of Notes, shall
mean the amount described in the Supplemental Indenture providing for the
issuance thereof.
"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
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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 an Eligible Borrower for post-secondary
education authorized to be made or acquired by the Corporation pursuant to its
Articles of Incorporation and the Loan Purchase Regulations [and described in
Section 150(d) of the Code.]
"Student Loan Purchase Agreements" shall mean all agreements between the
Corporation and a Lender providing for the sale by such Lender to the
Corporation or the Trustee on behalf of the Corporation 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.
"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.
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"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.
"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.
"Supplemental Indenture" shall mean any amendment of or supplement to the
Indenture made in accordance with the provisions thereof. (See "Supplemental
Indentures" below.)
"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.
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"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 Matters Certificate" shall mean, with respect to [one or all series
of] Tax-Exempt Notes, the applicable 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 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.
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<PAGE>
"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 Spread" shall mean ___%
per annum.
"Taxable LIBOR Rate Series 1997-1 Subordinate Notes" shall mean the Series
1997-1L Notes.
"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.
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<PAGE>
"Trust Estate" shall mean the Trust Estate as described in the Granting
Clauses of the Indenture.
"Trust Funds" shall mean, in the aggregate, all of the Funds and Accounts.
"Trustee 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.
"Trustee 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.
"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;
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<PAGE>
(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;
(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.
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<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 The Depository Trust Company ("DTC"), New York, New
York. 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" below.
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.
<PAGE>
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
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.
I-2
<PAGE>
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 Issuer 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 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.
I-3
<PAGE>
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-4
<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 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 The Depository Trust
Company ("DTC"), New York, New York. 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" below.
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, until Conversion, if any,
and 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.
<PAGE>
Until the Conversion Date, if any, 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 until Conversion, 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 Conversion, if
any, or 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 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; or
III-2
<PAGE>
(C) if a proposed Conversion for a series of Taxable Auction Rate
Series 1997-1 Senior Notes has failed, as described below under "Conversion
of and Mandatory Tender of the Taxable Auction Rate Series 1997-1 Senior
Notes", the [Series 1997-1 Senior Note Auction Rate] on such series will be
equal to the lesser of (i) the Maximum Auction Rate and (ii) the Net Loan
Rate as of the failed Conversion Date for the Interest Period commencing on
such date.
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.
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
III-3
<PAGE>
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
earlier of (a) the Conversion Date, if any, and, if then so paid, shall be paid
in full, or (b) 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 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 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 earlier of (a) the Conversion Date, if any, and, if then so paid, shall be
paid in full, or (b) 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 "Summary of Certain
Provisions of the Indenture -- Funds and Accounts --Surplus Fund" in Appendix
II, after taking into account all other amounts payable from the
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<PAGE>
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 clause (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 Auction 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 earlier of (a) the
Conversion Date, if any, and, if then so paid, shall be paid in full, or (b) 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 AN
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.] The Carry-Over Amount will continue
to accrue on Outstanding Taxable Auction Rate Series 1997-1 Senior Notes until
Conversion, if any. The Taxable Auction Rate Series 1997-1 Senior Notes of any
series will not be subject to Conversion unless all of the Carry-Over Amount
accrued (plus interest accrued thereon) with respect to such series has been
paid.
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<PAGE>
CONVERSION OF AND MANDATORY TENDER OF THE TAXABLE AUCTION RATE SERIES 1997-1
SENIOR NOTES
At the option of the Corporation, the method of determining the [Series
1997-1 Senior Note Interest Rate] for a series of the Taxable Auction Rate
Series 1997-1 Senior Notes is subject to Conversion on a Conversion Date for
such series from a Series 1997-1 Senior Note Interest Rate calculated on the
basis of an Auction Period to a Series 1997-1 Senior Note Interest Rate
calculated on the basis of another Interest Period. The method of determining
the new Series 1997-1 Senior Note Interest Rate for the new Interest Period and
the length of the new Interest Period, which may be any length of time between
one day and the Stated Maturity of the series of the Taxable Auction Rate Series
1997-1 Senior Notes subject to such conversion, shall be set forth in a
Supplemental Indenture executed in connection with the Conversion. No
Supplemental Indenture shall be executed in connection with a Conversion unless
the Corporation shall have furnished to the Trustee, prior to such execution,
written evidence from each of the Rating Agencies then rating the Notes that
execution of the Supplemental Indenture and the related Conversion will not
adversely affect the ratings on any series of Notes, any of which are
Outstanding.
The Corporation shall give written notice to the Trustee, the Remarketing
Agent and the Auction Agent of any such Conversion not less than 28 days prior
to the effective date of the Supplemental Indenture executed in connection
therewith, which effective date shall be no later than the Interest Rate
Determination Date for such new Interest Period. Upon receipt of such written
notice from the Corporation, the Trustee shall give written notice to the
Holders of the series of the Taxable Auction Rate Series 1997-1 Senior Notes
subject to such Conversion not less than 25 days prior to the effective date of
such Supplemental Indenture. Such notice shall state (i) that the method of
determining the Series 1997-1 Senior Note Variable Rate for such series of
Taxable Auction Rate Series 1997-1 Senior Notes will be converted; (ii) the
Conversion Date; (iii) that all Holders are required to tender their Taxable
Auction Rate Series 1997-1 Senior Notes of such series to the Trustee no later
than the Conversion Date for purchase at a price equal to 100% of the principal
amount thereof; provided, however, that all Taxable Auction Rate Series 1997-1
Senior Notes of such series that are not tendered to the Trustee by such date
shall be deemed tendered to the Trustee as of the Conversion Date, subject,
however, to remarketing or purchase by the Remarketing Agent for settlement on
the Conversion Date and receipt by the Trustee of the price equal to 100% of the
principal amount of such Taxable Auction Rate Series 1997-1 Senior Notes from
the purchasers thereof or the Remarketing Agent; (iv) that, in the event that on
the Conversion Date the Remarketing Agent has been unable to remarket all
Taxable Auction Rate Series 1997-1 Senior Notes of such series for settlement on
the Conversion Date and has elected not to purchase for its own account such
unremarketed Taxable Auction Rate Series 1997-1 Senior Notes, or on the
Conversion Date the Trustee has not received the price equal to 100% of the
principal amount of such Taxable Auction Rate Series 1997-1 Senior Notes from
the purchasers thereof or the Remarketing Agent, the proposed Conversion of such
series of Taxable Auction Rate Series 1997-1 Senior Notes shall be cancelled,
such series of Taxable Auction Rate Series 1997-1 Senior Notes shall remain in
an Auction Period and all Taxable Auction Rate Series 1997-1 Senior Notes of
such series shall
III-6
<PAGE>
bear interest at the lesser of the Net Loan Rate or the Maximum [Taxable]
Auction Rate (subject to the Series 1997-1 Senior Note Interest Rate Limitation)
as of the failed Conversion Date for the Interest Period commencing on such
date; (v) that the proposed Conversion is conditioned upon there being
sufficient moneys available in the Interest Account, after making provision for
the payment of accrued interest on such series of Taxable Auction Rate Series
1997-1 Senior Notes, as well as all other obligations payable from the Interest
Account having priority over the payment of Carry-Over Amounts, due and payable
on such Conversion Date, to pay on the Conversion Date all Carry-Over Amount
(and accrued interest thereon), if any, on such series of Taxable Auction Rate
Series 1997-1 Senior Notes through the Conversion Date; (vi) that a Holder has
no right to elect to retain any Taxable Auction Rate Series 1997-1 Senior Notes
of such series that have been remarketed, or will be purchased, by the
Remarketing Agent, on the Conversion Date; and (vii) if it shall be the case,
that the ratings on such series of Taxable Auction Rate Series 1997-1 Senior
Notes may be reduced or withdrawn. The Trustee is to mail a copy of such notice
to each of the Rating Agencies.
Notwithstanding anything to the contrary in the First Supplemental
Indenture, if all of the Taxable Auction Rate Series 1997-1 Senior Notes of a
series are not remarketed or purchased by the Remarketing Agent for settlement
on the Conversion Date, or if the Trustee does not, by 11:00 a.m., New York City
time, on the Conversion Date, receive from the purchaser or the Remarketing
Agent the price equal to 100% of the principal amount thereof, or if there are
not sufficient moneys available in the Interest Account, after making provision
for the payment of accrued interest on such series of Taxable Auction Rate
Series 1997-1 Senior Notes, as well as all other obligations payable from the
Interest Account having priority over the payment of Carry-Over Amounts, due
and payable on such Conversion Date, to pay on the Conversion Date all Carry-
Over Amount (and accrued interest thereon), if any, on such series of Taxable
Auction Rate Series 1997-1 Senior Notes through the Conversion Date, none of the
Taxable Auction Rate Series 1997-1 Senior Notes of such series shall be
converted to a new Interest Period on the Conversion Date, but all Taxable
Auction Rate Series 1997-1 Senior Notes of such series shall bear interest at
the lesser of the Net Loan Rate or the Maximum [Taxable] Auction Rate (subject
to the Senior Note Interest Rate Limitation) as of the failed Conversion Date
for the Interest Period commencing on such date and shall continue to be owned
by and registered to the Holders that owned Taxable Auction Rate Series 1997-1
Senior Notes of such series immediately prior to the failed Conversion.
If Conversion from an Auction Period to a new Interest Period for a series
of Taxable Auction Rate Series 1997-1 Senior Notes is to take place, such series
shall be tendered to the Trustee no later than the related Conversion Date for
purchase at a price equal to 100% of the principal amount thereof; provided,
however, that any Taxable Auction Rate Series 1997-1 Senior Notes of such series
not tendered to the Trustee by such date shall be deemed tendered to the
Trustee. Any unpaid Carry-Over Amount (and any interest accrued thereon) with
respect to such series as of the Conversion Date, as well as interest on such
Taxable Auction Rate Series 1997-1 Senior Notes accrued to the Conversion Date,
will be paid in the ordinary fashion. The Trustee is to give notice by mail to
the Holders of such series of Taxable Auction Rate Series 1997-1 Senior Notes,
not less than 25 days prior to the effective date of the Supplemental
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<PAGE>
Indenture executed in connection with the Conversion, of the mandatory tender of
such Taxable Auction Rate Series 1997-1 Senior Notes.
Pursuant to the Remarketing Agreement, the Remarketing Agent shall be
obligated (i) to use its best efforts to remarket the Taxable Auction Rate
Series 1997-1 Senior Notes of such series subject to Conversion based upon the
new Series 1997-1 Senior Note Interest Rate and new Interest Period upon
Conversion at a price of not less than 100% of the principal amount thereof,
(ii) not later than 3:00 p.m., New York City time, on the Business Day before
the Conversion Date, to give notice to the Trustee stating whether all of the
Taxable Auction Rate Series 1997-1 Senior Notes of such series have been
remarketed or will be purchased by the Remarketing Agent on the Conversion Date
and (iii) to cause the purchase price of each Taxable Auction Rate Series 1997-1
Senior Note of such series so remarketed or to be purchased by the Remarketing
Agent to be deposited in the fund to be established under the Remarketing
Agreement and maintained by the Remarketing Agent pursuant to the Remarketing
Agreement (the "Note Purchase Fund") in immediately available funds. Pursuant
to the Remarketing Agreement, all amounts deposited in the Note Purchase Fund as
aforesaid shall be held by the Remarketing Agent uninvested and in cash and in
trust for the sole and exclusive benefit of the Holders of the Taxable Auction
Rate Series 1997-1 Senior Notes for the purchase of which such amounts were
deposited in the Note Purchase Fund and shall be applied by the Remarketing
Agent to such purchase by payment to such Holders without further authorization
or direction. Accrued interest on and any unpaid Carry-Over Amount (and any
interest accrued thereon) with respect to the Taxable Auction Rate Series 1997-1
Senior Notes of such series shall be paid by the Trustee to such Holders from
the Interest Account.
If, by 11:00 a.m., New York City time, on the Conversion Date there is on
deposit in the Note Purchase Fund an amount sufficient to pay the purchase price
of all Taxable Auction Rate Series 1997-1 Senior Notes of the series subject to
Conversion equal to 100% of the principal amount thereof and there is on deposit
in the Interest Account an amount sufficient, and available, to pay accrued
interest on, and any unpaid Carry-Over Amount (and any interest accrued thereon)
with respect to, such series as of the Conversion Date, all Taxable Auction Rate
Series 1997-1 Senior Notes of such series which have not been delivered to the
Trustee shall be deemed to have been tendered in accordance with the provisions
of the First Supplemental Indenture. Replacement Taxable Auction Rate Series
1997-1 Senior Notes of such series shall be authenticated by the Trustee and
delivered to the purchasers thereof; provided, however, that in the case of
Taxable Auction Rate Series 1997-1 Senior Notes of such series held in book-
entry form, replacement Taxable Auction Rate Series 1997-1 Senior Notes of such
series shall be authenticated by the Trustee and delivered to the Securities
Depository. The Holder of any undelivered Taxable Auction Rate Series 1997-1
Senior Notes shall not be entitled to any payment (including any interest to
accrue on and subsequent to the Conversion Date) other than the purchase price
for such undelivered Taxable Auction Rate Series 1997-1 Senior Notes, together
with accrued interest thereon, and any unpaid Carry-Over Amount (and any
interest accrued thereon) with respect thereto, as of the Conversion Date, and
undelivered Taxable Auction Rate Series 1997-1 Senior Notes of such series shall
no longer be entitled to the benefit of the Indenture, except for the purpose of
payment of the purchase price therefor,
III-8
<PAGE>
together with accrued interest thereon, and any unpaid Carry-Over Amount (and
any interest accrued thereon) with respect thereto, as of the Conversion Date.
As of the Conversion Date, the Taxable Auction Rate Series 1997-1 Senior
Notes of the series subject to conversion shall be registered to the purchasers
thereof, regardless of tender of the predecessor Taxable Auction Rate Series
1997-1 Senior Notes of such series by the Holders thereof, and shall bear
interest at the applicable new Series 1997-1 Senior Note Interest Rate.
The Holders of Taxable Auction Rate Series 1997-1 Senior Notes of a series
which are subject to mandatory tender on the Conversion Date do not have the
right to elect to retain such Taxable Auction Rate Series 1997-1 Senior Notes.
Subject only to receipt by the Trustee from the purchasers of the price equal to
100% of the principal amount of all Taxable Auction Rate Series 1997-1 Senior
Notes of such series on the Conversion Date and the payment of accrued interest
thereon and any unpaid Carry-Over Amount (and accrued interest thereon) with
respect thereto, such Taxable Auction Rate Series 1997-1 Senior Notes will be
deemed to be tendered to the Trustee on such Conversion Date and registered in
the names of the purchasers thereof.
If, by 11:00 a.m., New York City time, on the Conversion Date there is not
on deposit in the Note Purchase Fund an amount sufficient to pay the purchase
price of all Taxable Auction Rate Series 1997-1 Senior Notes of the series
subject to Conversion equal to 100% of the principal amount thereof and on
deposit in the Interest Account an amount sufficient, and available, to pay
accrued interest on, and any unpaid Carry-Over Amount (and interest accrued
thereon) with respect to, such series as of the Conversion Date, all Taxable
Auction Rate Series 1997-1 Senior Notes of such series that have been tendered
to the Trustee shall be returned by the Trustee to the tendering Holders
thereof, and the Trustee shall give written notice on the date that the proposed
Conversion was to have occurred to each Holder of Taxable Auction Rate Series
1997-1 Senior Notes of such series, whether such Holder has actually tendered
his Taxable Auction Rate Series 1997-1 Senior Note or not, that (i) the
Conversion of such series of Taxable Auction Rate Series 1997-1 Senior Notes has
been cancelled and the reason therefor, and (ii) such series of Taxable Auction
Rate Series 1997-1 Senior Notes will bear interest at the lesser of the Net Loan
Rate or the Maximum [Taxable] Auction Rate as of the failed Conversion Date for
the Interest Period commencing on such date, written notice of which Series
1996-1 Senior Note Interest Rate will be given by the Trustee to each such
Holder on the second Business Day of the new Auction Period.
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
III-9
<PAGE>
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."
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<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 LIBOR RATE SERIES 1997-1 SENIOR NOTES
During the Initial Interest Period for the LIBOR Rate Series 1997-1 Senior
Notes, being the period from the date of delivery through ____________, 1997,
the LIBOR Rate Series 1997-1 Senior Notes of each series will bear interest at
the Initial Interest Rate for such series. The interest rate on the LIBOR Rate
Series 1997-1 Senior Notes (the "LIBOR Rate Series 1997-1 Senior Note Interest
Rate") for each Interest Period after the Initial Interest Period will be the
LIBOR-Based Rate based upon One-Month LIBOR plus the applicable Spread,
determined and subject to certain limitations as hereinafter described.
Interest on the 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 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 LIBOR Rate Series 1997-1 Senior Note Interest
Rate shall be effective as of and on the Interest
<PAGE>
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 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
"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
LIBOR Rate Series 1997-1 Senior Notes" below.
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 Second Supplemental
Indenture and written notice of such determination shall be given by such
securities dealer to the Trustee.
CARRY-OVER AMOUNTS ON THE 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 LIBOR Rate Series
1997-1 Senior Note Interest Rate for the related Interest Period will be the Net
Loan Rate. If the LIBOR Rate Series 197-1 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 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 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 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-
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<PAGE>
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 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 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 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 LIBOR Rate Series
1997-1 Senior Note), (i) the Carry-Over Amount (and interest accrued thereon)
shall be paid by the Trustee on such 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 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 LIBOR Rate
Series 1997-1 Senior Notes shall be paid by the Trustee on Outstanding 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 "Summary of Certain Provisions of the Indenture --
Funds and Accounts -- Surplus Account" in Appendix VIII, 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 LIBOR Rate Series 1997-1 Senior
Note which is unpaid as of an Interest Payment Date, which LIBOR Rate Series
1997-1 Senior Note is to be redeemed or deemed no longer Outstanding under the
Third 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 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
IV-3
<PAGE>
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 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 LIBOR Rate Series 1997-1 Senior Note of the Carry-Over Amount
remaining unpaid on such LIBOR Rate Series 1997-1 Senior Note.
The Interest Payment Date on which any Carry-Over Amount (or any interest
accrued thereon) for the 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 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 LIBOR RATE SERIES 1997-1
SENIOR NOTE NOT PAYABLE ON ANY REDEMPTION DATE WITH RESPECT TO SUCH LIBOR RATE
SERIES 1997-1 SENIOR NOTE WILL BE FORFEITED UPON THE REDEMPTION (WHETHER
CUMULATIVE SINKING FUND, OPTIONAL OR SPECIAL) OR AT MATURITY OF SUCH LIBOR RATE
SERIES 1997-1 SENIOR NOTE, OR ON SUCH EARLIER INTEREST PAYMENT DATE, IF ANY, ON
WHICH SUCH LIBOR RATE SERIES 1997-1 SENIOR NOTE CEASES TO BE OUTSTANDING UNDER
THE THIRD SUPPLEMENTAL INDENTURE. FITCH'S RATING ON THE LIBOR RATE SERIES 1997-
1 SENIOR NOTES WILL NOT APPLY TO ANY CARRY-OVER AMOUNT THAT MAY ACCRUE ON THE
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
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 LIBOR Rate Series 1997-1 Senior Notes
or related documents or otherwise contracted for, charged, reserved, taken or
received in connection with the LIBOR Rate Series 1997-1 Senior Notes, or if the
redemption or acceleration of the maturity of the LIBOR Rate Series 1997-1
Senior Notes results in payment to or receipt by the Holder or any former Holder
of the LIBOR Rate Series 1997-1 Senior Notes of any interest in excess of that
permitted by applicable law, then, notwithstanding any provision of the LIBOR
Rate Series 1997-1 Senior Notes or related documents to the contrary, all excess
amounts theretofore paid or received with respect to the LIBOR Rate Series 1997-
1 Senior Notes shall be credited on the principal balance of the LIBOR Rate
Series 1997-1 Senior Notes (or, if the 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 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
IV-4
<PAGE>
law, but so as to permit the recovery of the fullest amount otherwise called for
under the LIBOR Rate Series 1997-1 Senior Notes and under the related documents.
REDEMPTION AND PREPAYMENT OF TAXABLE LIBOR RATE SERIES 1997-1 SENIOR NOTES
The 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-5
<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 principal amount of $5,000 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 interest rate
on the Taxable LIBOR Rate Series 1997-1 Subordinate Notes (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 [for such series], 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
<PAGE>
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 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
VI-2
<PAGE>
"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 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 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 purpose
in accordance with the second paragraph under "Summary of Certain Provisions of
the Indenture -- Funds and Accounts -- Surplus Account" in Appendix VIII, 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 Third 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
VI-3
<PAGE>
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 CUMULATIVE
SINKING FUND, 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 THIRD 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
VI-4
<PAGE>
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 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-5
<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.
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
<PAGE>
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 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,
VII-2
<PAGE>
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.
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., as the initial Broker-Dealer, or any other broker
or dealer (each as defined in the Securities Exchange Act of 1934, as amended),
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.
VII-3
<PAGE>
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
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"
VII-4
<PAGE>
Composite 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
VII-5
<PAGE>
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
(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
VII-6
<PAGE>
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.
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.
VII-7
<PAGE>
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
VII-8
<PAGE>
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 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:
VII-9
<PAGE>
(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 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
VII-10
<PAGE>
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:
(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
VII-11
<PAGE>
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
VII-12
<PAGE>
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.
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
VII-13
<PAGE>
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 1997-1 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
VII-14
<PAGE>
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.
VII-15
<PAGE>
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 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 __ - "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
VII-16
<PAGE>
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 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
VII-17
<PAGE>
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.
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
VII-18
<PAGE>
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-19
<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 "Summary of Certain Provisions of the Indenture
- - Certain Definitions" or "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
<PAGE>
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
(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;
VIII-2
<PAGE>
(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;
(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
VIII-3
<PAGE>
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-Dealer 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-4
<PAGE>
APPENDIX IX
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE
The following is a summary of certain 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, copies of which, in reasonable quantity,
may be obtained during the offering period upon request directed to the
Corporation or to the Underwriters at the respective addresses set forth in
"Miscellaneous" in this Prospectus.
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 at
such Redemption Price or Prices and upon such terms, as shall be provided for in
the Supplemental Indenture creating that series. The Supplemental Indenture
creating any series of Notes may contain a provision limiting the aggregate
principal amount of the Notes of that series or the aggregate principal amount
of Notes which may thereafter be issued.
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
<PAGE>
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. The Notes and Other Obligations are not a
debt of the State of South Dakota or any agency or political subdivision thereof
for any purpose whatsoever.
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 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 the following conditions and any
additional conditions specified in a Supplemental Indenture:
1. The Trustee shall certify that there is no deficiency in the
Rebate Fund or the Note Fund and that, after the issuance of the series of
Notes then to be issued, there will not be a deficiency in the Reserve
Fund.
2. An Authorized Officer of the Corporation shall have certified that
the Corporation is not in default in the performance of any of its
covenants and agreements in the Indenture made (unless, in the opinion of
Counsel, any such default does not deprive any Beneficiary in any material
respect of the security afforded by the Indenture).
3. The Trustee shall have been provided with a Cash Flow Projection
giving effect to such issuance of Notes which shall reflect that, after
such issuance, the Senior Asset Requirement will be met; provided that no
such Cash Flow Projection shall be required if Unenhanced Notes are then
Outstanding and
IX-2
<PAGE>
each Rating Agency confirms in writing to the Trustee that it will not
require such Cash Flow Projection.
4. If such Notes are to be Senior Notes or Subordinate Notes, the
Trustee shall have been provided with written evidence from each Rating
Agency that such series of Notes is rated (i) if such Notes are to be
Senior Notes, at least as high as the outstanding rating assigned by each
Rating Agency to any Outstanding Senior Notes, and (ii) if such Notes are
to be Subordinate Notes, at least as high as the outstanding rating
assigned by each Rating Agency to any Outstanding Subordinate Notes.
5. If any Unenhanced Notes are Outstanding, 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
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 issuance of such Notes.
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 "Sources of Payment and Security for the Notes --
Priorities".) 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. 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
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<PAGE>
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:
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.
IX-4
<PAGE>
Funds and Accounts
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 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 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 (which, in the case of the First
Supplemental Indenture, includes, at the direction of the Corporation, proceeds
of the resale to a Lender of any Student Loans Financed with proceeds of the
Series 1997-1 Notes pursuant to such Lender's repurchase obligation under the
applicable Student Loan Purchase Agreement received by the Trustee prior to
_______________). 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 acquisition
of Eligible Loans pursuant to a Student Loan Purchase Agreement (including, for
this purpose, the acquisition of Eligible Loans previously purchased or
originated by the Corporation pursuant to a Student Loan Purchase Agreement from
other available moneys of the Corporation), (b) the origination of Eligible
Loans, (c) the redemption or purchase of Notes as provided in a Supplemental
Indenture providing for the issuance of such series of Notes, (d) the payment of
Debt Service on the Senior Notes and Other Senior Obligations when due (upon
transfer to the Note Fund as set forth in the following paragraph), (e) 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 as set
forth in the following paragraph), or (f) to cure deficiencies in the Rebate
Fund (upon transfer to the Rebate Fund as set forth in the following paragraph).
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 Acquisition Account 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 that assumed in the Closing Cash Flow
Projection (or such greater premium the payment of which will not materially
adversely affect the Corporation's ability to pay Debt Service on the
Outstanding Notes, Other Indenture Obligations, Carry-Over Amounts (including
accrued interest thereon) with respect to Outstanding Notes, Administrative
Expenses or Note Fees or to make required transfers to the Rebate Fund, as shown
in a subsequent Cash Flow Projection received by the Trustee, and which will not
result in the lowering or withdrawal of the outstanding rating assigned by any
Rating Agency to any of the Unenhanced Senior or Subordinate Notes Outstanding,
as evidenced in writing to the Trustee by each such Rating Agency)] upon receipt
by the Trustee of an Eligible Loan Acquisition Certificate and all documents,
opinions and certificates required thereby. The
IX-5
<PAGE>
Trustee shall make, or authorize the Deposit Agent to make, payments to the
Corporation from the Acquisition Fund for the origination of Eligible Loans upon
receipt by the Trustee of an Eligible Loan Origination Certificate and all
documents, opinions and certificates required thereby.
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".
The unpaid principal balance of Financed Student Loans in the Acquisition
Fund shall be included in the Balance of the Acquisition Fund until such
Financed Student Loans shall have been paid in full or sold or exchanged as
provided in the Indenture. Interest and principal payments, including Guarantee
payments, and Special Allowance Payments received 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) and proceeds from the sale or other conveyance of Financed
Student Loans (except as otherwise described in the immediately preceding
paragraph) shall be credited, in the case of such principal and interest,
including Guarantee payments, and Special Allowance Payments, to the Revenue
Fund as described under "Revenue Fund" below; in the case of the portion of the
proceeds of such sale or other conveyance which represents payment of the
principal of Financed Student Loans sold, to the Principal Account; and in the
case of the portion of the proceeds of such sale or other conveyance which
represent payment of accrued interest on and Special Allowance Payments with
respect to Financed Student Loans sold, to the Interest Account.
The Corporation may sell to any purchaser one or more Student Loans
Financed with moneys in the Acquisition Fund in exchange for one or more
Eligible Loans (of approximately
IX-6
<PAGE>
the same aggregate Principal Balance and accrued noncapitalized borrower
interest as such Financed Student Loans) which (1) evidence the additional
obligations of Eligible Borrowers whose Student Loans have been previously
Financed, or (2) are to be substituted for Financed Student Loans which are not
Eligible Loans; provided that (I) no such sale and exchange shall cause the
Corporation to breach any of its representations or covenants contained in the
Tax Matters Certificate furnished by the Corporation in connection with the
issuance of any series of Tax-Exempt Notes, and (II) prior to any such sale and
exchange the Trustee shall have received an Eligible Loan Acquisition
Certificate or an Eligible Loan Origination Certificate and all documents,
opinions and certifications required thereby with respect to all Eligible Loans
to be so transferred to the Indenture in exchange, together with (A) except in
the case of Eligible Loans referred to in the preceding clause (2) or unless the
Principal Balance of Eligible Loans sold or exchanged within the preceding 12-
month period pursuant to this paragraph will not, together with the Principal
Balance of Eligible Loans then proposed to be sold or exchanged, exceed
$1,000,000, a Corporation Certificate that, based on a Cash Flow Projection,
such sale and exchange 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
the required deposits to the credit of the Rebate Fund, and (B) a written
instrument satisfactory to the Trustee assigning all right, title, interest and
privilege of the Corporation in, to and under the student loan purchase
agreement pursuant to which each such Eligible Loan to be transferred to the
Indenture was acquired by the Corporation, to the extent such right, title,
interest and privilege relate to such Eligible Loan. Any money received by the
Corporation in connection with a sale and exchange of Financed Student Loans
pursuant to this paragraph, including those moneys representing the excess of
the aggregate Principal Balance of and accrued noncapitalized borrower interest
on such Financed Student Loans released from the Indenture over the aggregate
Principal Balance of and accrued noncapitalized borrower interest on the
Eligible Loans transferred to the Indenture in exchange therefor, shall be
deposited to the credit of the Principal Account and the Interest Account in
accordance with the preceding paragraph. Any such Eligible Loans so transferred
to the Indenture in exchange for Student Loans previously Financed from the
Acquisition Fund are, for all purposes of the Indenture, deemed to have been
Financed with moneys in the Acquisition Fund and shall be credited to the
Acquisition Fund and included in the Balance thereof.
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 comprising 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
IX-7
<PAGE>
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.
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.
The Corporation agrees to cause all amounts required to be credited to the
Revenue Fund, upon receipt by the Corporation, a Lender or a Servicer, or any
agent thereof, as the case may be, to be forthwith transmitted to the Trustee or
any Deposit Agent for such credit. 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, all such moneys then held by a Deposit
Agent shall be transferred to the Trustee. The Trustee shall deposit and credit
all revenues to be credited to the Revenue Fund as follows: all such revenues
received as payments of principal of Financed Student Loans shall be credited by
the Trustee forthwith upon receipt to the Repayment Account in the Revenue Fund;
and all other revenues and amounts, including all such revenues received as
payments of interest on or Special Allowance Payments with respect to Financed
Student Loans and income from Investment Securities, shall be credited by the
Trustee forthwith upon receipt to the Income Account in the Revenue Fund.
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 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
IX-8
<PAGE>
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 Account, to the extent necessary to increase the Balance thereof
to the Special Redemption 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
IX-9
<PAGE>
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 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 Account, to the extent necessary to increase the Balance
thereof to the Special Redemption 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 comprising 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. With respect to each series of Senior Notes or
Subordinate Notes, the Trustee shall, upon delivery to the original purchasers
thereof and from the proceeds thereof, credit to the Interest Account 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
Interest Account (i) that portion of the proceeds from the sale of Financed
Student Loans as is described
IX-10
<PAGE>
under "Acquisition Fund" above, (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 six equal
monthly deposits to the credit of the Interest Account not later than the six
Monthly Payment Dates preceding such Interest Payment Date, to aggregate the
full amount of such interest, payments and fees; except that if the first such
Interest Payment Date occurs in seven months or less from the date on which the
Senior Notes or Subordinate Notes of such series are delivered to the initial
purchasers thereof, then the Trustee shall make equal monthly deposits to the
credit of the Interest Account not later than each Monthly Payment Date
beginning with the second calendar month following the calendar month in which
such Notes are delivered to the initial purchasers and ending with the last such
Monthly Payment Date prior to such first Interest Payment Date (provided,
however, with respect to any Variable Rate Notes, deposits shall be made in an
amount equal to the interest accrued on such Notes from the date of issuance
thereof (in the case of the first Monthly Payment Dates therefor), and
thereafter from the last previous Monthly Payment Date or regularly scheduled
Interest Payment Date therefor, whichever is later, to that Monthly Payment Date
or, in the case of the last Monthly Payment Date preceding a regularly scheduled
Interest Payment Date, to such regularly scheduled Interest Payment Date), to
aggregate the full amount of such interest, payments and fees, and except that
the Corporation shall receive a credit against such payments for any accrued
Counterparty Swap Payments that are to be paid on the next regularly scheduled
Interest Payment Date if the Swap Counterparty is not then in default under the
Swap Agreement and if the Swap Counterparty has unsecured long-term debt rated
by each Rating Agency in any of its three highest Rating Categories. 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. In making the deposits required to be credited
to the Interest Account, the credits otherwise made or required to be made under
the Indenture to the Interest Account shall, to the extent available for such
purpose, be taken into consideration and allowed for. 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
IX-11
<PAGE>
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 in accordance with the second
paragraph under "Surplus Fund" below, after taking into account all other
amounts payable from the Surplus Fund in accordance with such paragraph 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
IX-12
<PAGE>
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 to be used to pay principal of Senior Notes or Subordinate Notes,
(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 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).
The Indenture provides that (i) commencing with the sixth (or, if principal
of such series of Notes is payable annually, the twelfth) Monthly Payment Date
immediately preceding the Stated Maturity of Senior or Subordinate Serial Notes
or a Sinking Fund Payment Date for Senior Term Notes, and continuing in each
month thereafter, ending on the last Monthly Payment Date before such Stated
Maturity or Sinking Fund Payment Date, equal monthly payments shall be made by
the Trustee into the Principal Account to provide for the payment of the
principal of such Senior or Subordinate Serial Notes or Senior Term Notes as and
when the same becomes due, and (ii) commencing with the seventh (or, if
principal of such series of Notes is subject to sinking fund redemption
annually, the twelfth) Monthly Payment Date
IX-13
<PAGE>
immediately preceding each Sinking Fund Payment Date with respect to Subordinate
Term Notes and continuing in each month thereafter, ending on the next-to-the-
last Monthly Payment Date before such Sinking Fund Payment Date, equal monthly
payments shall be made by the Trustee into the Principal Account to provide for
the retirement of the principal of Subordinate Term Notes in an amount equal to
(a) the maximum Principal Amount of Subordinate Term Notes which may be redeemed
pursuant to the cumulative sinking fund provisions on such Sinking Fund Payment
Date in accordance with the Indenture, plus (b) the Principal Amount of
Subordinate Term Notes the Stated Maturity of which is such Sinking Fund Payment
Date. To the extent there are not available moneys to make any monthly payment
as described in the preceding clause (ii)(a), 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. Any such contingencies
specified in a Supplemental Indenture authorizing the issuance of a series of
Subordinate Notes must be identical to contingencies, if any, specified in any
other Supplemental Indenture authorizing a series of Subordinate Notes any of
which are then Outstanding.
Subject to the second succeeding paragraph, in the event that, in any year
in which sinking fund installments are due with respect to two or more series of
Subordinate Notes, payments on account of such sinking fund installments are not
deposited and accumulated in the Principal Account in the full amount thereof
(taking into account any reduction in or credit against such installments as
provided in the Supplemental Indenture pursuant to which such Subordinate Notes
were issued) on or before the next-to-the-last Monthly Payment Date prior to the
Sinking Fund Payment Date with respect thereto, such payments as shall have been
accumulated are to be allocated as follows: (i) first, to the payment of any
such Subordinate Term Notes whose Stated Maturity is such Sinking Fund Payment
Date, and (ii) otherwise, between the series of Subordinate Notes in proportion
to the respective total amounts of sinking fund installments due on such Sinking
Fund Payment Date.
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. Moneys in the Principal Account
required for the payment of the purchase price of such Notes shall, subject
IX-14
<PAGE>
to the applicable provisions of the related Supplemental Indenture, be applied
by the Trustee to such payment without further authorization or direction.
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.
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
prior ity 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 in the Note Fund (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
IX-15
<PAGE>
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.
Apart from transfers to the Rebate Fund and the Interest Account and the
redemption and prepayment of Notes, 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.
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, upon receipt by the Trustee of Corporation Orders
directing the payment to designated
IX-16
<PAGE>
payees in designated amounts for stated services, or, in the case of
reimbursement of the Corporation for its expenses, to the Corporation, and in
each case certifying that such payment is authorized by the Indenture, be used
for and applied only 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 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, the Surplus Fund
(other than that portion of the Balance thereof consisting of Eligible Loans)
and the Reserve Fund; second, to remedy deficiencies in the Interest Account for
the payment of interest on Senior Notes or Other Senior Obligations payable
therefrom, 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; third, to remedy deficiencies in the Principal Account
with respect to the redemption or payment of principal or the purchase price of
Senior Notes or the payment of Other Senior Obligations payable therefrom, 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; fourth, to remedy deficiencies in the Retirement Account for the
redemption of Senior Notes or the payment of Other Senior Obligations payable
therefrom, 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; fifth, to remedy deficiencies in the Interest Account for
the payment of interest on Subordinate Notes or Other Subordinate Obligations
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; sixth, to remedy deficiencies in the Principal Account with respect to the
payment of principal at Stated Maturity or the purchase price of Subordinate
Notes or the payment of Other Subordinate Obligations 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; seventh, to remedy
deficiencies in the Retirement Account for the redemption of Subordinate Notes
or the payment of Other Subordinate Obligations payable therefrom, 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; and, eighth, to pay Costs of Issuance, Note Fees and Administrative
Expenses.
Amounts in the Administration Fund may, subject to the last sentence of
this paragraph and any limitations specified in a Supplemental Indenture, be
paid out for Costs of Issuance or Note Fees at any time upon receipt of a
Corporation Order and shall be paid in the full amount designated therein;
provided that the aggregate amount of Costs of Issuance paid or reimbursed from
amounts in the Administrative Fund or any other Fund or Account in respect of a
particular series of Notes shall under no circumstances exceed the amount, if
any, specified therefor in the Supplemental Indenture authorizing the issuance
of Notes of such series. Amounts in the Administration Fund may, subject to the
last sentence of this paragraph and any limitations specified in a Supplemental
Indenture, be paid out for Administrative Expenses, or to reimburse the
Corporation for the prior payment of Administrative Expenses, at any time, in
cumulative
IX-17
<PAGE>
amounts in any given Fiscal Year not in excess of (A) the amount of Budgeted
Administrative Expenses for that Fiscal Year, unless an Authorized Officer of
the Corporation shall certify in writing to the Trustee that Administrative
Expenses in an increased amount (i) are reasonable and necessary in light of all
circumstances then existing, (ii) will not materially adversely affect the
ability of the Corporation to pay or perform, as the case may be, all of its
obligations under the Indenture, and (iii) can be paid out of amounts deposited
into the Administration Fund pursuant to the provisions of the Indenture, plus
(B) the amount of Administrative Expenses for any prior Fiscal Year previously
paid by the Corporation from a source other than the Administration Fund and
requested to be reimbursed to such source, provided that the amount of such
Administrative Expenses, together with all other Administrative Expenses for
such prior Fiscal Year previously paid or reimbursed from the Administration
Fund, do not exceed the Budgeted Administrative Expenses for such prior Fiscal
Year. Notwithstanding the foregoing, no amounts in the Administration Fund
shall be paid out for Costs of Issuance, Note Fees or Administrative Expenses
unless, after giving effect to such payment (taking into account, for this
purpose, all previous such payments from the Administration Fund and all
payments from the Surplus Fund with respect to Costs of Issuance, Note Fees,
Administrative Expenses and any other uses permitted by clause (3) of the sixth
paragraph under "Surplus Fund" below), as to each series of Tax-Exempt Notes,
either (a) at least 90% of the net proceeds of such series will, at the time of
such payment, have been used directly or indirectly to make or finance student
loans described in Section 144(b)(1)(A) of the Code, or (b) at least 95% of the
net proceeds of such series will, at the time of such payment, have been used
directly or indirectly to make or finance student loans described in Section
144(b)(1)(B) of the Code, all within the meaning of such Section 144(b) of the
Code.
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.
IX-18
<PAGE>
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 the following Funds and Accounts in the
following order of priority: the Repayment Account (to the extent not required
for credit to the Rebate Fund, the Note Fund or the Acquisition Fund), the
Income Account (to the extent not required for credit to the Rebate Fund, the
Note Fund, the Acquisition Fund or the Administration Fund) and the Surplus Fund
(to the extent not required for credit to the Rebate Fund, the Note Fund or the
Administration 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 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
IX-19
<PAGE>
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; provided,
however, that on the Stated Maturity or any Redemption Date of any Senior Notes
or Subordinate Notes, amounts in the Reserve Fund shall, upon Corporation Order,
be applied to the payment at maturity or redemption of all Outstanding Senior
Notes or Subordinate Notes of a series, to the extent that such application, and
payment of all deposits to be made to the credit of the Rebate Fund upon such
redemption, will not reduce the Balance of the Reserve Fund below the Reserve
Fund Requirement (calculated as though the Notes to be retired on such Stated
Maturity or Redemption Date were not Outstanding as of the date of such
calculation), and, after giving effect to such payment or redemption, the
conditions in the Indenture described above under "Redemption, Prepayment or
Purchase of Notes; Senior Asset Requirement" will be met; and provided, further,
that at any time when the aggregate of the Balances in the Note Fund, the
Reserve Fund and the Surplus Fund (exclusive of Student Loans) equal an amount
sufficient to discharge and satisfy the obligations of the Corporation with
respect to all of the Outstanding Senior Notes and Subordinate Notes and all
Other Indenture Obligations and to make all required deposits to the Rebate
Fund, all in the manner described in the Indenture, said Balances shall, upon
Corporation Order, be so applied. Notwithstanding the foregoing, 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 comprising two accounts: the
Rebate Account and the Excess Earnings Account.
Rebate Account. The Trustee shall, unless and until the Corporation
delivers to the Trustee a written opinion of Bond Counsel as described in the
second succeeding paragraph, 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
IX-20
<PAGE>
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.
Notwithstanding the foregoing, in the event the Trustee is furnished with a
written opinion of Bond Counsel to the effect that it is not necessary under
either existing laws, regulations, rulings and decisions or any then pending
federal legislation to pay any portion of earnings on investments held under the
Indenture or otherwise to the United States in order to assure the exclusion
from gross income for federal income tax purposes of interest on any series of
Tax-Exempt Notes, the requirements set forth in the preceding two paragraphs
(with respect to the portion of such earnings specified in such opinion) need
not be complied with and shall no longer be effective and all amounts at the
time on deposit in the Rebate Account (to the extent covered by such opinion)
shall be transferred to the Revenue Fund.
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. 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.
IX-21
<PAGE>
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. The Corporation shall consult with Bond Counsel on or
within 30 days before each date on which, pursuant to the Excess Earnings
Regulations or otherwise, amounts are required to be paid to the United States
Department of the Treasury with respect to Excess Earnings, to determine what,
if any, action may be necessary to be taken with respect to disposition of any
amounts in the Excess Earnings Account to prevent any Tax-Exempt Notes from
becoming "arbitrage bonds" under Section 148 of the Code, and the Corporation
agrees to take any such action as shall be necessary to prevent any Tax-Exempt
Notes from becoming arbitrage bonds. In any event, the Corporation and the
Trustee shall comply with all provisions and restrictions with respect to the
Excess Earnings Account set forth in the Tax Matters Certificate furnished by
the Corporation in connection with the issuance of any Tax-Exempt Notes.
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.
Notwithstanding the foregoing, in the event the Trustee is furnished with a
written opinion of Bond Counsel to the effect that it is unnecessary under both
existing laws, regulations, rulings and decisions and any then pending federal
legislation to pay any portion of Excess Earnings to the United States (or take
any other action with respect thereto) in order to assure the exclusion from
gross income for federal income tax purposes of interest on any Tax-Exempt
Notes, the requirements described in the preceding portion of this section (but
only with respect to the portion of such Excess Earnings specified in such
opinion) need not be complied with and shall no longer be effective and all
amounts at the time on deposit in the Excess Earnings Account (to the extent
covered by such opinion) shall be transferred to the Revenue Fund.
Surplus Fund
The Indenture establishes a Surplus Fund comprising 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
IX-22
<PAGE>
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 (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 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. For a description of the circumstances under which moneys in the
Surplus Fund may be applied to the redemption of Series 1997-1 Notes, see
"Description of Series 1997-1 Notes -- Special Redemption and Prepayment -- From
Moneys in the Surplus Account" herein and "Redemption, Prepayment or Purchase of
Notes; Senior Asset Requirement" above.
IX-23
<PAGE>
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. Balances in the Special Redemption and Prepayment
Account shall be transferred to the Acquisition Fund to be so used upon receipt
by the Trustee of a Corporation Request directing such transfer, accompanied by
an Eligible Loan Acquisition Certificate or an Eligible Loan Origination
Certificate and all documents, opinions and certificates required thereby.
Subject to compliance with the provisions of the Indenture described under
"Redemption, Prepayment or Purchase of Notes; Senior Asset Requirement" above,
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 at a
purchase price (including any brokerage or other charges) not to exceed the
greater of the Principal Amount thereof or, if such purchase occurs during the
period when such Notes are subject to redemption at the option of the
Corporation from such funds, the Redemption Price set forth in the Supplemental
Indenture authorizing the issuance of such Notes that would be applicable to the
redemption of Notes pursuant thereto on the date of such purchase, in either
case plus accrued interest, as determined by the Corporation at such time,
provided that the Trustee shall have first certified that no deficiencies exist
at such time in the Note Fund, the Rebate Fund or the Reserve Fund, any such
Balances to be so used are not required to be applied to the prepayment of
principal of any Notes and, if the purchase price of any Note to be so purchased
exceeds the Principal Amount thereof plus accrued interest thereon, the Trustee
shall have been provided with a Corporation Certificate certifying that, based
on a Cash Flow Projection, any such purchase of 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.
Balances in the Surplus Account may, subject to the last sentence of the
following paragraph, 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 (A)
the Trustee shall have certified that no deficiencies exist at such time in the
Note Fund, the Rebate Fund or the Reserve Fund; (B) after taking into account
any such payments of interest on the Class C Notes, the Senior Percentage will
not be less than 110% (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 the Subordinate Percentage will not be less
than 100% (or such lower percentage specified in a Corporation Certificate
delivered to the Trustee which, if Unenhanced Subordinate Notes are
IX-24
<PAGE>
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); and (C)
after taking into account any such payments of principal of the Class C Notes,
the Senior Asset Requirement will be met. If the amounts in the Surplus Account
are to be used to pay principal of or interest on the Class C Notes in
accordance with this paragraph, payments shall be made first from any cash or
Investment Securities included in the Surplus Account and thereafter from the
proceeds of any sale of Student Loans included in the Surplus Account.
Subject to compliance with the provisions of the Indenture described under
"Redemption, Prepayment or Purchase of Notes; Senior Asset Requirement" above,
and to the last sentence of this paragraph, 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; provided that, if the Redemption Price of any
Note to be so redeemed is to exceed the Principal Amount thereof, the
Trustee shall have received a Corporation Certificate certifying that,
based on a Cash Flow Projection, any such redemption of Notes will not
materially adversely affect the Corporation's ability to pay Debt Service
on the Outstanding Notes, Other Indenture Obligations, Carry-Over Amounts
(including accrued interest thereon) with respect to Outstanding Notes,
Administrative Expenses or Note Fees or to make required transfers to the
Rebate Fund;
(2) transfer to the Principal Account or the Retirement Account for
the purchase of Senior Notes or Subordinate Notes at a purchase price
(including any brokerage or other charge) not to exceed the greater of the
Principal Amount thereof or, if such purchase occurs during the period when
such Notes are subject to redemption at the option of the Corporation from
such funds, the Redemption Price set forth in the Supplemental Indenture
authorizing the issuance of such Notes that would be applicable to the
redemption of Notes pursuant thereto on the date of such purchase, in
either case plus accrued interest; provided that, if the purchase price of
any Note to be so purchased is to exceed the Principal Amount thereof plus
accrued interest thereon, the Trustee shall have received a Corporation
Certificate certifying that, based on a Cash Flow Projection, any such
purchase of Notes will not materially adversely affect the Corporation's
ability to pay Debt Service on the Outstanding Notes, Other Indenture
Obligations, Carry-Over Amounts (including accrued interest thereon) with
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<PAGE>
respect to Outstanding Notes, Administrative Expenses or Note Fees or to
make required deposits to the Rebate Fund; or
(3) upon the receipt by the Trustee of a Corporation Certificate that
the Balance in the Administration Fund is at least equal to the Budgeted
Administrative Expenses and Note Fees for the next succeeding 90 days, and
that, based on a Cash Flow Projection, any moneys to be so used are not
reasonably expected to be needed for the payment of 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 for transfer to the Rebate Fund:
(a) the acquisition of Student Loans meeting the requirements of clauses
(A) (1) and (2) or (B) of the definition of "Eligible Loan" (see "Certain
Definitions" above), the moneys to be applied from the Surplus Account for
such purpose being no more than the Principal Balance of such Student
Loans, plus accrued noncapitalized interest thereon payable by the Eligible
Borrower, if any, to the date of purchase, reasonable transfer, origination
and assignment fees, if applicable, and a premium not to exceed that
assumed in the most recent Cash Flow Projection delivered in conjunction
with the issuance of a series of Notes (or such greater premium the payment
of which will not materially adversely affect the Corporation's ability to
pay Debt Service on the Outstanding Notes, Other Indenture Obligations,
Carry-Over Amounts (including accrued interest thereon) with respect to
Outstanding Notes, Administrative Expenses or Note Fees or to make required
transfers to the Rebate Fund, as shown in a subsequent Cash Flow Projection
received by the Trustee, and which will not result in the lowering or
withdrawal of the outstanding rating assigned by any Rating Agency to any
of the Unenhanced Senior or Subordinate Notes Outstanding, as evidenced in
writing to the Trustee by each such Rating Agency), and being paid to the
Lender upon the receipt by the Trustee of a Student Loan Acquisition
Certificate and all documents, opinions and certifications required
thereby; (b) to reimburse another fund, account or other source of the
Corporation for the previous payment of Costs of Issuance, to the extent
not previously reimbursed from the Surplus Account; and (c) for such other
purposes as the Corporation shall determine upon receipt by the Trustee of
an opinion of Counsel that such use will not violate any covenants of the
Corporation described under "Covenants -- Corporate Existence and Tax-
Exempt Status" below, is authorized by the Corporation's Articles of
Incorporation and Bylaws, and will not violate the provisions of any State
law or Section 150(d) of the Code; 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
IX-26
<PAGE>
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, 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 (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, 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); 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 Subaccount).
Notwithstanding the foregoing, no amounts in the Surplus Fund shall be paid out
with respect to Costs of Issuance, Note Fees or Administrative Expenses, or for
any other use permitted by the preceding paragraph or clause (3) above, unless,
after giving effect to such payment (taking into account, for this purpose, all
previous such payments from the Surplus Fund and all payments from the
Administration Fund with respect to Costs of Issuance, Note Fees and
Administrative Expenses), as to each series of Tax-Exempt Notes either (a) at
least 90% of the net proceeds of any series of Tax-Exempt Notes will, at the
time of such payment, have been used directly or indirectly to make or finance
student loans described in Section 144(b)(1)(A) of the Code or (b) at least 95%
of the net proceeds of such series will, at the time of such payment, have been
used directly or indirectly to make or finance student loans described in
Section 144(b)(1)(B) of the Code, all within the meaning of such Section 144(b)
of the Code.
The unpaid principal balance of Student Loans Financed with moneys in the
Surplus Account shall be included in the Balance of the Surplus Account until
such Financed Student Loans shall have been paid in full or sold as provided in
the Indenture; provided that, to the extent provided in a Supplemental
Indenture, any such Student Loans so Financed and constituting Eligible Loans
shall, upon the Financing thereof, be credited to, and included in the Balance
of, the Acquisition Fund and shall thereafter not be deemed to have been
Financed with moneys in the Surplus Account (in this regard, the First
Supplemental Indenture so provides with
IX-27
<PAGE>
respect to Eligible Loans Financed from Balances in the Series 1997-1 Surplus
Subaccount prior to ________________). Interest and principal payments,
including Guarantee payments and similar payments made by any other Person, and
Special Allowance Payments (excluding any federal interest subsidy payments and
Special Allowance Payments that accrued prior to the date on which such Student
Loans were Financed) received with respect to Student Loans Financed with moneys
in the Surplus Account shall be credited to the Revenue Fund.
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; provided that no such sale shall cause the Corporation to
breach any of its representations or covenants contained in the Tax Matters
Certificate furnished by the Corporation in connection with the issuance of any
series of Tax-Exempt Notes. 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.
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
described above under "Acquisition Fund" or "Surplus Fund", 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
IX-28
<PAGE>
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. Neither the State nor any agency or political
subdivision thereof shall be liable on the Notes or any Other Indenture
Obligations in any respect and neither the Notes or any Other Indenture
Obligations shall be a debt of the State or any agency or political subdivision
thereof for any purpose.
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 (but only upon
receipt by the Trustee of an opinion of Bond Counsel that the creation of such
lien will not be prejudicial to the Trustee or the Holders of any Outstanding
Notes or any Other Beneficiary) 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 of the Corporation with the Holders of the Notes and
Other Beneficiaries contained in the Indenture are summarized as follows:
Administration of the Program. The Corporation agrees to administer,
operate and maintain the Program in such manner as to ensure that the Program
and the Financed Student Loans will benefit, to the optimum extent, from each
Guarantee Program and the federal program of reimbursement for student loans
pursuant to the Higher Education Act, or from any other federal statute
providing for such federal program.
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
IX-29
<PAGE>
Guarantee Agency, the Corporation agrees that it (1) will, from and after the
date on which [it (or the Trustee on its behalf)] shall have entered into the
Guarantee Agreement, maintain (or cause the Trustee to maintain) the same and
diligently enforce its (or the Trustee's) rights thereunder, (2) will enter into
(or 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.
Enforcement and Amendment of Certificates of Insurance and Contracts of
Insurance. So long as any Notes or Other Obligations are Outstanding, the
Corporation agrees that it (a) will maintain (or cause the Trustee to maintain)
all Certificates of Insurance and the Contracts of Insurance and diligently
enforce its (or the Trustee's) rights thereunder; (b) will enter into (or cause
the Trustee to enter into) such other similar or supplemental agreements as
shall be required to maintain benefits for all Financed Eligible Loans covered
thereby, and (c) will not voluntarily consent to or permit any rescission of or
consent to any amendment to or otherwise take any action under or in connection
with any such Certificates of Insurance or the Contracts of Insurance or any
similar or supplemental agreement which in any manner will materially adversely
affect the rights of any Beneficiaries.
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), acquire or originate (or cause the
Trustee to originate or acquire) only Eligible Loans with moneys in any of the
Funds and shall diligently cause to be collected all principal and interest
payments on all the Financed Student Loans and, subject to the following
proviso, all Non-Delivery Fees 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; provided that the Corporation may, in its discretion,
waive its right to receive, or return to Lenders, any portion or all of the Non-
Delivery Fees to which the Corporation is otherwise entitled under the Student
Loan Purchase Agreements as evidenced by a Corporation Certificate (in the case
of any waiver) or Corporation Order (in the case of any return) to that effect.
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 assign (or cause the Trustee to assign) such
Financed Student Loans for payment of guarantee or insurance benefits at the
earliest date permitted under applicable law and regulations. The Corporation
will comply with all United States and State statutes, rules and regulations
which apply to the Program and to such Financed Student Loans and shall from
time to time amend the Loan Purchase Regulations in such manner as may be
required in order to conform the same to the requirements of the Higher
Education Act and a Guarantee Program.
IX-30
<PAGE>
Enforcement of Financed Student Loans. The Corporation agrees that it
shall cause to be diligently enforced, and take 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
and all other amounts due the Corporation or the Trustee thereunder. The
Corporation agrees that it shall not permit the release of the obligations of
any student borrower under any Financed Student Loan and shall at all times, to
the extent permitted by law, cause to be defended, enforced, preserved and
protected the rights and privileges of the Corporation, the Trustee and the
Beneficiaries under or with respect to each Financed Student Loan and agreement
in connection therewith. The Corporation agrees not to consent or agree to or
permit any amendment or modification of any Financed Student Loan or agreement
in connection therewith which will in any manner materially adversely affect the
rights or security of the Beneficiaries. 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 forgive (or 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 forgive (or 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
evidenced by a Corporation Certificate delivered to the Trustee, the cost of
collection of the remaining indebtedness of such Financed Student Loan would
exceed such remaining indebtedness, and (2) the Corporation may amend (or 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.
Enforcement and Amendment of Servicing Agreements. The Corporation agrees
that it will cause to be diligently enforced and taken all reasonable steps,
actions and proceedings necessary for the enforcement of, all terms, covenants
and conditions of all Servicing Agreements, including the prompt payment of all
principal and interest payments and all other amounts due the Corporation or the
Trustee thereunder, including all grants, subsidies, donations, insurance
payments, Special Allowance Payments and all defaulted payments Guaranteed
and/or Insured by any Guarantee Agency and/or the Secretary of Education which
relate to any Financed Student Loans. The Corporation agrees not to permit the
release of the obligations of any Servicer under any Servicing Agreement and at
all times, to the extent permitted by law, cause to be defended, enforced,
preserved and protected the rights and privileges of the Corporation, the
Trustee and the Noteholders under or with respect to each Servicing Agreement.
The Corporation agrees not to consent or agree to or permit any amendment or
modification of any Servicing Agreement which will in any manner materially
adversely affect the rights or security of the Beneficiaries.
IX-31
<PAGE>
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 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 Loan
Purchase Regulations, 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.
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 (including, without limitation,
by reason of the violation of any limitation imposed by Sections 141 through 150
of the Code). In particular, the Corporation agrees not to use, or permit the
use of, any proceeds of Tax-Exempt Notes or any other moneys attributable to
Tax-Exempt Notes in the Funds and Accounts unless, after giving effect to such
use, as to each series of Tax-Exempt Notes, either (a) at least 90% of the net
proceeds of any series of Tax-Exempt Notes will, at the time of such use, have
been used directly or indirectly to make or finance student loans described in
Section 144(b)(1)(A) of the Code, or (b) at least 95% of the net
IX-32
<PAGE>
proceeds of such series will, at the time of such payment, have been used
directly or indirectly to make or finance student loans described in Section
144(b)(1)(B) of the Code, all within the meaning of such Section 144(b) of the
Code. The foregoing covenants shall remain in full force and effect
notwithstanding the defeasance of the Tax-Exempt Notes of any series and
notwithstanding any other provision of the Indenture.
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.
Amendment of Student Loan Purchase Agreements and Loan Purchase
Regulations. The Corporation shall notify the Trustee in writing of any
proposed amendments to the Student Loan Purchase Agreements or the Loan Purchase
Regulations. 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.)
IX-33
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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 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;
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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
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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.
Moneys held by the Trustee or any Deposit Agent for the credit of any Fund
or Account shall be invested by the Trustee or such Deposit Agent, in accordance
with the sections of the Indenture relating to such Funds and Accounts, as
directed by the Corporation, to the fullest extent practicable and reasonable,
in Investment Securities which shall mature or be redeemable at the option of
the holder prior to the respective dates when the moneys held for the credit of
such Fund or Account will be required for the purposes intended.
REPORTS TO NOTEHOLDERS
The Trustee, in accordance with the Indenture, is required to mail a copy
of each Monthly Servicer's 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
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(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
(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
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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;
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<PAGE>
(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
(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,
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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, including,
without limitation, any remedy of a secured party under the South Dakota Uniform
Commercial Code, foreclosure and mandamus, 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.
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<PAGE>
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 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
IX-41
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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:
(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, without regard to due date, to the Senior Noteholders and to
each Other Senior
IX-42
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Beneficiary, without any discrimination or preference, and the Trustee
shall apply the amount so apportioned to the Senior Noteholders as follows:
first, to the payment of the Holders of the Senior Notes of
all installments of interest (other than interest on overdue
principal) then due and payable in the order in which such
installments became due and payable, and if the amount available shall
not be sufficient to pay in full any particular installment, then to
the payment, ratably, according to the amounts due on such installment
and other amounts, to the Persons entitled thereto, without any
discrimination or preference, and
second, to the payment to the Holders of the Senior Notes of
the unpaid principal of any of the Senior Notes which shall have
become due and payable (other than Senior Notes called for redemption
for the payment of which money is held pursuant to the provisions of
the Indenture) in the order of their stated payment dates, with
interest on the Principal Amount of such Notes at the respective rates
specified therein from the respective dates upon which such Senior
Notes became due and payable, and, if the amount available shall not
be sufficient to pay in full the Principal Amount of the Senior Notes
by their stated terms due and payable on any particular date, then to
the payment of such principal, ratably, according to the amount of
such principal then due on such date, to the Persons entitled thereto
without any discrimination or preference;
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 as follows:
first, to the payment of the Holders of the Subordinate
Notes of all installments of interest (other than interest on overdue
principal) then due and payable in the order in which such
installments became due and payable, and if the amount available shall
not be sufficient to pay in full any particular installment, then to
the payment, ratably, according to the amounts due on such installment
and other amounts, to the Persons entitled thereto, without any
discrimination or preference, and
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second, to the payment to the Holders of the Subordinate
Notes of the unpaid principal of any of the Subordinate Notes which
shall have become due and payable (other than Subordinate Notes called
for redemption for the payment of which money is held pursuant to the
provisions of the Indenture) in the order of their stated payment
dates, with interest on the Principal Amount of such Notes at the
respective rates specified therein from the respective dates upon
which such Subordinate Notes became due and payable, and, if the
amount available shall not be sufficient to pay in full the Principal
Amount of the Subordinate Notes by their stated terms due and payable
on any particular date, then to the payment of such principal,
ratably, according to the amount of such principal then due on such
date, to the Persons entitled thereto without any discrimination or
preference;
THIRD, to the payment of the Holders of the Class C Notes of all
installments of interest (other than interest on overdue principal) then
due and payable in the order in which such installments became due and
payable, and if the amount available shall not be sufficient to pay in full
any particular installment, then to the payment, ratably, according to the
amounts due on such installment and other amounts, to the Persons entitled
thereto, without any discrimination or preference; and
FOURTH, to the payment to the Holders of the Class C Notes of the
unpaid principal of any of the Class C Notes which shall have become due
and payable (other than Class C Notes called for redemption for the payment
of which money is held pursuant to the provisions of the Indenture) in the
order of their stated payment dates, with interest on the Principal Amount
of such Class C Notes at the respective rates specified therein from the
respective dates upon which such Class C Notes became due and payable, and,
if the amount available shall not be sufficient to pay in full the
Principal Amount of the Class C Notes by their stated terms due and payable
on any particular date, then to the payment of such principal, ratably,
according to the amount of such principal then due on such date, to the
Persons entitled thereto without any discrimination or preference.
(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
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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.
TRUSTEE
[Eligible lender requirements and covenants]
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.
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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:
(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,
(d) evidence the appointment of a separate trustee or a co-trustee or
the succession of a new trustee under the Indenture,
IX-46
<PAGE>
(e) authorize the issuance of a series of Notes, subject to the
requirements of the Indenture (see "Additional Notes" above),
(f) modify, eliminate and/or add to the provisions of the Indenture to
such extent as shall be necessary to effect the qualification of the
Indenture under the Trust Indenture Act of 1939, as then amended, or under
any similar Federal statute enacted after the date of the Indenture, and to
add to the Indenture such other provisions as may be expressly permitted by
said Trust Indenture Act of 1939, excluding, however, the provisions
referred to in Section 316(a)(2) of said Trust Indenture Act of 1939,
(g) modify, eliminate and/or add to the provisions of the Indenture to
such extent as shall be necessary or advisable in order to comply with the
requirements of Section 148 or any other provision of the Code with respect
to the exclusion of interest on any Tax-Exempt Notes from gross income for
purposes of federal income taxation,
(h) amend the assumptions contained in the definition of "Cash Flow
Projection" (upon receipt by the Trustee from each Rating Agency of written
confirmation that the outstanding ratings on any Outstanding Unenhanced
Notes will not be reduced or withdrawn as a result of such amendment, 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 amendment of such assumptions, as evidenced in
writing to the Trustee by each such Other Beneficiary).
(i) modify the Indenture (including deletions of or changes to
provisions of the Indenture or additions to the Indenture or any
combination of deletions, changes and additions) 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
(j) 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
IX-47
<PAGE>
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 or be construed as
permitting 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, whether at the Stated Maturity thereof, on a Sinking Fund Payment
Date or otherwise, (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.
For purposes of the Indenture, Notes are deemed "affected" by an amendment
if such amendment adversely affects or diminishes the rights of the Holders
thereof to be assured of the payment of principal of, premium, if any, and
interest on, [and any Carry-Over Amount (and accrued interest thereon) with
respect to such Notes,] taking into account the priorities between classes of
Notes theretofore prescribed by the Indenture. The Trustee may in its
discretion determine whether any Notes would be affected by any amendment and
any such determination shall be conclusive upon the Holders of all Notes,
whether theretofore or thereafter authenticated and delivered under the
Indenture. The Trustee shall not be liable for any such determination made in
good faith.
If at any time the Corporation requests the Trustee to enter into any such
Supplemental Indenture for any such purposes, the Trustee, upon being
satisfactorily indemnified with respect to expenses, shall cause notice of the
proposed execution of such Supplemental Indenture to be
IX-48
<PAGE>
mailed to each Holder of an Outstanding Note and to each Other Beneficiary. The
Trustee shall not, however, be subject to any liability to any Noteholder or any
Other Beneficiary by reason of its failure to mail such notice, and any such
failure shall not affect the validity of such Supplemental Indenture when
consented to and approved as provided in the Indenture. If, at the time of the
execution of any such Supplemental Indenture, the Holders of Notes and each
Other Beneficiary shall have consented to and approved the execution thereof as
provided in the Indenture, no Beneficiary shall have any right to object to any
of the terms and provisions contained therein, or the operation thereof, or in
any manner to question the propriety of the execution thereof, or to enjoin or
restrain the Trustee or the Corporation from executing the same or from taking
any action pursuant to the provisions thereof. Upon the execution of any such
Supplemental Indenture, the Indenture shall be deemed modified and amended in
accordance therewith.
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.
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.
IX-49
<PAGE>
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 (whether such due
date be by reason of Stated Maturity or upon redemption or prepayment, or
otherwise), 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 and irrevocably
appropriating and setting aside 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, and all necessary and proper fees,
compensation and expenses of the Trustee, any Deposit Agents, any
Remarketing Agents, any Depositaries, any Auction Agents, any Broker-
Dealers, any Authenticating Agents, the Note Registrar and any Paying
Agents pertaining to the Note with respect to which such deposit is made
shall have been paid or the payment thereof provided for to the
satisfaction of the Trustee, said Deposit Agents, said Remarketing Agents,
said Depositaries, said Auction Agents, said Broker-Dealers, said
Authenticating Agents, said Note Registrar and said Paying Agents.
Any deposit under the preceding clause (b) shall be accompanied by a Corporation
Certificate certifying that the moneys and Government Obligations so
appropriated and set aside are sufficient, and will mature as needed, to pay the
principal, premium, if any, and interest due on the Note with respect to which
such deposit has been made on the Stated Maturity or Redemption Date thereof and
on each Interest Payment Date on and prior to such Stated Maturity or Redemption
Date.
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.
IX-50
<PAGE>
At such time as a Note shall be deemed to be no longer Outstanding under
the Indenture, as aforesaid, such Note shall cease to draw interest from the due
date thereof (whether such due date be by reason of maturity, or upon redemption
or prepayment or by declaration as aforesaid, or otherwise) and, except for the
purposes of any such payment from such moneys or Investment Securities, shall no
longer be secured by or entitled to the benefits of the Indenture.
Notwithstanding the foregoing, (A) in the case of Notes which by their
terms may be redeemed or otherwise prepaid prior to their Stated Maturities, no
deposit under clause (b) of subparagraph (ii) above shall constitute such
payment, discharge and satisfaction as aforesaid, as to all such Notes which are
to be redeemed or prepaid prior to their respective Stated Maturities, until
proper notice of such redemption or prepayment shall have been previously given
in accordance with the Indenture or provision satisfactory to the Trustee shall
have been irrevocably made for the giving of such notice and (B) in the case of
Notes which may be required to be purchased on a Purchase Date, no deposit under
clause (b)(2) of subparagraph (ii) above shall constitute such payment,
discharge and satisfaction as aforesaid.
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 Credit
Enhancement Facility or Swap Agreement in the manner and with the effect
provided in the Supplemental Indenture providing for such Credit Enhancement
Facility or Swap Agreement.
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 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.
IX-51
<PAGE>
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-52
<PAGE>
APPENDIX X
WEIGHTED AVERAGE LIFE OF THE
TAXABLE LIBOR RATE SERIES 1997-1 NOTES
<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>
AVAILABLE INFORMATION....................................................................... 4
REPORTS TO NOTEHOLDERS...................................................................... 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................. 5
PROSPECTUS SUMMARY.......................................................................... 6
RISK FACTORS................................................................................ 21
DESCRIPTION OF SERIES 1997-1 NOTES.......................................................... 34
APPLICATION OF SERIES 1997-1 NOTE PROCEEDS.................................................. 44
SOURCE OF PAYMENT AND SECURITY FOR THE NOTES................................................ 45
THE ORIGINAL ISSUER AND THE CORPORATION..................................................... 49
THE SERVICER................................................................................ 50
THE SERVICING AGREEMENT..................................................................... 51
DESCRIPTION OF FINANCED ELIGIBLE LOAN PROGRAM............................................... 57
ESTIMATED CHARACTERISTICS OF THE FINANCED ELIGIBLE LOANS.................................... 61
DESCRIPTION OF FEDERAL FAMILY EDUCATION LOAN PROGRAM........................................ 65
DESCRIPTION OF THE GUARANTEE AGENCIES....................................................... 84
TAX MATTERS................................................................................. 93
ERISA CONSIDERATIONS........................................................................ 97
CERTAIN RELATIONSHIPS AMONG FINANCING PARTICIPANTS.......................................... 99
PLAN OF DISTRIBUTION........................................................................ 100
LEGAL MATTERS............................................................................... 101
FINANCIAL INFORMATION....................................................................... 102
RATINGS..................................................................................... 102
GLOSSARY OF CERTAIN DEFINED TERMS........................................................... 103
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
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
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 CERTAIN PROVISIONS 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*
23.1 Consents of Dorsey & Whitney LLP (included in Exhibits 5.1
and 8.1)
24.1a Powers of Attorney
25.1 Statement of Eligibility of Trustee (Form T-1)*
_______________
* To be filed by amendment.
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 registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Aberdeen, State of South Dakota on May 7, 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
registration statement 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 May 7, 1997
A. Norgrin Sanderson and Director
(principal executive officer,
principal financial and accounting officer)
____________*____________ Chairman of the Board May 7, 1997
V. G. Stoia
____________*____________ Vice Chairman of the Board May 7, 1997
Manley B. Feinstein
____________*____________ Director May 7, 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*
23.1 Consents of Dorsey & Whitney LLP*
24.1b Powers of Attorney
25.1 Statement of Eligibility of Trustee (Form T-1)*
* 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.
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 registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Aberdeen, State of South Dakota on May 7, 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
registration statement 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 May 7, 1997
- ------------------------ and Chairman of the Board
A. Norgrin Sanderson (principal executive officer,
principal financial and accounting officer)
____________*____________ Director May 7, 1997
V. G. Stoia
____________*____________ Director May 7, 1997
Manley B. Feinstein
____________*____________ Director May 7, 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*
23.1 Consents of Dorsey & Whitney LLP (included in Exhibits 5.1 and 8.1)
24.1a Powers of Attorney
24.1b Powers of Attorney
25.1 Statement of Eligibility of Trustee (Form T-1)*
_______________
* To be filed by amendment.
<PAGE>
EXHIBIT 3.1A
RESTATED
ARTICLES OF INCORPORATION
OF
EDUCATION LOANS INCORPORATED
Pursuant to Section 47-22-27 of the South Dakota Codified Laws, Education
Loans Incorporated adopts the following Restated Articles of Incorporation:
ARTICLE I
The name of the Corporation is Education Loans Incorporated.
ARTICLE II
The period of existence is in perpetuity from and after the date of filing
these Articles of Incorporation with the Secretary of State of South Dakota
unless dissolved according to law.
ARTICLE III
The purpose or purposes for which the Corporation is organized:
The Corporation is organized exclusively for the purpose of providing funds
for the acquisition of, and acquiring, student loan notes incurred under
the Federal Higher Education Act of 1965, as amended, and to provide
procedures for the servicing of such loans as required for continued
participation in the Federally Insured Guaranteed Student Loan Program
under the Higher Education Act of 1965, as amended, and to devote any
income (after payment of expenses, debt service and the creation of
reserves for the same) to the purchase of additional student loan notes or
to pay over any income to the United States. The Corporation shall have
and exercise all powers conferred by the law of the State of South Dakota
upon corporations formed under the South Dakota Nonprofit Corporation Act
which are consistent with the foregoing purposes and which an organization
described in Section 103(e) of the Internal Revenue Code of 1954, as
amended through October 21, 1986, Sections 150(d) and 501(c)(3) of the
Internal Revenue Code of 1986, as amended (hereinafter referred to as the
"Code"), or the corresponding provisions of any future United States
Internal Revenue Law, and the regulations promulgated thereunder, may have
or exercise. Notwithstanding any other provision of these Articles, the
Corporation shall not carry on any other activities not permitted to be
carried on (a) by an organization described under Section 501(c)(3) of the
Code and exempt from Federal income tax under Section 501(a) of the Code
(or the corresponding provision of
<PAGE>
any future United States Internal Revenue Law) or (b) by a corporation,
contributions to which are deductible under Section 170(c)(2) of the Code
(or the corresponding provision of any future United States Internal
Revenue Law).
ARTICLE IV
The Corporation will be a nonmembership corporation.
ARTICLE V
In the Event of dissolution of the Corporation, no individual shall be
entitled to any distribution or division of its remaining property or its
proceeds. The balance of money and other property received by the Corporation
from any source (after payment of all debts and obligations) shall be
distributed to the United States, to the extent such money and other property
constitutes "income" or is otherwise required to be distributed to the United
States in order to enable the Corporation to issue "qualified scholarship fund
bonds" within the meaning of Section 150(d) of the Code or the corresponding
provisions of any future United States Internal Revenue Law. To the extent not
otherwise provided in the preceding sentence, such money and other property
shall be distributed to the State of South Dakota for public purposes.
ARTICLE VI
The address of its registered office is 105 First Avenue S.W., Aberdeen,
South Dakota 57401 and the name of its registered agent at such address is
A. Norgrin Sanderson.
ARTICLE VII
The corporation shall be governed by a Board of Directors consisting of not
less than four nor more than seven members of the Board of Directors as are from
time to time set by the directors of the corporation. The directors shall be
elected annually as provided in the By-Laws and shall serve one-year terms or
until their successors are elected and qualified. Individuals who have not
served on the Board of Directors within the previous year shall be submitted to
the then Governor of the State of South Dakota for his approval.
These Articles may be amended in the manner authorized by law at the time
of amendment.
2
<PAGE>
VERIFICATION
The foregoing Restated Articles of Incorporation of Education Loans
Incorporated correctly set forth the provisions of the original Articles of
Incorporation as heretofore amended, have been duly adopted by the Board of
Directors at a meeting held on May 6, 1997, and supersede the original Articles
and all amendments thereto.
Executed in duplicate on May 6, 1997. /s/ A. Norgrin Sanderson
__________________________________
A. Norgrin Sanderson, President
State Of South Dakota )
) ss
County Of Brown )
On this the 6th day of May, 1997, before me, the undersigned officer,
personally appeared A. Norgrin Sanderson, known to me to be the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same for the purposes therein contained.
IN WITNESS WHEREOF I hereunto set my hand and official seal.
[Notarial Seal] /s/ Leah Tobin
__________________________________
Notary Public
My Commission Expires: October 30, 2000
3
<PAGE>
EXHIBIT 3.1B
CERTIFICATE OF INCORPORATION
OF
EDUCATION LOANS INCORPORATED
To form a corporation pursuant to the Delaware General Corporation Law, the
undersigned hereby certifies as follows:
Article I. Name. The name of the Corporation is Education Loans
Incorporated (the "Corporation").
Article II. Registered Office and Agent. The address of the Corporation's
registered office in the State of Delaware is 1209 Orange Street, Wilmington,
New Castle County, Delaware, and the name of its registered agent at such
address is The Corporation Trust Company.
Article III. Purpose. The nature of the business or purpose to be
conducted or promoted by the Corporation is to engage exclusively in the
following business and financial activities:
(a) to receive the assets and assume the liabilities transferred to it
under that certain Contribution Agreement by and among Education Loans
Incorporated, a South Dakota nonprofit corporation, Student Loan Finance
Corporation, a South Dakota corporation, and the Corporation (the "Initial
Transaction");
(b) to originate or acquire loans for post-secondary education of
students ("Student Loans");
(c) to enter into any agreement relating to any Student Loans that
provides for the acquisition, origination, administration, servicing and
collection of amounts due on such Student Loans;
(d) to issue any class of bonds, notes, asset-backed certificates or
other securities payable solely from Student Loans and other assets pledged
to the payment thereof (the "Securities"); and
(e) to engage in any lawful act or activity and to exercise any powers
permitted to corporations organized under the General Corporation Law of
the State of Delaware that are incidental to and necessary, suitable or
convenient for the accomplishment of the purposes specified in clauses (a)
through (d) above.
<PAGE>
Article IV. Duration. The Corporation is to have perpetual existence.
Article V. Number of Shares. The aggregate number of shares of all
classes of capital stock that the Corporation shall have authority to issue is
one hundred (100) shares of Common Stock, par value of $0.01 per share.
Article VI. Incorporator. The name and mailing address of the
incorporator is as follows:
Name Mailing Address
---- ---------------
Timothy S. Hearn Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
Article VII. Number of Directors; Initial Directors. The number of
directors of the Corporation will not be less than two nor more than seven. The
exact number of directors is to be fixed in the Bylaws. The number of directors
constituting the initial Board of Directors is four, and the names and addresses
of the persons who are to serve as directors until the first annual meeting of
shareholders or until their respective successors are elected and qualified are:
Name Address
---- -------
A. Norgrin Sanderson 105 First Avenue Southeast
Aberdeen, SD 57401
V.G. Stoia 105 First Avenue Southeast
Aberdeen, SD 57401
Manley B. Feinstein 105 First Avenue Southeast
Aberdeen, SD 57401
Harvey C. Jewett 105 First Avenue Southeast
Aberdeen, SD 57401
The list above setting forth the names and addresses of the initial directors of
the Corporation does not include additional persons who may otherwise be elected
and qualified to serve as directors in accordance with the Bylaws.
Article VIII. Independent Directors. Within forty-five (45) days after
the closing of the Corporation's first registered offering of securities and at
all times thereafter, at least two directors of the Corporation must be
Independent Directors
2
<PAGE>
and at least one member of each committee of the Board of Directors must be an
Independent Director. "Independent Director" means a director of the Corporation
who shall not be at the time of initial appointment, and for at least five years
prior thereto shall not have been, (i) a director, officer or employee of, or
direct or indirect beneficial owner of 5% or more of the voting securities of,
any Affiliate of the Corporation (provided that such person may be serving or
have served as an "independent director" (meeting a definition substantially
similar to the definition of "Independent Director" in this Article VIII) of
another limited purpose entity similar to the Corporation and under common
control with the Corporation), (ii) a customer, supplier or other person who
derives more than 10% of its purchases or revenues from its activities with the
Corporation or any Affiliate of the Corporation; (iii) a person controlling or
under common control with any such stockholder, customer, supplier or other
person; or (iv) a member of the immediate family of any such stockholder,
director, officer, employee, customer, supplier or other person. For the
purposes of this Certificate of Incorporation, an "Affiliate" of a person or an
entity is a person or an entity controlling, controlled by, or under common
control with such first person or entity and the term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of management, policies or activities of a person or entity, whether
through ownership of voting securities, by contract or otherwise.
Article IX. Directors' Powers. The Board of Directors shall have general
power and authority to manage the business, properties and affairs of the
Corporation, provided that, without the consent in writing of the Independent
Directors (as that term is defined in Article VIII of this Certificate of
Incorporation), the directors shall not have power (i) to make or to alter or
amend the Bylaws, (ii) to fix the amount to be reserved as working capital, or
(iii) to authorize or cause to be executed, mortgages or liens upon the property
and franchise of this Corporation except that such consent of the Independent
Directors shall not be required in connection with the Initial Transaction and
any actions incident thereto.
The Bylaws shall determine whether and to what extent the accounts and
books of this Corporation, or any of them, shall be open to the inspection of
the stockholders; and no stockholder shall have any right of inspecting any
account, or book, or document of this Corporation, except as conferred by law or
the Bylaws or by resolution of the stockholders.
The stockholders and directors shall have power to hold their meetings and
keep the books, documents and papers of the Corporation outside the State of
Delaware, at such places as may be from time to time designated by the Bylaws or
by resolution of the stockholders or directors, except as otherwise required by
the laws of Delaware.
3
<PAGE>
Article X. Written Action by Directors. An action required or permitted
to be taken at a meeting of the Board of Directors of the Corporation may be
taken by written action signed, or counterparts of a written action signed in
the aggregate, by all of the directors.
Article XI. Reliance on Books and Records, Etc. A director shall, in the
performance of his duties, be fully protected in relying in good faith upon the
records of the Corporation and upon such information, opinions, reports or
statements presented to the Corporation by any of the Corporation's officers or
employees, or committees of the Board of Directors, or by any other person as to
matters the director reasonably believes are within such other person's
professional or expert competence and who has been selected with reasonable care
by or on behalf of the Corporation.
Article XII. Liability of Directors. To the fullest extent permitted by
the General Corporation Law of the State of Delaware as the same exists or may
hereafter be amended, a director of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for a breach of fiduciary
duty as a director, except (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. Any
repeal or modification of this Article XII shall not adversely affect any right
or protection of a director of the Corporation existing at the time of such
repeal or modification.
Article XIII. Internal Affairs. The Corporation:
(a) shall (i) maintain and prepare financial reports, financial
statements, books and records and bank accounts separate from those of its
Affiliates and any other person or entity and (ii) not permit any Affiliate
or any other person or entity independent access to its bank accounts;
(b) shall not commingle its funds and other assets with those of any
Affiliate, any guarantor of any of the obligations of the Corporation
(each, a "Guarantor"), any Affiliate of any Guarantor or any other person
or entity;
(c) shall conduct its own business in its own name and shall hold all
of its assets in its own name;
(d) shall remain solvent and pay its debts and liabilities (including
employment and overhead expenses) from its assets as the same shall become
due;
4
<PAGE>
(e) shall do all things necessary to observe corporate formalities and
preserve its existence as a single-purpose, bankruptcy-remote entity in
accordance with the standards of the Rating Agencies (as defined below)
providing ratings on any outstanding Securities, as such standards are in
effect on the date of issuance of such Securities;
(f) shall enter into transactions with Affiliates only if each such
transaction is commercially reasonable and on substantially similar terms
as a transaction that would be entered into on an arm's length basis with a
person or entity other than an Affiliate of the Corporation;
(g) shall pay the salaries of its own employees from its own funds and
maintain a sufficient number of employees in light of its contemplated
business operations;
(h) shall compensate each of its consultants and agents from its own
funds for services provided to it and pay from its own assets all
obligations of any kind incurred;
(i) shall not guarantee, become obligated for, or hold itself or its
credit out to be responsible for, or available to satisfy, the debts or
obligations of any other person or entity or the decisions or actions
respecting the daily business or affairs of any other person or entity;
(j) shall not (i) acquire obligations or securities of any Affiliate
or any of the stockholders of the Corporation or (ii) buy or hold any
evidence of indebtedness issued by any other person or entity, other than
cash, investment-grade securities, Student Loans and other obligations and
securities specified in Article III hereof;
(k) will allocate fairly and reasonably and pay from its own funds the
cost of (i) any overhead expenses (including paying for any office space)
shared with any Affiliate of the Corporation and (ii) any services (such as
asset management, legal and accounting) that are provided jointly to the
Corporation and one or more of its Affiliates;
(l) will maintain and utilize separate stationery, invoices and checks
bearing its own name and allocate separate office space (which may be a
separately identified area in office space shared with one or more
Affiliates of the Corporation) and maintain a separate sign in the office
directory of the building in which the Corporation maintains its principal
place of business;
5
<PAGE>
(m) shall not make any loans or advances to, or pledge its assets for
the benefit of, any other person or entity, including, without limitation,
any Affiliate or Guarantor or any Affiliate of any Guarantor;
(n) shall be, and at all times shall hold itself out to the public as,
a legal entity separate and distinct from any other person or entity;
(o) shall, in the event that any authorized officer knows of any
misunderstanding regarding the separate identity of the Corporation,
correct such misunderstanding;
(p) shall not identify itself or any of its Affiliates as a division
or part of any other entity; and
(q) shall maintain adequate capital for the normal obligations
reasonably foreseeable in a business of its size and character and in light
of its contemplated business operations.
Article XIV. Meetings of Stockholders. Meetings of stockholders shall be
held at such place, within or without the State of Delaware, as may be
designated by or in the manner provided in the Bylaws or, if not so designated
or provided, at the registered office of the Corporation in the State of
Delaware. Elections of directors shall be by written ballot. The books of the
Corporation may be kept (subject to any provision contained in any applicable
statute) outside the State of Delaware at such place or places as may be
designated from time to time by the Board of Directors or in the Bylaws of the
Corporation.
Article XV. Limitations on Actions.
(a) Notwithstanding any other provision of this Certificate of
Incorporation, the Bylaws or any provision of law that otherwise so
empowers the Corporation, the Corporation shall not, without (i) the
affirmative vote of 100% of the members of the Board of Directors of the
Corporation, including the affirmative vote of the Independent Directors
required by Article VIII, and (ii) the affirmative vote of stockholders
holding at least two-thirds (2/3) of the total number of outstanding shares
of Common Stock of the Corporation, make an assignment for the benefit of
creditors, file a petition in bankruptcy, petition or apply to any tribunal
for the appointment of a custodian, receiver or any trustee for it or for a
substantial part of its property, commence any proceeding under any
bankruptcy, reorganization, arrangement, readjustment of debt, dissolution
or liquidation law or statute of any jurisdiction, whether now or
hereinafter in effect, consent or acquiesce in the filing of any such
petition, application, proceeding or appointment of or taking possession by
the custodian, receiver, liquidator, assignee, trustee,
6
<PAGE>
sequestrator (or other similar official) of the Corporation or any
substantial part of its property, or admit its inability to pay its debts
generally as they become due or authorize any of the foregoing to be done
or taken on behalf of the Corporation; provided, that if there are not two
Independent Directors required by Article VIII of this Certificate of
Incorporation then in office and acting, a vote upon any matter set forth
in this paragraph (a) of this Article XV shall not be taken unless and
until at least two Independent Directors meeting the requirements of
Article VIII of this Certificate of Incorporation have been appointed and
qualified.
(b) The Corporation shall not:
(i) engage in any business or activity other than as
authorized in Article III hereof,
(ii) dissolve or liquidate, in whole or in part,
(iii) consolidate with or merge into any other entity,
(iv) convey, transfer or lease its properties and assets
substantially as an entirety to any person or entity (except in
connection with the business and activities authorized in Article III
hereof),
(v) permit any entity to merge into it,
(vi) permit any person or entity to convey, transfer or lease
its properties and assets substantially as an entirety to the
Corporation (except in connection with the business and activities
authorized in Article III hereof),
(vii) incur any indebtedness (except in connection with the
business and activities authorized in Article III hereof),
(viii) take any action that might cause the Corporation to become
insolvent or
(ix) form, or cause to be formed, any subsidiaries of the
Corporation.
(c) So long as any Securities remain outstanding, the Corporation
shall not amend or modify Article III, Article VIII, Article XIII or this
Article XV of this Certificate of Incorporation unless the Corporation
shall have first received written confirmation from each of the nationally-
recognized statistical ratings organizations that provide ratings on such
Securities on the
7
<PAGE>
date of issuance of such Securities (each, a "Rating Agency") that such
action, in and of itself, will not cause such Rating Agency to qualify,
downgrade or withdraw any of its then-current ratings on any of such
Securities.
(d) No transfer of any direct or indirect ownership interest in the
Corporation such that the transferee owns more than a 49% interest in the
Corporation (or such other interest specified by a Rating Agency with
respect to any outstanding Securities) may be made unless such transfer is
conditioned upon the delivery of an acceptable non-consolidation opinion to
any trustee with respect to any outstanding Securities and any Rating
Agency providing ratings on any outstanding Securities on the date of
issuance of such Securities concerning, as applicable, the Corporation, the
transferee and/or their respective owners.
Article XVI. Amendment, Alteration or Repeal. The Corporation reserves
the right to amend, alter, or repeal any other provision contained in this
Certificate of Incorporation in the manner now or hereafter prescribed by
statute, and all rights of stockholders herein are subject to this reservation;
provided, however, that Article III, Article VIII, Article XIII and Article XV
may be amended only in accordance with Article XV of this Certificate of
Incorporation.
Executed this 6th day of May, 1997.
/s/ Timothy S. Hearn
------------------------------------
Timothy S. Hearn
8
<PAGE>
EXHIBIT 3.2A
BY - LAWS
OF
EDUCATION LOANS INCORPORATED
(as amended through May 7, 1997)
____________
ARTICLE I
Name
----
The name of the Corporation shall be Education Loans Incorporated, and it
is sometimes referred to in these By-Laws as the Corporation.
ARTICLE II
Purposes
--------
1. Purposes. The purposes for which the Corporation is formed are those
set forth in its Articles of Incorporation, as from time to time amended.
Namely, the Corporation is organized exclusively for the purpose of providing
funds for the acquisition of and acquiring student loan notes incurred under the
Federal Higher Education Act of 1965, as amended, and to provide procedures for
the servicing of such loans as required for continued participation in the
Federally Insured Guaranteed Student Loan Program under the Higher Education Act
of 1965, as amended, and to devote any income (after payment of expenses, debt
service, and the creation of reserves for the same) to the purchase of
additional student loan notes or to pay over any income to the United States.
The Corporation shall have and exercise all powers conferred by the laws of the
State of South Dakota upon corporations formed under the South Dakota Non-Profit
Corporation Act, which are consistent with the foregoing purposes and which an
organization described in Section 103(e) of the Internal Revenue Code of 1954,
as amended through October 21, 1986, Sections 150(d) and 501(c)(3) of the
Internal Revenue Code of 1986, as amended (the "Code"), or the corresponding
provisions of any future United States Internal Revenue Law, and the regulations
promulgated thereunder, as amended or as hereinafter amended, may have or
exercise. Notwithstanding any other provision of these By-Laws, the Corporation
shall not carry on any other activities not permitted to be carried on (a) by a
corporation exempt from federal income tax under Section 501(c)(3) of the Code
and exempt from Federal income tax under Section 501(a) of the Code (or the
corresponding provisions of any future United States Internal Revenue Law) or
(b) by a corporation, contributions to which are deductible under Section
170(c)(2) of the Code (or the corresponding provision of any future United
States Internal Revenue Law).
<PAGE>
2. Powers. In general, carrying on any activity in connection with the
foregoing and having and exercising all of the powers and rights conferred by
the laws of the State of South Dakota upon corporations formed under such laws.
3. 501(c)(3). Notwithstanding anything contained herein to the contrary,
the Corporation is organized and shall be operated exclusively for purposes
provided for in Sections 501(c)(3) and 150(d) of the Code as the same now exists
or as they may be amended from time to time. No part of the net earnings of
this Corporation shall inure to the benefit of any private shareholder, member
or individual; no substantial part of the activities of the Corporation shall
consist of carrying on propaganda or otherwise attempting to influence
legislation; and the Corporation shall not participate in, or intervene in (by
publishing or distributing statements or otherwise), any political campaign on
behalf of any candidate for public office.
ARTICLE III
Dissolution
-----------
In the event of dissolution of the Corporation, no individual shall be
entitled to any distribution or division of its remaining property or its
proceeds. The balance of money and other property received by the Corporation
from any source, after payment of all debts and obligations, shall be
distributed to the United States of America, to the extent such money and other
property constitutes "income" or is otherwise required to be distributed to the
United States in order to enable the Corporation to issue "qualified scholarship
funding bonds" within the meaning of Section 150(d) of the Code or the
corresponding provisions of any future United States Internal Revenue Law. To
the extent not otherwise provided in the preceding sentence, such money and
other property shall be distributed to the State of South Dakota for public
purposes.
ARTICLE IV
Basic Policies
--------------
The following are basic policies of the Corporation:
1. Restrictions. The Corporation shall be noncommercial, nonsectarian,
and nonpartisan.
2. Commercial Activities. The name of the Corporation or the names of any
members in their official capacities shall not be used in any connection with a
commercial concern or with any partisan interest or for any purpose not
appropriately related to promotion of the objects of the Corporation.
-2-
<PAGE>
3. Limitations. The Corporation may cooperate with other organizations
and agencies concerned with social welfare, but persons representing the
Corporation in such matters shall make no commitments that bind the Corporation.
ARTICLE V
Officers and Their Election
---------------------------
1. Officers. (a) The officers of the Corporation shall consist of a
Chairman, a Vice-Chairman, a Secretary, a Treasurer, a President, Senior Vice-
President, Vice-Presidents, and such other officers as may be authorized by the
directors from time to time.
(b) Officers shall be elected by ballot annually by the Board of Directors
in the month of December. However, if there is but one nominee for any office,
it shall be in order to move that the Secretary cast the elective ballot of the
Corporation for the nominee.
(c) Officers shall assume their official duties following the close of the
annual meeting in December, and shall serve for a term of one year and until the
election and qualification of their successors.
(d) Any officer of the Corporation may be removed, with or without cause,
by a majority vote of the directors of the Corporation then in office.
2. Vacancy. A vacancy occurring in any office shall be filled for the
unexpired term and by a person elected by a majority vote of the members of the
Board of Directors, notice of such election having been given. In case a
vacancy occurs in the office of Chairman, the Vice-Chairman shall serve notice
of the election.
3. Other Agents. The Board of Directors may, from time to time, appoint
such agents as it shall deem necessary, each of whom shall hold office during
the pleasure of the Board of Directors and shall have such authority and perform
such duties and receive such reasonable compensation, if any, as the Board of
Directors may from time to time determine.
4. Assistant Secretary. The Board of Directors may designate an Assistant
Secretary of the Corporation, who shall perform only such duties and take only
such actions as the Board of Directors may from time to time determine.
5. Assistant Treasurer. The Board of Directors may designate an Assistant
Treasurer of the Corporation, who shall perform only such duties and take only
such actions as the Board of Directors may from time to time determine.
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ARTICLE VI
Duties of Officers
------------------
1. Chairman. The Chairman shall preside at all meetings of the Board of
Directors at which he may be present; shall perform such other duties as may be
prescribed in these By-Laws or assigned to him by the Board of Directors, and
shall coordinate the work of the officers and committees of the Corporation in
order that the purposes may be promoted.
2. Vice-Chairman. The Vice-Chairman shall act as aide to the Chairman and
shall perform the duties of the Chairman during the absence or disability of
that officer.
3. Secretary. The Secretary shall record the minutes of all meetings of
the Board of Directors and shall perform such other duties as may be delegated
to him.
4. Treasurer. The Treasurer shall have custody of all of the funds of the
Corporation; shall keep a full and accurate account of receipts and
expenditures; and shall make disbursements in accordance with the approved
budget as authorized by the Board of Directors or a special committee. The
Treasurer shall present a financial statement at every meeting of the Board of
Directors and shall make a full report at the annual meeting. The Treasurer
shall be responsible for the maintenance of such books of account and records as
conform to the requirements of these By-Laws.
5. President. The duties of the President shall be (a) to transact
necessary business in the intervals between meetings of the Board of Directors
and such other business as may be referred to him by the Board of Directors; (b)
to present a report at the regular meetings of the Board of Directors; (c) to
prepare and submit to the Board of Directors for approval a budget for each
fiscal year; and (d) to approve routine bills within the limits of the budget.
6. Senior Vice-President and Vice-Presidents. A Senior Vice-President and
Vice-Presidents may be elected from time to time by the members of the Board of
Directors of the Corporation and shall perform such duties as are from time to
time determined by the Board of Directors.
7. Bank Accounts. A bank account designated as the "Operating Account"
shall be established at the Dacotah Bank Aberdeen of Aberdeen, South Dakota.
Any two of the officers of the Board of Directors and other officers designated
by resolution of the Board of Directors are authorized to deposit and withdraw
from
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said account and any two of the officers of the Board of Directors are
authorized to obligate the Corporation by notes or other promises to pay.
8. Other Duties. All officers shall:
(a) Perform, in addition to the duties outlined in these By-Laws, those
assigned from time to time by the Board of Directors.
(b) Deliver to their successors all official material not later than ten
(10) days following the election of their successors.
ARTICLE VII
Board of Directors
------------------
1. Number. There are authorized not more than seven members of the Board
of Directors, as are from time to time determined by the Board of Directors.
2. Removal. Directors may be removed and successors appointed by the
Governor of the State of South Dakota if any event of default occurs under the
Corporation's initial indenture of trust for student loan revenue bonds and the
Governor is notified of such an event of default by the Trustee pursuant to the
terms of such indenture.
3. Term. The members of the Board of Directors shall serve until the
election and qualification of their successors at the succeeding annual meeting
of the Board of Directors.
4. Meetings. Regular meetings of the Board of Directors shall be held
monthly during the year, the time and dates to be fixed by the Board from time
to time. A majority of the Board of Directors shall constitute a quorum.
Special meetings of the Board of Directors may be called by the Chairman or by a
majority of the members of the Board.
5. Compensation. The compensation of officers and directors, for services
rendered as a director or officer, shall be determined from time to time by a
resolution of the Board of Directors at any regular or special meeting of the
same.
6. Resignation. Any director may resign at any time by giving written
notice to the President of the Corporation. Such resignation shall take effect
at any time specified therein and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
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ARTICLE VIII
Standing and Special Committees
-------------------------------
1. Committees. The Board of Directors may create such standing committees
as it may deem necessary to promote the purposes and carry on the work of the
Corporation. The term of each committee chairman shall be one year and until
the election and qualification of his successor.
2. Plan. The chairman of each standing committee shall present a plan for
work to the Board of Directors for approval. No committee work shall be
undertaken without the consent of the Board of Directors.
3. Special Committees. The power to form special committees and appoint
their members rests with the Board of Directors.
4. Ex Officio Member. The Chairman shall be a member ex officio of all
committees except the nominating committee.
ARTICLE IX
Seal
----
The seal of the Corporation shall be in the form prescribed by the Board of
Directors and shall have inscribed thereon the name of the Corporation and the
words "Corporate Seal" and "South Dakota".
ARTICLE X
Indemnification of Directors and Officers
-----------------------------------------
1. Mandatory Indemnification.
a. To the extent an Executive has been successful on the merits or
otherwise in connection with any Action (see Section 15 of this Article X for
definitions of capitalized terms used herein), including, without limitation,
the settlement, dismissal, abandonment or withdrawal of any such Action where
the Executive does not pay, incur or assume any material Liabilities, he or she
shall be indemnified by the Corporation against all Liabilities incurred by or
on behalf of him or her in connection therewith. The Corporation shall pay or
reimburse such Liabilities to the Executive, or to such other person or entity
as the Executive may designate in writing to the Corporation, within ten days
after the receipt of the Executive's written request therefor, without regard to
the provisions of Section 3.
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In the event the Corporation refuses or fails to pay or reimburse such requested
Liabilities, the Executive may petition a court to order the Corporation to make
such payment pursuant to Section 4.
b. In all cases other than those set forth in Section 1a hereof and
subject to the conditions and limitations set forth hereinafter in this Article
X, the Corporation shall indemnify and hold harmless any Executive who is or was
a party, or is threatened to be made a party, to any Action by reason of his or
her status as an Executive, and/or as to acts performed in the course of such
Executive's duties to the Corporation and/or an Affiliate, against Liabilities
incurred by or on behalf of an Executive in connection with any Action,
including, without limitation, in connection with the investigation, defense,
settlement or appeal of any Action; provided, that it is not determined by the
Authority, or by a court, pursuant to Section 3 that the Executive engaged in
misconduct which constitutes a Breach of Duty.
c. Notwithstanding any other provision contained in this Article X to the
contrary, the Corporation shall not:
(i) indemnify against Liabilities (or advance Expenses) to an
Executive with respect to any Action initiated or brought voluntarily by
the Executive and not by way of defense, except with respect to Actions:
(a) brought to establish or enforce a right to indemnification
against Liabilities (or an advance of Expenses) under Section 4, under
the Act or under any other applicable statute, law or provision;
(b) initiated or brought voluntarily by an Executive to the
extent such Executive is successful on the merits or otherwise in
connection with such an Action; or
(c) as to which the Board determines it be appropriate.
(ii) indemnify an Executive against judgments, fines or penalties
incurred in a Derivative Action if the Executive is finally adjudged liable
to the Corporation by a court (unless the court before which such
Derivative Action was brought determines that the Executive is fairly and
reasonably entitled to indemnity for any or all of such judgments, fines or
penalties); or
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(iii) indemnify an Executive under this Article X for any amounts
paid in settlement of any Action effected without the Corporation's written
consent.
d. The Corporation shall not settle any Action in any manner which would
impose any Liabilities or other type of limitation on the Executive without the
Executive's written consent. Neither the Corporation nor the Executive shall
unreasonably withhold their consent to any such proposed settlement.
2. Advance for Expenses.
a. The Corporation shall from time to time pay to or reimburse an
Executive, or such other person or entity as the Executive may designate in
writing to the Corporation, Expenses incurred by or on behalf of such Executive
in connection with any Action in advance of the final disposition or conclusion
of any such Action within ten days after the receipt of the Executive's written
request therefor; provided, that the Executive furnishes to the Corporation an
executed written certificate affirming his or her good faith belief that he or
she has not engaged in misconduct which constitutes a Breach of Duty and agrees
in writing to repay any advances made under this Section 2 if it is ultimately
determined that he or she is not entitled to be indemnified by the Corporation
for such Expenses pursuant to this Article X.
3. Determination of Right to Indemnification.
a. Except as otherwise set forth in this Section 3 or in Section 1c, any
indemnification to be provided to an Executive by the Corporation under Section
1b upon the final disposition or conclusion of any Action, unless otherwise
ordered by a court, shall be paid or reimbursed by the Corporation to the
Executive, or such other person or entity as the Executive may designate in
writing to the Corporation, within sixty days after the receipt of the
Executive's written request therefor. Such request shall include an accounting
of all Liabilities for which indemnification is being sought. No further
corporate authorization for such payment shall be required other than this
Section 3a.
b. Notwithstanding the foregoing, the payment of such requested
indemnifiable Liabilities pursuant to Section 1b may be denied by the
Corporation if:
(i) a Disinterested Quorum, by a majority vote thereof, determines
that the Executive has engaged in misconduct which constitutes a Breach of
Duty; or
(ii) a Disinterested Quorum cannot be obtained.
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c. In either event of nonpayment pursuant to Section 3b, the Board shall
immediately authorize and direct, by resolution, that an independent
determination be made as to whether the Executive has engaged in misconduct
which constitutes a Breach of Duty and, therefore, whether indemnification of
the Executive is proper pursuant to this Article X. If the Board does not
authorize an Authority to determine the Executive's right to indemnification
hereunder within such sixty-day period and/or if indemnification of the
requested amount of Liabilities is paid by the Corporation, then it shall be
conclusively presumed for all purposes that a Disinterested Quorum has
affirmatively determined that the Executive did not engage in misconduct
constituting a Breach of Duty and, if not so paid, indemnification by the
Company of the requested amount of Liabilities shall be paid to the Executive
immediately.
d. An independent determination under Section 3c shall be made, at the
option of the Executive seeking indemnification, by (i) a panel of three
arbitrators (selected as set forth below in Section 3f from the panels of
arbitrators of the American Arbitration Association) at a location to be
mutually agreed upon by the Executive and the Corporation, in accordance with
the Commercial Arbitration Rules then prevailing of the American Arbitration
Association; (ii) an independent legal counsel mutually selected by the
Executive seeking indemnification and a Disinterested Quorum (or by the Board if
a Disinterested Quorum cannot be obtained) by a majority vote thereof; or (iii)
a court in accordance with Section 4.
e. In any such independent determination under Section 3c there shall
exist a rebuttable presumption that the Executive has not engaged in misconduct
which constitutes a Breach of Duty and is, therefore, entitled to
indemnification hereunder. The burden of rebutting such presumption by clear
and convincing evidence shall be on the Corporation or on such other party
challenging the payment of such indemnification.
f. If a panel of arbitrators is to be employed hereunder, one of such
arbitrators shall be selected by a Disinterested Quorum (or by the Board if a
Disinterested Quorum is not obtainable) by a majority vote thereof, the second
by the Executive seeking indemnification and the third by the two previously
selected arbitrators.
g. To the extent practicable, the Authority shall make its independent
determination hereunder within sixty days of being selected and shall
simultaneously submit a written opinion of its conclusions to both the
Corporation and the Executive.
h. If the Authority determines that an Executive is entitled to be
indemnified for any Liabilities pursuant to this Article X, the Corporation
shall pay such Liabilities to the Executive, including interest on such amounts
as provided in
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Section 6c, or to such other person or entity as the Executive may designate in
writing to the Corporation, within ten days of receipt of such opinion.
i. The Expenses associated with the indemnification process set forth in
this Section 3, including, without limitation, the Expenses of the Authority
selected hereunder, shall be paid by the Corporation.
4. Court-Ordered Indemnification and Advance for Expenses.
a. An Executive may, either before or within two years after a
determination, if any, has been made by the Authority, petition the court before
which such Action was brought or any other court of competent jurisdiction to
independently determine whether or not he or she has engaged in misconduct which
constitutes a Breach of Duty and is, therefore, entitled to indemnification
under the provisions of this Article X. Such court shall thereupon have the
exclusive authority to make such determination unless and until such court
dismisses or otherwise terminates such proceeding without having made such
determination. An Executive may petition a court under this Section 4 either to
seek an initial determination as authorized by Section 3d or to seek review of a
previous determination by the Authority.
b. The court shall make its independent determination irrespective of any
prior determination made by the Authority; provided, however, that there shall
exist a rebuttable presumption that the Executive has not engaged in misconduct
which constitutes a Breach of Duty and is, therefore, entitled to
indemnification hereunder. The burden of rebutting such presumption by clear
and convincing evidence shall be on the Corporation or such other party
challenging the payment of indemnification.
c. In the event the court determines that an Executive has engaged in
misconduct which constitutes a Breach of Duty, it may nonetheless order
indemnification to be paid by the Corporation if it determines that the
Executive is otherwise fairly and reasonably entitled to such indemnification in
view of all of the circumstances of such Action.
d. In the event the Corporation does not (i) advance Expenses to the
Executive within ten days of such Executive's compliance with Section 2; or (ii)
indemnify an Executive with respect to requested Liabilities under Section 1a
within ten days of such Executive's written request therefor, the Executive may
petition the court before which such Action was brought, if any, or any other
court of competent jurisdiction to order the Corporation to pay such Expenses or
Liabilities immediately. Such court, after giving any notice it considers
necessary, shall order the Corporation to immediately pay such Expenses or
Liabilities if it determines that
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the Executive has complied with the applicable provisions of Section 2 or 1a, as
the case may be.
e. If the court determines pursuant to this Section 4 that the Executive
is entitled to be indemnified for any Liabilities, or to the advance of
Expenses, unless otherwise ordered by such court, the Corporation shall pay such
Liabilities or Expenses to the Executive, including interest thereon as provided
in Section 6c, or to such other person or entity as the Executive may designate
in writing to the Corporation, within ten days of the rendering of such
determination.
f. An Executive shall pay all Expenses incurred by such Executive in
connection with the judicial determination provided in this Section 4, unless it
shall ultimately be determined by the court that he or she is entitled, in whole
or in part, to be indemnified by, or to receive an advance from, the Corporation
as authorized by this Article X. All Expenses incurred by an Executive in
connection with any subsequent appeal of the judicial determination provided for
in this Section 4 shall be paid by the Executive regardless of the disposition
of such appeal.
5. Termination of an Action is Nonconclusive. The adverse termination of
any Action against an Executive by judgment, order, settlement, conviction, or
upon a plea of no contest or its equivalent, shall not, of itself, create a
presumption that the Executive has engaged in misconduct which constitutes a
Breach of Duty.
6. Partial Indemnification; Reasonableness; Interest.
a. If it is determined by the Authority, or by a court, that an Executive
is entitled to indemnification against Liabilities incurred as to some claims,
issues or matters, but not as to other claims, issues or matters, involved in
any Action, the Authority, or the court, shall authorize the proration and
payment by the Corporation of such Liabilities with respect to which
indemnification is sought by the Executive, among such claims, issues or matters
as the Authority, or the court, shall deem appropriate in light of all of the
circumstances of such Action.
b. If it is determined by the Authority, or by a court, that certain
Expenses incurred by or on behalf of an Executive are for whatever reason
unreasonable in amount, the Authority, or the court, shall nonetheless authorize
indemnification to be paid by the Corporation to the Executive for such Expenses
as the Authority, or the court, shall deem reasonable in light of all of the
circumstances of such Action.
c. Interest shall be paid by the Corporation to an Executive at a
reasonable interest rate as determined by the Authority, or by a court, for
amounts for which the Corporation indemnifies or advances to the Executive.
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7. Insurance. The Corporation may purchase and maintain insurance on
behalf of any person who is or was an Executive of the Corporation, and/or is or
was serving as an Executive of an Affiliate, against Liabilities asserted
against him or her and/or incurred by or on behalf of him or her in any such
capacity, or arising out of his or her status as such an Executive, whether or
not the Corporation would have the power to indemnify him or her against such
Liabilities under this Article X or under the Act. Except as expressly provided
herein, the purchase and maintenance of such insurance shall not in any way
limit or affect the rights and obligations of the Corporation and/or any
Executive under this Article X. Such insurance may, but need not, be for the
benefit of all Executives of the Corporation and those serving as an Executive
of an Affiliate.
8. Witness Liabilities. The Corporation shall advance or reimburse any
and all Liabilities incurred by or on behalf of an Executive in connection with
his or her appearance as a witness in any Action at a time when he or she has
not been formally named a defendant or respondent to such an Action, within ten
days after the receipt of an Executive's written request therefor.
9. Indemnification of Employees. To the extent determined appropriate by
the Board, the Corporation may indemnify and hold harmless any person who is or
was a party, or is threatened to be made a party to any Action by reason of his
or her status as, or the fact that he or she is or was an employee or authorized
agent or representative of the Corporation and/or an Affiliate as to Liabilities
incurred in connection with an Action arising out of acts performed in the
course and within the scope of such employee's, agent's or representative's
duties to the Corporation and/or an Affiliate, in accordance with and to the
fullest extent permitted by the Act.
10. Severability. If any provision of this Article X shall be deemed
invalid or inoperative, or if a court of competent jurisdiction determines that
any of the provisions of this Article X contravene public policy, this Article X
shall be construed so that the remaining provisions shall not be affected, but
shall remain in full force and effect, and any such provisions which are invalid
or inoperative or which contravene public policy shall be deemed, without
further action or deed by or on behalf of the Corporation, to be modified,
amended and/or limited, but only to the extent necessary to render the same
valid and enforceable, and the Corporation shall indemnify and hold harmless an
Executive against Liabilities incurred with respect to any Action to the fullest
extent permitted by any applicable provision of this Article X that shall not
have been invalidated and to the fullest extent otherwise permitted by the Act;
it being understood that the intention of the Corporation is to provide the
Executives with the maximum protection against personal liability available
under the Act.
11. Nonexclusivity of Article X. The right to indemnification against
Liabilities and advancement of Expenses provided to an Executive by this
Article X
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shall not be deemed exclusive of any other rights to indemnification against
Liabilities and advancement of Expenses which any Executive or other employee or
agent of the Corporation and/or of an Affiliate may be entitled under any
charter provision, written agreement, resolution, vote of disinterested
directors of the Corporation or otherwise, including, without limitation, under
the Act, both as to acts in his or her official capacity as such Executive or
other employee or agent of the Corporation and/or of an Affiliate or as to acts
in any other capacity while holding such office or position, whether or not the
Corporation would have the power to indemnify against Liabilities or advance
Expenses to the Executive under this Article X or under the Act; provided that
it is not determined that the Executive or other employee or agent has engaged
in misconduct which constitutes a Breach of Duty.
12. Notice to the Corporation; Defense of Actions.
a. An Executive shall promptly notify the Corporation in writing upon
being served with or having actual knowledge of any citation, summons,
complaint, indictment or any other similar document relating to any Action which
may result in a claim of indemnification against Liabilities or advancement of
Expenses hereunder, but the omission so to notify the Corporation will not
relieve the Corporation from any Liability which it may have to the Executive
otherwise than under this Article X unless the Corporation shall have been
irreparably prejudiced by such omission.
b. With respect to any such Action as to which an Executive notifies the
Corporation of the commencement thereof:
(i) The Corporation shall be entitled to participate therein at its
own expense; and
(ii) Except as otherwise provided below, to the extent that it may
wish, the Corporation (or any other indemnifying party, including any
insurance carrier, similarly notified by the Corporation or the Executive)
shall be entitled to assume the defense thereof, with counsel selected by
the Corporation (or such other indemnifying party) and reasonably
satisfactory to the Executive.
c. After notice from the Corporation (or such other indemnifying party) to
the Executive of its election to assume the defense of an Action, the
Corporation shall not be liable to the Executive under this Article X for any
Expenses or other Liabilities subsequently incurred by the Executive in
connection with the defense thereof other than reasonable costs of investigation
or as otherwise provided below. The Executive shall have the right to employ
his or her own counsel in such Action but the Expenses of such counsel incurred
after notice from the Corporation (or such
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other indemnifying party) of its assumption of the defense thereof shall be at
the expense of the Executive unless (i) the employment of counsel by the
Executive has been authorized by the Corporation (or such other indemnifying
party); (ii) the Executive shall have reasonably concluded that there may be a
conflict of interest between the Corporation (or such other indemnifying party)
and the Executive in the conduct of the defense of such Action; or (iii) the
Corporation (or such other indemnifying party) shall not in fact have employed
counsel to assume the defense of such Action, in each of which cases the
Expenses of counsel shall be at the expense of the Corporation. The Corporation
shall not be entitled to assume the defense of any Derivative Action or any
Action as to which the Executive shall have made the conclusion provided for in
clause (ii) above.
13. Continuity of Rights and Obligations. The terms and provisions of
this Article X shall continue as to an Executive subsequent to his or her
Termination Date and such terms and provisions shall inure to the benefit of the
heirs, estate, executors and administrators of such Executive and the successors
and assigns of the Corporation, including, without limitation, any successor to
the Corporation by way of merger, consolidation and/or sale or disposition of
all or substantially all of the assets of the Corporation. Except as provided
herein, all rights and obligations of the Corporation and the Executive
hereunder shall continue in full force and effect despite the subsequent
amendment or modification of the Corporation's Articles of Incorporation, as it
is in effect on the date hereof, and such rights and obligations shall not be
affected by any such amendment or modification, any resolution of directors of
the Corporation, or by any other corporate action which conflicts with or
purports to amend, modify, limit or eliminate any of the rights or obligations
of the Corporation and/or of the Executive hereunder.
14. Amendment. This Article X may only be altered, amended or repealed by
the affirmative vote of two-thirds of the Board of Directors of the Corporation;
provided, however, that the Board may alter or amend this Article X by majority
vote if any such alteration or amendment:
a. Is made in order to conform to any amendment or revision of the Act
which (i) expands or permits the expansion of an Executive's right to
indemnification thereunder; (ii) limits or eliminates, or permits the limitation
or elimination, of the liability of the Executives; or (iii) is otherwise
beneficial to the Executives; or
b. In the sole judgment and discretion of the Board, does not materially
adversely affect the rights and protections of the Corporation.
Any repeal, modification or amendment of this Article X shall not adversely
affect any rights or protections of an Executive existing under this Article X
immediately prior to the time of such repeal, modification or amendment.
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15. Certain Definitions. The following terms as used in this Article X
shall be defined as follows:
a. "Act" shall mean the South Dakota Nonprofit Corporation Act (or any
successor provisions), as the same shall then be in effect, including any
amendments thereto, but, in the case of such amendment, only to the extent such
amendment permits or requires the Corporation to provide broader rights to
indemnification than the Act permitted or required the Corporation to provide
prior to such amendment.
b. "Action(s)" shall include, without limitation, any threatened, pending
or completed action, claim, litigation, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative, whether predicated on
foreign, Federal, state or local law, whether brought under and/or predicated
upon the Securities Act of 1933, as amended, and/or the Securities Exchange Act
of 1934, as amended, and/or the Investment Company Act of 1940, as amended,
and/or their respective state counterparts and/or any rule or regulation
promulgated thereunder, whether a Derivative Action and/or whether formal or
informal.
c. "Affiliate" shall include, without limitation, any corporation,
partnership, joint venture, limited liability company, employee benefit plan,
trust, or other similar enterprise that directly or indirectly through one or
more intermediaries, controls or is controlled by, or is under common control
with, the Corporation.
d. "Authority" shall mean the panel of arbitrators or independent legal
counsel selected under Section 3 of the Agreement.
e. "Board" shall mean the entire then serving Board of Directors of the
Corporation.
f. "Breach of Duty" shall mean the Executive breached or failed to perform
his or her duties to the Corporation or an Affiliate, as the case may be, and
the Executive's breach of or failure to perform those duties constituted:
(i) a breach of his or her "duty of loyalty" (as defined herein) to
the Corporation;
(ii) acts or omissions not in "good faith" (as further defined herein)
or which involve intentional or willful misconduct or a knowing violation
of the law;
(iii) a violation of Section 47-24-5 of the Act; or
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(iv) a transaction from which the Executive derived an improper direct
personal financial profit (unless such profit is determined to be
immaterial in light of all the circumstances); provided, that transactions
between the Corporation and the Executive or an entity in which the
Executive has a direct or indirect interest which are approved or ratified
by the Board after full disclosure to the Board of all material aspects of
the nature and extent of Executive's interest in such transaction shall not
be considered as giving rise to an improper personal financial profit of
the Executive as long as the terms and conditions of such transaction are
consistent in all material respects with the transaction approved by the
Board.
In determining whether an Executive has acted or omitted to act otherwise
than in "good faith," as such term is used herein, the Authority, or the court,
shall determine solely whether such Executive (i) in the case of conduct in his
or her "official capacity" (as defined herein) with the Corporation, believed in
the exercise of his or her business judgment, that his or her conduct was in the
best interests of the Corporation; and (ii) in all other cases, reasonably
believed that his or her conduct was at least not opposed to the best interests
of the Corporation. Notwithstanding any other provision of this Article X, an
Executive's conduct with respect to an employee benefit plan or trust sponsored
by or otherwise associated with the Corporation and/or an Affiliate for a
purpose he or she reasonably believes to be in the interests of the participants
in and beneficiaries of such plan is conduct that does not constitute a breach
or failure to perform his or her duties to the Corporation or an Affiliate, as
the case may be.
g. "Derivative Action" shall mean any Action brought by or in the right of
the Corporation and/or an Affiliate.
h. "Disinterested Quorum" shall mean a quorum of the Board who are not
parties in interest to the subject Action or any related Action.
i. "Duty of loyalty" shall mean a breach of fiduciary duty by an Executive
which constitutes a willful failure to deal fairly with the Corporation in
connection with a transaction in which the Executive has a material undisclosed
personal conflict of interest.
j. "Executive(s)" shall mean any individual who is, was or has agreed to
become a director and/or officer of the Corporation and/or an Affiliate.
k. "Expenses" shall include, without limitation, any and all reasonable
expenses, fees, costs, charges, attorneys' fees and disbursements, other out-of-
pocket costs, reasonable compensation for time spent by the Executive in
connection with the Action for which he or she is not otherwise compensated by
the Corporation,
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any Affiliate, any third party or other entity and any and all other reasonable
direct and indirect costs of any type or nature whatsoever.
l. "Liabilities" shall include, without limitation, judgments, amounts
incurred in settlement, fines, penalties and, with respect to any employee
benefit plan, any excise tax or penalty incurred in connection therewith, all
Expenses and any and all other reasonable liabilities of every type or nature
whatsoever incurred in connection with the subject Action.
m. "Official capacity" shall mean the office of director or officer in the
Corporation, membership on any committee of directors, any other offices in the
corporation held by an Executive and any other employment or agency relationship
between the Executive and the Corporation and "official capacity," as such term
is used herein, shall not include service for any Affiliate or other foreign or
domestic corporation or any partnership, joint venture, trust, employee benefit
plan, or other enterprise.
n. "Termination Date" shall mean the date an Executive ceases, for
whatever reason, to serve in an employment or directorship relationship with the
Company and/or any Affiliate.
16. Private Foundation Limitation. Notwithstanding the foregoing, during
any period in which the Corporation is a "private foundation" within the meaning
of section 509(a) of the Code, as amended, the following limitation shall apply:
No indemnification shall be provided to the extent such indemnification would
constitute an act of "self-dealing" or would otherwise be subject to excise
taxes under Chapter 42 of the Code, or any successor provision thereto.
ARTICLE XI
Emergency Succession Resolution
-------------------------------
1. That in the event of the death, resignation, or disability of the
President of the Corporation, the Senior Vice-President shall succeed to all of
the duties and authorities of the President pending action by the Board of
Directors of the Corporation. Pending and until the meeting of the Board of
Directors, the Senior Vice-President shall have the authority to designate any
Vice-President to assume the duties of the Senior Vice-President and assign such
other duties to other employees as such Senior Vice-President deems fit and
proper.
2. In the event of the simultaneous death, resignation, or disability of
the President and Senior Vice President of the Corporation, the most senior
Vice-President of the Corporation in terms of position with the Corporation
shall
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<PAGE>
succeed to all of the duties and authorities of the President of the
Corporation, pending action by the Board of Directors of the Corporation in the
following order:
1. Vice-President -- Operations
2. Vice-President -- Comptroller
3. Vice-President -- M.I.S. and Administration
Pending and until a meeting of the Board of Directors, such senior Vice-
President shall have authority to designate further Vice-Presidents of the
Corporation to assume such duties as the most senior Vice-President deems fit
and proper.
3. In the event that two or more directors of the Corporation shall die,
or in the event of any occurrence by death, resignation, disability or otherwise
which prevents the existence of a quorum of directors of the Corporation, then
the number of the then remaining directors of the Corporation shall constitute a
quorum of the Board of Directors to transact business for all purposes.
4. In the event of the death, resignation, disability or any other reason
which prevents the performance of the duties of all of the Board of Directors of
this Corporation, then the most senior officer of the Corporation in the order
of President, Senior Vice-President, or most senior Vice-President as set forth
in paragraph 2 of this Article, shall automatically become a member of the Board
of Directors of the Corporation for all purposes and shall forthwith notify the
then existing Governor of the State of South Dakota of the vacancies in the
Board of Directors of the Corporation and request such Governor to appoint new
members of the Board of Directors to assume the management of the affairs of the
Corporation.
ARTICLE XII
Informal Action
---------------
Any action that may be taken by the Board of Directors at a formal meeting
may also be taken without a meeting if all directors of the Corporation agree to
such action and such consent in writing, setting forth the action so to be
taken, shall be signed by all of the directors and forthwith made a part of the
minutes of the meetings of the Board of Directors.
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<PAGE>
ARTICLE XIII
Amendments
----------
These By-Laws may be amended, repealed, or altered in whole or in part by a
majority vote at any regular or special meeting of the Board of Directors of the
Corporation.
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<PAGE>
EXHIBIT 3.2B
BYLAWS
OF
EDUCATION LOANS INCORPORATED
ARTICLE I.
----------
Meetings of Stockholders
------------------------
Section 1. Annual Meetings. The annual meeting of the stockholders for
the election of directors and for the transaction of such other business as may
properly come before the meeting shall be held each year at such time, on such
day and at such place, within or without the State of Delaware as shall be
designated by the Board of Directors.
Section 2. Special Meetings. A special meeting of the stockholders for
any purpose or purposes, unless otherwise prescribed by statute, may be called
at any time by the President or by the Secretary at the request in writing of a
majority of either the members of the Board of Directors or the stockholders
entitled to vote.
Section 3. Time and Place of Meetings. All meetings of the stockholders
shall be held at such times and places, within or without the State of Delaware,
as may from time to time be fixed by the Board of Directors or by the President
with respect to special meetings, or as shall be specified or fixed in the
respective notices or waivers of notice thereof.
Section 4. Notice of Meetings. Except as otherwise expressly required
by law, notice of each annual or special meeting of the stockholders shall be
given at least ten (10) days before the day on which the meeting is to be held,
to each stockholder of record entitled to vote at such meeting by mailing such
notice in a postage prepaid envelope addressed to the stockholder at the
stockholder's last postoffice address appearing on the stock records of the
Corporation. Except as otherwise expressly required by law, no publication of
any notice of a meeting of the stockholders shall be required. At special
meetings of stockholders no business other than that specified in the notice of
the meeting or germane thereto shall be transacted at such meeting. Except as
otherwise expressly required by law, notice of any adjourned meeting of the
stockholders need not be given.
Section 5. Quorum. At each meeting of the stockholders, except as
otherwise expressly required by law, stockholders holding a majority of the
shares of stock of the Corporation, issued and outstanding, and entitled to be
voted thereat, shall be present in person or by proxy to constitute a quorum for
the transaction of
<PAGE>
business. In the absence of a quorum at any such meeting or any adjournment or
adjournments thereof, a majority in voting interest of those present in person
or by proxy and entitled to vote thereat, or in the absence therefrom of all the
stockholders, any officer entitled to preside at, or to act as secretary of,
such meeting may adjourn such meeting from time to time until stockholders
holding the amount of stock requisite for a quorum shall be present or
represented. At any such adjourned meeting at which a quorum may be present any
business may be transacted which might have been transacted at the meeting as
originally called.
Section 6. Organization. At each meeting of the stockholders, one of
the following shall act as chairman of the meeting and preside thereat, in the
following order of precedence:
(a) the President;
(b) the Vice President designated by the Board of Directors to act as
chairman of said meetings and to preside thereat;
(c) a stockholder of record of the Corporation who shall be chosen
chairman of such meeting by a majority in voting interest of the
stockholders present in person or by proxy and entitled to vote
thereat.
The Secretary, or, if he shall be absent from such meeting, the person (who
shall be an Assistant Secretary, if an Assistant Secretary shall be present
thereat) whom the chairman of such meeting shall appoint, shall act as secretary
of such meeting and keep the minutes thereof.
Section 7. Order of Business. The order of business at each meeting of
the stockholders shall be determined by the chairman of such meeting, but such
order of business at any meeting at which a quorum is present may be changed by
the vote of a majority in voting interest of those present in person or by proxy
at such meeting and entitled to vote thereat, provided that at special meetings
of stockholders no business other than that specified in the notice of the
meeting or germane thereto shall be transacted.
Section 8. Voting. Each stockholder shall, at each meeting of the
stockholders, be entitled to one vote in person or by proxy for each share of
stock of the Corporation held by the stockholder and registered in the
stockholder's name on the books of the Corporation on the date fixed or
determined pursuant to the provisions of Section 5 of Article V of these Bylaws
as the record date for the determination of stockholders who shall be entitled
to receive notice of and to vote at such meeting.
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Shares of its own stock belonging to the Corporation shall not be voted
directly or indirectly. Any vote on stock of the Corporation may be given at
any meeting of the stockholders by the stockholder entitled thereto in person or
by the stockholder's proxy appointed by an instrument in writing delivered to
the Secretary or an Assistant Secretary of the Corporation or to the secretary
of the meeting. The attendance at any meeting of a stockholder who may
theretofore have given a proxy shall not have the effect of revoking the same
unless the stockholder shall in writing so notify the secretary of the meeting
prior to the voting of the proxy. At all meetings of the stockholders all
matters, except as otherwise provided in these Bylaws or by law, shall be
decided by the vote of a majority in voting interest of the stockholders present
in person or by proxy and entitled to vote thereat, a quorum being present.
Subject to Article II, Section 3, the vote at any meeting of the stockholders on
any question need not be by ballot, unless so directed by the chairman of the
meeting. On a vote by ballot each ballot shall be signed by the stockholder
voting, or by the stockholder's proxy, if there be such proxy.
Section 9. List of Stockholders. It shall be the duty of the Secretary
or other officer of the Corporation who shall have charge of its stock ledger to
prepare and make, at least ten (10) days before every meeting of the
stockholders, a complete list of the stockholders entitled to vote thereat,
arranged in alphabetical order and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least ten (10)
days prior to said meeting either at a place within the city where said meeting
is to be held and which place shall be specified in the notice of said meeting,
or, if not so specified, at the place where said meeting is to be held, and such
list shall be produced and kept at the time and place of said meeting during the
whole time thereof, and may be inspected by any stockholder who is present. The
stock ledger shall be the only evidence as to who are the stockholders entitled
to examine the stock ledger or such list or the books of the Corporation, or to
vote in person or by proxy at any meeting of stockholders.
Section 10. Inspectors or Judges. The Board of Directors, in advance of
any meeting of stockholders, may appoint one or more inspectors or judges to act
at such meeting or any adjournment thereof. If the inspectors or judges shall
not be so appointed, or if any of them shall fail to appear or act, the chairman
of such meeting shall appoint the inspectors or judges, or such replacement or
replacements therefor, as the case may be. Such inspectors or judges, before
entering on the discharge of their duties, shall take and sign an oath or
affirmation faithfully to execute the duties of inspectors or judges at meetings
for which they are appointed. At such meeting, the inspectors or judges shall
receive and take in charge the proxies and ballots and decide all questions
touching the qualification of voters and the validity of proxies and the
acceptance or rejection of votes. An inspector or judge need not be a
stockholder of the Corporation, and any officer of the
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<PAGE>
Corporation may be an inspector or judge on any question other than a vote for
or against his election to any position with the Corporation.
Section 11. Action Without a Meeting. Except as otherwise provided by
law or by the Certificate of Incorporation of the Corporation, any action which
may be taken at any annual or special meeting of stockholders may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
ARTICLE II.
-----------
Board of Directors
------------------
Section 1. General Powers. Subject to the provisions of the Certificate
of Incorporation of the Corporation, the business, properties and affairs of the
Corporation shall be managed by the Board of Directors, which, without limiting
the generality of the foregoing, shall have power to elect and appoint officers
of the Corporation, to appoint and direct agents, to grant general or limited
authority to officers, employees and agents of the Corporation, to make, execute
and deliver contracts and other instruments and documents in the name and on
behalf of the Corporation and, if a seal has been adopted, over its seal,
without specific authority in each case, and, by resolution adopted by a
majority of the whole Board of Directors, to appoint committees of the Board of
Directors, the membership of which may consist of one or more directors, and
which may, except as limited by the Certificate of Incorporation of the
Corporation, advise the Board of Directors with respect to any matters relating
to the conduct of the Corporation's business. In addition, the Board of
Directors may exercise all the powers of the Corporation and do all lawful acts
and things which are not reserved to the stockholders by law or by the
Certificate of Incorporation of the Corporation or by these Bylaws.
Section 2. Number and Term. Subject to the requirements of the laws of
the State of Delaware, the number of directors shall be four, provided that,
such number shall automatically increase to six and shall include, on and at all
times after a date that is no more than forty-five (45) days after the closing
of the Corporation's first registered public offering of securities, at least
two Independent Directors (as described in Article VIII of the Certificate of
Incorporation). Subject to Article VIII of the Certificate of Incorporation of
the Corporation, each of the directors of the Corporation shall hold office
until the expiration of his term and until his successor shall be elected and
qualified or until his earlier death,
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<PAGE>
resignation, retirement, disqualification or removal. Directors need not be
stockholders.
Section 3. Election of Directors. Subject to the requirements of Article
VIII of the Certificate of Incorporation of the Corporation, at each meeting of
the stockholders for the election of directors, at which a quorum is present,
the persons receiving the greatest number of votes, up to the number of
directors to be elected, shall be the directors. Such election shall be by
ballot, provided, however, a nomination shall be accepted and votes cast for a
nominee shall be counted by the inspectors or judges of the election, only if
the Secretary of the Corporation has received at least 24 hours prior to the
meeting a statement over the signature of the nominee that he consents to being
a nominee and, if elected, intends to serve as a director.
Section 4. Organization and Order of Business. At each meeting of the
Board, one of the following shall act as chairman of the meeting and preside
thereat, in the following order of precedence:
(a) the President;
(b) any Vice President designated by the Board of Directors; or
(c) any director chosen by a majority of the directors present
thereat.
The Secretary, or in case of his absence any Assistant Secretary (who shall be
present thereat) or the person (who shall be present thereat) whom the chairman
of such meeting shall appoint, shall act as secretary of such meeting and keep
the minutes thereof. The order of business at each meeting of the Board of
Directors shall be determined by the chairman of such meeting.
Section 5. Resignations. Subject to the requirements of Article VIII of
the Certificate of Incorporation of the Corporation, any director may resign at
any time by giving written notice of his resignation to the President or the
Secretary of the Corporation. Any such resignation shall take effect at the time
specified therein, or, if the time when it shall become effective shall not be
specified therein, then it shall take effect when accepted by action of the
Board of Directors. Except as aforesaid, the acceptance of such resignation
shall not be necessary to make it effective.
Section 6. Vacancies, etc. Subject to the requirements of Article VIII
of the Certificate of Incorporation of the Corporation, in case of any vacancy
on the Board, a director to fill the vacancy for the unexpired portion of the
term being filled may be elected by the holders of shares of stock of the
Corporation entitled to vote in respect thereof at a special meeting of said
holders or by a majority of the directors of the Corporation then in office
though less than a quorum.
5
<PAGE>
Section 7. Removal. Subject to the requirements of Article VIII of the
Certificate of Incorporation of the Corporation, any director or directors may
be removed either for or without cause at any time by the affirmative vote of
the holders of a majority of all the shares of stock outstanding and entitled to
vote, at a special meeting of the stockholders called for that purpose, and the
vacancies thus created may be filled, at the meeting held for the purpose of
removal, by the affirmative vote of a majority in interest of the stockholders
entitled to vote.
Section 8. Increase of Number. Subject to the requirements of Article
VIII of the Certificate of Incorporation of the Corporation, the number of
directors may be increased by amendment of these Bylaws to a number not to
exceed seven (7) which number shall include, on and at all times after a date
that is no more than forty-five (45) days after the closing of the Corporation's
first registered public offering of securities, at least two Independent
Directors (as described in Article VIII of the Certificate of Incorporation) by
the affirmative vote of a majority of the directors or by the affirmative vote
of a majority in interest of the stockholders, at the annual meeting or at a
special meeting called for that purpose, and by like vote the additional
directors may be chosen at such meeting to hold office until the next annual
election and until their successors are elected and qualified.
Section 9. Place of Meeting. The Board may hold its meetings at such
place or places within or without the State of Delaware as the Board may from
time to time by resolution determine or as shall be specified or fixed in the
respective notices or waivers of notice thereof.
Section 10. First Meeting. As soon as practicable after each annual
election of directors, the Board shall meet for the purpose of organization, the
election of officers and the transaction of other business; provided that a
quorum of the whole Board of Directors, including on and at all times after a
date that is no more than forty-five (45) days after the closing of the
Corporation's first registered public offering of securities, at least two
Independent Directors (as described in Article VIII of the Certificate of
Incorporation), shall be present at such meeting. Such meeting shall be held at
the time and place theretofore fixed by the Board for the next regular meeting
of the Board and no notice thereof need be given; provided, however, that the
Board may determine that such meeting shall be held at a different place and
time but notice thereof shall be given in the manner hereinafter provided for
special meetings of the Board.
Section 11. Regular Meetings. Regular meetings of the Board shall be
held at such times as the Board shall from time to time determine. Notices of
regular meetings need not be given. If any day fixed for a regular meeting
shall be a legal holiday at the place where the meeting is to be held, then the
meeting which would otherwise be held on that day shall be postponed until the
same hour on the same day of the next succeeding week in which such day shall
not be a legal holiday at
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such place, or at such other time and place as the Board shall determine in
which event notice thereof shall be given.
Section 12. Special Meetings: Notice. Special meetings of the Board shall
be held whenever called by the President or by one of the directors at the time
in office. The Secretary shall give notice to each director as hereinafter in
this Section provided of each such special meeting, in which shall be stated the
time and place of such meeting. Notice of each such meeting shall be mailed to
each director, addressed to the director at his residence or usual place of
business, at least ten (10) days before the day on which such meeting is to be
held, or shall be sent addressed to him at such place by facsimile, telegraph,
cable, wireless or other form of recorded communication, or be delivered
personally or by telephone not later than the day before the day on which such
meeting is to be held. Notice of any meeting of the Board need not, however, be
given to any director, if waived by him in writing or by facsimile, telegraph,
cable, wireless or other form of recorded communication, before, during or after
such meeting, or if he shall be present at such meeting, and any meeting of the
Board shall be a legal meeting without any notice thereof having been given if
all the directors of the Corporation then in office shall be present thereat.
Section 13. Quorum and Manner of Acting. Subject to the requirements of
the Certificate of Incorporation of the Corporation, and except as otherwise
provided in these Bylaws, the Certificate of Incorporation of the Corporation,
or by law, a majority of the members of the Board of Directors at the time in
office, including on and at all times after a date that is no more than forty-
five (45) days after the closing of the Corporation's first registered public
offering of securities, at least two Independent Directors (as described in
Article VIII of the Certificate of Incorporation), shall be present in person at
any meeting of the Board of Directors in order to constitute a quorum for the
transaction of business at such meeting, and the affirmative vote of a majority
of directors present at any such meeting, at which a quorum is present, shall be
necessary for the adoption of any resolution or act of the Board. In the
absence of a quorum, a majority of the Board of Directors may adjourn any
meeting, from time to time, until a quorum is present. No notice of any
adjourned meeting need be given other than by announcement at the meeting that
is being adjourned.
Section 14. Action by Consent. Unless otherwise restricted by the
Certificate of Incorporation, any action required or permitted to be taken at
any meeting of the Board of Directors, or of any committee thereof, may be taken
without a meeting, if prior to such action a written consent thereto is signed
by all members of the Board or of such committee, as the case may be, and such
written consent is filed with the minutes of proceedings of the Board or
committee.
7
<PAGE>
Section 15. Committees. The Board of Directors may appoint standing
committees of its members, provided that on and at all times after a date that
is no more than forty-five (45) days after the closing of the Corporation's
first registered public offering of securities, each such committee shall have
at least one member who is an Independent Director (as described in Article VIII
of the Certificate of Incorporation). Unless otherwise restricted by the
Certificate of Incorporation of the Corporation, such committees shall have such
powers as are conferred by the Bylaws or authorized by the Board of Directors;
provided, however, that no committee shall have the power to act with respect to
any matter that, pursuant to the Certificate of Incorporation, requires the
consent of the Independent Directors. The members of all standing committees
shall be appointed annually at the first meeting of the Board of Directors after
the annual meeting of the stockholders and shall continue as members until their
successors are appointed, subject to the power of the Board to remove any member
of a committee at any time and to appoint a successor.
Section 16. Meeting by Communications Equipment. Members of the Board of
Directors or any committee appointed by the Board of Directors, may participate
in a meeting of the Board of Directors or of such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
in a meeting shall constitute presence in person at such meeting.
ARTICLE III.
------------
Officers
--------
Section 1. Election. Term of Office. The Executive Officers of the
Corporation shall consist of a President, a Treasurer and such number of Vice
Presidents, if any, as the Board of Directors may determine from time to time.
There shall also be a Secretary.
Any officer may hold two or more offices, the duties of which can be
consistently performed by the same person.
The Board of Directors may also elect such other officers and agents as it
may deem necessary, who shall have such authority and perform such duties as may
be prescribed by the Board.
All Executive Officers and other officers of the Corporation shall be
regularly elected by the majority vote of the whole Board of Directors at its
first meeting after the annual meeting of the stockholders and shall hold office
until the first meeting of the Board after the next annual meeting of the
stockholders, and until their successors are elected or appointed.
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<PAGE>
If additional officers are elected during the year, they shall hold office
until the next annual meeting of the Board of Directors at which officers are
regularly elected and until their successors are elected or appointed.
A vacancy in any office may be filled for the unexpired portion of the term
in the same manner as provided for election to such office.
All officers and agents elected by the Board of Directors shall be subject
to removal at any time by the Board of Directors, either for or without cause,
by an affirmative vote of a majority of the entire Board of Directors, at any
regular meeting or at any special meeting.
Section 2. President. The President shall be the chief executive officer
of the Corporation, and shall have the powers and perform the duties incident to
that position. He shall be in general and active charge of the entire business
and all the affairs of the Corporation. He shall have the primary responsibility
for continuing the separate status of the Corporation from any affiliated
corporation and the proper segregation of corporate assets from the assets of
third parties who may have possession of assets of the Corporation. He shall
have general authority to execute bonds, deeds and contracts in the name and on
behalf of the Corporation within limits, if any, established by the Board of
Directors from time to time, and responsibility for the employment or
appointment of such employees, agents and officers (except officers elected by
the Board of Directors pursuant to Section 1 of this Article III) as may be
required to carry on the operations of the business, and he shall have authority
to fix the compensation of such agents and officers. He shall have such other
powers and perform such other duties as may be prescribed by the Board of
Directors or provided herein.
Section 3. Vice Presidents. Each Vice President shall have such powers
and duties as shall be prescribed by the Board of Directors at the time of his
election and such other powers and duties as may be assigned to him from time to
time by the President or the Board of Directors.
Section 4. Treasurer. The Treasurer shall be responsible for safeguarding
the cash and securities of the Corporation and the formulation of the investment
and financial policies of the Corporation. He shall keep a full and accurate
account of all monies received and paid on account of the Corporation and shall
render a statement of his accounts whenever the Board of Directors shall
require. He shall have such other powers and duties as may be assigned to him by
the President or the Board of Directors. In the absence of the Treasurer, the
President or such person as shall be designated by the President shall perform
the duties of the Treasurer.
Section 5. Secretary. The Secretary shall attend to the giving of notice
of all meetings of stockholders and of the Board of Directors and committees
thereof, and
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as provided in Section 6 of Article I and Section 4 of Article II, shall keep
the minutes of all proceedings at meetings of the stockholders and of the Board
of Directors at which he is present, as well as of all proceedings at all
meetings of committees of the Board of Directors on which he has served as
secretary and, where some other person has served as secretary thereto, the
Secretary shall maintain custody of the minutes of such proceedings. He shall
perform such other duties as may be assigned to him from time to time by the
President or the Board of Directors.
ARTICLE IV.
-----------
Contracts, Checks, Drafts, Bank Accounts, Etc.
----------------------------------------------
Section 1. Execution of Documents by Officers. The Executive Officers of
the Corporation elected as provided in Section 1 of Article III of the Bylaws,
shall have power to execute and deliver any deeds, contracts, mortgages, bonds,
debentures and other documents for and in the name of the Corporation within
limits, if any, established by the Board of Directors from time to time.
The other officers shall have such powers with respect to execution and
delivery of deeds, contracts, mortgages, bonds, debentures and other documents
as may be assigned to them by the Board of Directors.
Section 2. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation or
otherwise as the Board of Directors, the President or the Treasurer shall direct
in such banks, trust companies or other depositories as the Board of Directors
may select or as may be selected by any officer or officers or agent or agents
of the Corporation to whom power in that respect shall have been delegated by
the Board of Directors. For the purpose of deposit and for the purpose of
collection for the account of the Corporation, checks, drafts and other orders
for the payment of money which are payable to the order of the Corporation may
be endorsed, assigned and delivered by any officer or agent of the Corporation
designated by the Board of Directors.
ARTICLE V.
----------
Shares and Their Transfer; Examination of Books
-----------------------------------------------
Section 1. Certificates for Stock. Every holder of stock of the
Corporation shall be entitled to have a certificate or certificates, in such
form as the Board shall prescribe, certifying the number of shares of stock of
the Corporation owned by the stockholder. The certificates representing shares
of such stock shall be numbered in the order in which they shall be issued and
shall be signed in the name of the Corporation by the person who was at the time
of signing the President or a Vice President and by a person who was at the time
of signing the Secretary or an
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Assistant Secretary and its seal, if one is adopted by the Board of Directors,
shall be affixed thereto; provided, however, that the signature of such
Executive Officer of the Corporation and of such Secretary or Assistant
Secretary and the seal of the Corporation may be facsimile. In case any officer
or officers of the Corporation who shall have signed, or whose facsimile
signature or signatures shall have been used on, any such certificate or
certificates shall cease to be such officer or officers, whether because of
death, resignation or otherwise, before such certificate or certificates shall
have been delivered by the Corporation, such certificate or certificates may
nevertheless be adopted by the Corporation and be issued and delivered as though
the person or persons who signed such certificate or certificates, or whose
facsimile signature or signatures shall have been used thereon, had not ceased
to be such officer or officers. A record shall be kept of the respective names
of the persons, firms or corporations owning the stock represented by
certificates for stock of the Corporation, the number of shares represented by
such certificates, respectively, and the respective dates thereof, and in case
of cancellation, the respective dates of cancellation. Every certificate
surrendered to the Corporation for exchange or transfer shall be canceled and a
new certificate or certificates shall not be issued in exchange for any existing
certificate until such existing certificate shall have been so canceled except
in cases provided for in Section 4 of this Article VI.
Section 2. Transfers of Stock. Transfers of shares of the stock of the
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, or by his attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary of the Corporation, or with a
transfer clerk or a transfer agent appointed as in Section 3 of this Article V
provided, and upon surrender of the certificate or certificates for such shares
properly endorsed and payment of all taxes thereon. The person in whose name
shares of stock stand on the books of the Corporation shall be deemed the owner
thereof for all purposes as regards the Corporation.
Section 3. Regulations. The Board may make such rules and regulations as
it may deem expedient, not inconsistent with these Bylaws, concerning the issue,
transfer and registration of certificates for stock of the Corporation. The
Board may appoint or authorize any officer or officers to appoint one or more
transfer clerks, any of whom may be employees of the Corporation, or one or more
transfer agents and one or more registrars, and may require all certificates for
stock to bear the signature or signatures of any of them; provided, however,
that the signature of any transfer clerk, transfer agent, or registrar may be
facsimile. In case any transfer clerk, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such transfer clerk, transfer agent, or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such transfer clerk, transfer agent, or registrar at the date of
issue.
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Section 4. Lost, Stolen, Destroyed and Mutilated Certificates. The owner
of any stock of the Corporation shall immediately notify the Corporation of any
loss, theft, destruction or mutilation of the certificate therefor, and the
Corporation may issue a new certificate of stock in the place of any certificate
theretofore issued by the Corporation, which is delivered to the Corporation, in
the case of a mutilated certificate, or alleged to have been lost, stolen or
destroyed, and the Board may, in its discretion, require the owner of the lost,
stolen or destroyed certificate, or his legal representatives, to furnish
evidence to the Corporation, which it shall in its discretion determine is
satisfactory, of the loss, theft or destruction of such certificate and of the
ownership thereof, and to give the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties, as the Board shall
in its uncontrolled discretion determine, to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or the issuance of such new certificate.
Section 5. Record Date. To determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which shall not be
more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action. If no record
date is fixed by the Board of Directors:
(a) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close
of business on the day next preceding the day on which notice is
given.
(b) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto. A
determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any
adjournment of the meeting unless the Board of Directors shall
fix a new record date for the adjourned meeting.
Section 6. Examination of Books by Stockholders. The Board may determine,
from time to time, whether and to what extent, at what times and places, and
under what conditions and regulations, the accounts and books of the
Corporation, or any of them, shall be open to the inspection of the
stockholders, and no stockholder shall have any right to inspect any account or
book or document of the Corporation, except as conferred by the laws of the
State of Delaware or as
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<PAGE>
authorized by resolution adopted by the Board or by the stockholders of the
Corporation entitled to vote in respect thereof.
ARTICLE VI.
-----------
Offices, Etc.
-------------
Section 1. Registered Office. The registered office of the Corporation
in the State of Delaware shall be as stated in the Certificate of Incorporation
of the Corporation.
Section 2. Other Offices. The Corporation also may have an office or
offices other than said office in Section 1 of this Article VI at such place or
places, either within or without the State of Delaware, as provided in these
Bylaws or as the Board may from time to time appoint or as the business of the
Corporation may require.
Section 3. Books and Records. Except as otherwise required by law, the
Certificate of Incorporation or these Bylaws, the Corporation may keep the books
and records of the Corporation in such place or places within or without the
State of Delaware as the Board may from time to time by resolution determine or
the business of the Corporation may require.
ARTICLE VII.
------------
Dividends
---------
Subject to the provisions of law, of the Certificate of Incorporation of
the Corporation and of these Bylaws, the Board may declare and pay dividends
upon the shares of the stock of the Corporation either (a) out of its surplus as
computed in accordance with the provisions of the laws of the State of Delaware
or (b) in case there shall be no such surplus, out of its net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year,
whenever and in such amounts as, in the opinion of the Board, the condition of
the affairs of the Corporation shall render it advisable. Dividends upon the
shares of stock of the Corporation may be declared at any regular or special
meeting of the Board of Directors.
ARTICLE VIII.
-------------
Seal
----
The corporate seal, if one is adopted by the Board of Directors, shall be
in the form as prescribed by the Board of Directors and shall have inscribed
thereon the name of the Corporation and the words "Corporate Seal" and
"Incorporated 1997
13
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Delaware." If the Board of Directors adopts a corporate seal, such seal or a
facsimile thereof may be impressed or affixed or reproduced or other use made
thereof by the Secretary or any Assistant Secretary or any other officer
authorized by the Board.
ARTICLE IX.
-----------
Fiscal Year
-----------
The fiscal year of the Corporation shall end on the 30th day of June in
each year.
ARTICLE X.
----------
Waiver of Notices
-----------------
Whenever any notice whatever is required to be given pursuant to these
Bylaws or by the Certificate of Incorporation of the Corporation or by the
Delaware General Corporation Law, a waiver thereof in writing, signed by the
person or persons entitled to said notice, or by facsimile, telegraph, cable,
wireless or other form of recorded communication, whether before or after the
time stated therein, or if such person shall attend a meeting, except when that
person attends such meeting for the express purpose of objecting at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened, shall be deemed equivalent thereto. Neither
the business to be transacted at, nor the purpose of, any meeting need be
specified in any notice or written notice of waiver unless so required by the
Certificate of Incorporation of the Corporation or by these Bylaws.
ARTICLE XI.
-----------
Indemnification
---------------
Section 1. Indemnification. The Corporation may indemnify, and the
Board of Directors may authorize the purchase and maintenance of insurance for
the purpose of such indemnification, such persons for such liabilities in such
manner under such circumstances and to such extent as permitted by Section 145
of the Delaware General Corporation Law, as now enacted or hereafter amended.
Section 2. Limitation on Indemnification. Except as expressly required
under Section 145 of the Delaware General Corporation Law, notwithstanding any
other provision hereof, the Corporation shall not indemnify nor purchase
insurance for the purpose of indemnifying, any person who is then serving as a
director of Education Loans Incorporated, a South Dakota nonprofit corporation
(formerly known as Student Loan Finance Corporation) ("Edlinc"), unless and
until
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<PAGE>
an opinion, reasonably acceptable to the Corporation and its counsel, is
delivered to the Corporation by nationally recognized bond counsel to the effect
that such indemnification will not adversely impact the tax status of any
outstanding debt obligations of the Corporation.
ARTICLE XII.
------------
Miscellaneous
-------------
Section 1. Amendments. These Bylaws may be amended, altered or repealed
by the shareholders or the Board of Directors with the consent of each
Independent Director as provided in Article IX of the Certificate of
Incorporation at any regular or special meeting; provided that in no event shall
any amendment, alteration or repeal of any Bylaw in any manner impair, or impair
the intent of, or be inconsistent with, the Certificate of Incorporation of the
Corporation.
Section 2. Limitation on Compensation. Notwithstanding any other
provision of these Bylaws, the Corporation shall not pay any compensation,
directly or indirectly, to any person who is a member of the board of directors
of Edlinc for services performed in connection with the Corporation or for
services as a member of the board of directors or as an officer of the
Corporation, or which would otherwise cause such person not to qualify as an
"Independent Member" with respect to Edlinc within the meaning of Section
150(d)(3)(E) of the Internal Revenue Code of 1986, as amended.
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EXHIBIT 24.1A
EDUCATION LOANS INCORPORATED,
A South Dakota Nonprofit Corporation
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints A. Norgrin Sanderson and Harvey C. Jewett and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (including his capacity as a director and/or officer of
Education Loans Incorporated, a South Dakota nonprofit corporation (the
"Company")), to sign this registration statement on Form S-3 for the sale of
Student Loan Asset-Backed Notes by the Company, any additional registration
statement filed by the Company pursuant to Rule 462(b) under the Securities Act
of 1933, as amended, and any or all amendments (including post-effective
amendments) to this registration statement (or any additional registration
statement filed pursuant to Rule 462(b)), and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitutes, may lawfully do or cause to be done by virtue
hereof.
May 7, 1997 /s/ A. Norgrin Sanderson
---------------------------
A. Norgrin Sanderson
May 7, 1997 /s/ V. G. Stoia
---------------------------
V. G. Stoia
May 7, 1997 /s/ Manley B. Feinstein
---------------------------
Manley B. Feinstein
May 7, 1997 /s/ Harvey C. Jewett
---------------------------
Harvey C. Jewett
<PAGE>
EXHIBIT 24.1B
EDUCATION LOANS INCORPORATED,
A Delaware Corporation
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints A. Norgrin Sanderson and Harvey C. Jewett and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (including his capacity as a director and/or officer of
Education Loans Incorporated, a Delaware corporation (the "Company")), to sign
this registration statement on Form S-3 for the sale of Student Loan Asset-
Backed Notes by the Company, any additional registration statement filed by the
Company pursuant to Rule 462(b) under the Securities Act of 1933, as amended,
and any or all amendments (including post-effective amendments) to this
registration statement (or any additional registration statement filed pursuant
to Rule 462(b)), and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in about the premises, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitutes, may
lawfully do or cause to be done by virtue hereof.
May 7, 1997 /s/ A. Norgrin Sanderson
---------------------------
A. Norgrin Sanderson
May 7, 1997 /s/ V. G. Stoia
---------------------------
V. G. Stoia
May 7, 1997 /s/ Manley B. Feinstein
---------------------------
Manley B. Feinstein
May 7, 1997 /s/ Harvey C. Jewett
---------------------------
Harvey C. Jewett
